Photobucket - Video and Image Hosting On January 16, 2007, the Lerach Coughlin firm filed a purported securities class action lawsuit in federal court in the District of Columbia against Sunrise Senior Living and several of its directors and officers. A copy of the law firm’s press release can be found here and a copy of the complaint can be found here. The complaint raises a variety of different allegations but also contains allegations that the defendants manipulated the company’s stock option program by backdating or springloading option grants.

The Complaint alleges that the "top insiders of Sunrise took advantage of the artificial inflation in Sunrise’s shares to bail out of the stock, unloading almost a million shares of the stock." What is interesting about the plaintiffs’ insider trading allegation is their assertion that the defendants stock sales were triggered "in early 2006, as widespread revelations of a stock option backdating scandal began to sweep corporate America." The allegedly backdated or springloaded options were awarded during the period 1997 to 2001.

The plaintiffs do not specify why the unfolding scandal supposedly motivated the defendants to sell their shares; the suggested inference, I suppose, is that defendants sold their shares because they knew when the marketplace found out about the backdating in the company’s options, the company’s share price would drop. But in fact, the company’s share price declined in value as a result of its announcement (here) that it would be restating its financial statements for the years 2003 through 2005, not because of disclosures relating to options backdating.

Apparently in anticipation of the defendants’ likely arguments that their share sales were made pursuant to Rule 10b5-1 trading plans, the plaintiffs raise a number of interesting allegations. The plaintiffs not only contend that the plan terms "did not comply with regulatory requirements" but also that when the defendants put the plans in place, they knew "that they were already pursuing a scheme to defraud and falsify Sunrise’s reported financial results" hoping that the plans "would give them protection from the legal liability they knew they would otherwise face." In other words, the plaintiffs are trying to argue that the Rule 10b5-1 plans themselves were part of the scheme to defraud.

Updated Options Backdating Litigation Tally: The initiation of the lawsuit against Sunrise brings the total number of options backdating related securities class action lawsuits to 23. The number of companies named as nominal defendants in shareholders’ derivative lawsuits based on options backdating allegations now stands at 131. The D & O Diary’s running tally of the options backdating related lawsuits can be found here.

Courts Reject SOX Whistleblower’s Claim: Employees of public companies who believe they have been retaliated against because they engaged in "protected" whistleblowing activity may assert a claim against their employer under Section 806 of the Sarbanes-Oxley Act. The burden is on the employee to show that the protected activity was a contributing factor in the adverse employment action. The D & O Diary’s prior post about the difficulty employees are having obtaining relief under the SOX Whistleblower provisions can be found here.

There is still relatively little case authority establishing what constitutes "protected activity." A recent federal court decision from Michigan examined how direct the causal connection has to be between the allegedly protected activity and the job action.

In the case (Sussman v. K-Mart Holding Corp.) the plaintiff (Sussman) alleged that he had sent the company’s President a letter alleging that his supervisor was accepting kickbacks from vendors. K-Mart investigated the supervisor, but before the investigation was complete, the supervisor was terminated for unrelated reasons. Five months later, Sussman’s performance came under criticism, and he received a warning. Sussman asked his (new) supervisor whether the warning was related to his complaints about his prior supervisor. After additional performance shortcomings, Sussman was terminated.

In SOX whistleblower case that Sussman filed against K-Mart, the court held that Sussman had failed to establish a causal link between the job action and the activity he claimed was protected. The court did observe that Sussman was not engaging in protected activity when he raised with his new supervisor that he had blown the whistle on his prior supervisor’s kickbacks. The court found that his comments about his previous supervisor’s actions could not be related to protecting shareholders from fraud because his prior supervisor was fired for unrelated reasons five months before he made the remarks to his new supervisor.

A detailed summary of the decision, as well as a brief overview of the "protected activity" case law, can be found a memorandum by the Sutherland, Asbill & Brennan law firm, here.

The Ultimate Team Building Video: This YouTube video is for anyone who has ever felt like a team of one. The video takes about a minute to watch, but rewards a complete viewing.

 

In a January 10, 2007 Wall Street Journal op-ed piece provocatively entitled “Should Steve Jobs Go to Jail?” (here, subscription required) the attorneys for Gregory Reyes, the former CEO Brocade Communications who faces criminal charges in connection with stock option activity at Brocade, present their view that “most options backdating cases” are “not fraud, but books and records errors.” They recite that Steve Jobs, the CEO of Apple who faces his own set of questions about options grants at his company, like their client, is a “non- accountant who didn’t personally benefit one cent from the options grants at issue.” They go on to state that the “problem with the government’s theory is that it “conflates books and records violations with criminal securities fraud.” The government thus “untethers securities fraud from the legal elements that safeguard executives from conviction from inadvertent accounting violations resulting in little or no harm to companies or investors.” The authors go on to assert that “there is no proof of deceit or concealment in alleged backdating cases,” and that the backdating was “actually undertaken in good faith” arising from the high volume of options grants that led to “paperwork errors.”

While the authors’ essay is most directly intended to exonerate their client, their arguments join a chorus of other voices that have contending that options backdating in general is not illegal and the current proecutorial zeal to prosecute backdating is a combination of government (and media) overreaction and failure to understand the practical and legal ramifications of backdating. This view is most persuasively presented on Professor Larry Ribstein’s Ideoblog (here) and in Holman Jenkins columns in the Wall Street Journal (most recently, here).

There is absolutely no doubt that what has happened with the options backdating story is what usually happens when there is a contagion event across many companies. The media has jumped on the story, looking for scapegoats and all too eager to see this story as one more example of “greedy” corporate executives enriching themselves (supposedly) at shareholder expense. There is no doubt that some of the media coverage has swept with too broad a brush, and lumped together many companies and many kinds of activities as if the activity and the companies were all equivalent and equally culpable. But while not every company executive whose name has been associated with the backdating story is criminally culpable, neither is every one of them completely innocent, as the authors of the Journal op-ed piece seem to come close to suggesting.

It is undoubtedly the case, as the op-ed authors contend, that a number of different things have gotten “conflated” in the whole options backdating scandal. First and foremost, there is an unfortunate tendency for too many commentators to sweep together a whole range of conduct under the heading “options backdating.” As The D & O Diary has taken great pains to emphasize in discussing the options backdating scandal, what is commonly referred to as options backdating actually includes a wide variety of options related activities, including not just backdating itself, but options springloading (here and here), employee related options backdating (here), bullet-dodging (here), and even options exercise backdating (here). Each of these kinds of activities is different, each involves different actions, and each arguably involves varying levels of culpability, both potential, and in some cases, actual. More to the point, there varying aspects of each of these different sorts of activities that make the activities more or less arguably criminal.

The variables that potentially might make options related activities more arguably criminal can be seen best in an extreme example. As chance would have it, the same day as the op-ed piece appeared in the Journal, an extreme example arose in the case of William Savin, the ex-General Counsel of Comverse Technology. On January 10, 2007, Sorin settled the enforcement proceeding that had been brought against him by the SEC in connection with options backdating allegations. The SEC’s press release about the settlement can be found here. The SEC had charged Sorin, along with former Comverse CEO Kobi Alexander and David Kreinberg, Comverse’s former CFO, of engaging in a scheme to backdate Comverse options grants from 1991 to 2001. The SEC’s complaint against the three former officials can be found here. Their scheme is alleged to have resulted in the restatement of income because of the understatement of Comverse’s compensation expense. Sorin himself was alleged to have realized more than $14 million from the sale of stock underlying the exercises of backdated option that were granted during the 1991 to 2001 period. Sorin was specifically alleged to have played a critical role in the scheme by drafting grand documents with false grant dates. Sorin is also alleged to have facilitated a similar backdating scheme at Ulticom, a Comverse subsidiary, by creating false company records.

In settling the fraud charges, Sorin neither admitted or denied the allegations. (However, on November 2, 2006, Sorin pled guilty to a single count of conspiracy to commit securities fraud, mail fraud, and wire fraud.) As part of the SEC settlement, Sorin consented to be enjoined from further securities laws violations; to pay $1.6 million in dosgorgement, of which $1 million “represented the ‘in-the-money” benefit from the exercises of backdated options grants; $800,000 in prejudgment interest; and a civil fine of $600,000. The total value of the amounts Sorin agreed to pay is more than $3 million.

Even though Sorin neither admitted or denied the allegations against him, the allegations provide an interesting context to assess the op-ed authors’ assertion that backdating is no more than a mere scrivener’s error. By contrast to the benign picture the op-ed authors conjure, Sorin was alleged to have personally benefited; he was alledged to have falsified documents, both at Comverse and at Ulticom; and Comverse investors were alleged to have been deceived because income was overstated by the understatement of expense.

Using these elements as a framework to assess potential culpability, it seems to me that the op-ed authors’ theme that backdating is essentially innocent gets weaker the more a particular set of circumstances involves personal benefit, document falsification, and the greater the impact the activity had on the company’s reported financial condition. As they correctly contend, cases without these elements lack indicia of securities fraud. But as the allegations against Sorin suggest, there may be cases where these allegations of personal benefit and deception are present and where the shareholder harm was great.

Whether any particular case involved culpable behavior depends on what actually happened, and this is where the distinction between the different kinds of options grant activity matters most. As The D & O Diary pointed out when the criminal complaint was first filed against Gregory Reyes (here), the employee related options grant activity of which Reyes is accused seems to be different in kind and character from other alleged options backdating activity, precisely because it lacked the element of self-interest and self-benefit that may be involved in other kinds of options grant activities. So the differences between the kinds of activity matter. (A copy of the criminal complaint against Reyes may be found here.)

What these kinds of distinctions may mean for Steven Jobs is still an open question. As I have pointed out (here), the grant related practices under scrutiny at Apple involve both options springloading as well as options backdating. Moreover, one critical element – whether or not Jobs personally benefited from the options practices–is the subject of heated debate. For example, a January 11, 2007 Washington Post article entitled “Apple Chief Benefited From Options Dating, Records Indicate” (here, registration required) presents a perspective that the options he was granted in December 2001 and that were backdated to October 2001 personally benefited him when he later traded the options for registered shares he subsequently sold at a profit. By contrast, Professor Ribstein contends (here) that the same options grant involved no culpable activity and that the grant date was reasonably fixed at a date certain so that the exercise price could be fixed while Jobs continued his negotiations with the company over the size of the grant.

Without having the benefit of complete information, it is hard to tell what the government ultimately may do in connection with the options backdating at Apple, or for that matter at any of the other companies that are under investigation. But just as the op-ed authors argue that prosecutors ought not to conflate books and records violations with securities fraud, so too should distinctions be carefully drawn about the specific kind of activity involved, because different activities will involve different degrees of the elements that potentially could support allegations of culpability: self-benefiting activity, deceit, and shareholder harm. As the Comverse allegations illustrate, there are going to be at least some cases where these elements arguably support allegations of criminality. It seems to me that by “conflating” conduct that might be sufficiently self-interested and deceptive to constitute fraud with mere good faith paperwork errors, the op-ed authors seek to extend the justifiable excuse of the innocent to cover even the conduct of the culpable. Ironically, I happen to think that the lack of self-interest involved in the employee-related options backdating allegations against their client puts his client at the less culpable end of the spectrum.

According to an article in the January/February 2007 issue of Corporate Board Member entitled “Is Your Company Prepared for Bird Flu?” (here), boards should be anticipating and preparing for the potential impact of a bird flu pandemic. The article quotes former Secretary of Health and Human Services Tommy Thompson as saying that smart boards are preparing now, by reviewing contingency plans and establishing lines of authority in the event company leadership is stricken by the bird flu. The article does acknowledge that “[s]ome directors privately conceded that little attention is being paid to the specific challenges posed by a pandemic.”

As someone who has spend the better part of my professional career thinking and worrying about board focus and function, I have to admit that under the current circumstances I have a hard time seeing bird flu as belonging anywhere the top of the list of things boards at most companies are or ought to be worrying about. Along those lines, the article does contain the following:

Damian Brew, a managing director with Marsh’s professional-liability practice, says the risk of a pandemic pales against other exposures, including oil-price fluctuations, and adds that underwriters of directors’ and officers’ liability coverage are more concerned with options backdating and CEO pay disclosure. “Boards have a limited amount of time, and there are financial issues that should take priority over something that’s not likely to happen,” he says.

I agree with these statements. But the article goes on assert that boards that fail to plan for a bird flu pandemic “could find themselves targeted for dereliction of duty.” The article quotes one attorney as saying that Sarbanes-Oxley requires boards to take into account almost every conceivable problem that could put the company in jeopardy. The article quote another attorney as saying that “If the business has trouble functioning, you could have shareholders saying ‘Why wasn’t there a plan in place?’ You aren’t going to be able to say you hadn’t heard about it.”

Undoubtedly boards could allocate a portion of their scarce time together to worry about bird flu. They could also spend time worrying about global warming, land use policy, plate tectonics and its implication for seismic and volcanic activity, and the hole in the ozone layer. There are a limitless number of things that boards conceivably could spend their time on. At some point though, boards have to be focused on whether the company is on the right track, has the right management in place, or needs to make strategic changes. There undoubtedly are risks in every company’s environment, and boards should of course take reasonable steps to ensure that the company has a flexible catastrophe plan in place and that the plan adequately addresses the specific risks to which the particular company may most likely be prone. There are many threats facing companies today. Boards are doing their job best if they focus on the threats and opportunities that matter most immediately for their company.

Photobucket - Video and Image Hosting On January 11, 2007, the Public Company Accounting Oversight Board (PCAOB) released its annual inspection reports of Ernst & Young LLP and KPMG LLP. The reports can be found here and here. The PCAOB is required by law to annually inspect each accounting firm that audits more than 100 public companies. The agency’s reports on E & Y and KPMG are based on inspections done in 2005 of the firm’s audits of companies’ 2004 financial results. (The PCAOB previously released its reports of PWC and Deliotte & Touche.) If this seems like a long time ago to you, you are not alone.

As noted in a January 12, 2007 Wall Street Journal article (here, registration required), there have been “criticisms from investors and members of corporate audit committees that the agency is taking too long in getting the reports out and [the board] has pledged to try and speed up the process this year.”

The E & Y and KMPG reports cite multiple audit failures by both firms. The PCAOB identified 10 E & Y public company audits and 11 KPMG public company audits for criticisms. The E & Y report says that in “some cases” the errors appeared “likely to be material to the issuer’s financial statements” and the KPMG report says that in “one case” the result was likely to be material. However, according to its policies, the PCAOB does not identify the companies that had their audits cited. The PCAOB also does not make their entire inspection reports available publicly. The PCAOB’s statement of policy about issuing its reports, here, explains the statutory constraints on its ability to publicly release portions of the inspection reports that deal with criticisms that the audit firm has addressed within 12 months of the inspection. The statutory constraints also prohibit disclosure of information obtained from accounting firms and their clients.

While the PCAOB’s restrictions on its reports are statutorily compelled, the constraints produce a report that reveals relatively little, particularly with respect to the deficiencies noted. In the reports, each deficiency is separately identified and described, but only in the most general terms. The brevity of the descriptions prevent the reader from making any meaningful assessment about the deficiency, including any assessment of the deficiency’s seriousness or its impact on the reported financial condition of the audit client. The disclosure constraints are statutory, but the resulting reports are of relatively little use to investors and others (e.g., D & O insurance underwriters) who would certainly like to know more about the problems that were cited. For example, which problems were the ones that were likely to have been material? How material? What does it mean to say that in “some cases” the deficiencies in the E & Y reports were material — how many of the 10 E & Y audits cited, and which ones?

In addition, the PCAOB’s constraints on individual accounting firm’s inspections may be statutory, but arguably there are no statutory constraints on aggregate statistical information about the PCAOB’s inspections. The White Collar Fraud blog (here) has an interesting post about his unsuccessful efforts to obtain aggregate statistical information from the PCAOB, including the percentage of inspections that result in audit deficiencies by each firm. For example, the KPMG report says only that PCAOB inspectors visited 14 of 89 KPMG offices. That doesn’t tell us how many KPMG audits they reviewed; the inspectors found 11 KPMG audits with concerns, but did they review 11, 110 or 1100 audits to find the 11 violations? It clearly makes a difference. The D & O Diary agrees that the PCAOB should provide more statistical information about its inspections. There may be statutory constraints on its disclosures about individual inspections, but where the PCAOB is not constrained, it should make more information available, including specifically aggregate statistical information. I also wonder whether it would be possible for the PCAOB, consistent with its statutory constraints, to provide sufficient information for inspection report readers to be able to assess the seriousness and impact of deficiencies noted.

A January 12, 2007 CFO.com article entitled “Failing Grades for E & Y, KPMG” can be found here.

Photobucket - Video and Image Hosting Specter Reintroduces Thompson Memo Bill: As The D & O Diary previously noted (here), even though the McNulty Memo has replaced the Thompson Memo, there are still calls for a legislative remedy to the attorney-client privileges of employees who find themselves subject to criminal allegations. According to a January 10, 2007 CFO.com article entitled “Specter Re-Ups Thomspon Memo Battle” (here), Senator Arlen Specter has reintroducted the proposed bill he had previously advanced to try to circumvent the Thompson Memo. The CFO.com article quote Specter as saying that even though the McNulty Memo reflects “some improvement,” it still allows prosecutors to seek privilege waivers, which he says will “erode the attorney-client relationship.”

Senator Spector’s bill, originally entitled The Attorney-Client Privilege Protection Act of 2006, can be found here.

The Blogosphere Gets Respect: Amid the media coverage (for example, here) surrounding the lawsuit that Cisco Systems has filed against Apple over the use of the iPhone name, one particular detail caught my eye. That is, Cisco Systems declared its public position with respect to the lawsuit in a blog post (here), by its General Counsel, Mark Chandler. (Full disclosure: Chandler coincidentally happens to be a family friend.) As others have previously noted, blog posts increasingly are an important component of corporate media communication.

Photobucket - Video and Image Hosting The public dignity accorded the blogosphere got a boost earlier this week when SEC Chairman Christopher Cox acknowledged during a speech that he “uses blogs to gauge public reaction to securities issues.” (Refer here.) Not only that, but Cox previously posted a comment (here) on the blog of Sun Microsystems CEO Jonathan Schwarz. The SEC is also looking at whether blogs can be used to satisfy the disclosure requirements of Reg. FD.

As Professor Stephen Bainbridge noted with respect to Cox’s comments on his (Bainbridge’s) Business Associations blog (here), blogs represent increasingly important means “to communicate with lawyers, judges, and, it would seem, regulators” and that academics (or, I would assert, anyone) who wants to reach those audiences should have or have access to a blog. Cisco Systems clearly feels the same way.

Commissioner Cox, if you are reading this, you should know that you are cordially invited to guest post on my blog, anytime. Seriously. You don’t even need to call ahead.

Photobucket - Video and Image Hosting PLUS D & O Symposium: The 2007 Professional Liability Underwriting Society (PLUS) D & O Symposium is only days away. The 2007 Symposium will take place on January 31 and February 1, 2007, at the Marriott Marquis in New York City. I will be co-Chairing this year’s Symposium with my good friends Ivan Dolowich and Jeffrey Lattman. Among the many panelists and speakers will be such luminaries as Linda Thomsen, the head of the SEC Enforcement Division; Nell Minow, the founder and editor of the Corporate Library; and Charles Elson, Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, as well as many other distinguished speakers and guests. The keynote speaker will be former Senator and Secretary of Defense George Mitchell. The entire program schedule can be found here. The Registration materials are here. I look forward to seeing everyone there.

Photobucket - Video and Image Hosting In my prior comments on the Paulson Committee’s calls for regulatory reform (most recently, here), I have suggested that perhaps the U.S. securities markets may be better off without at least some of the companies that are avoiding the U.S. exchanges’ tougher listing requirements. A recent report by a U.K. accounting firm contains interesting data that may be pertinent to this question.

BDO Stoy Hayward reports (here) that annual reported instances of fraud in the U.K. rose 33% between 2005 and 2006 and the value of the reported fraud rose almost 40%. (According to the firm’s website, the full report will be available in February.) A January 8, 2007 New York Post article reporting on the BDO Stoy Howard study, entitled "Brits Get Bit: Lax British Marts Attract Fraud Along With U.S. Biz" (here), examines whether the increase in London-listed offerings by companies unwilling or unable to meet the U.S. listing requirements explains part of the increase in U.K. fraud. The article notes (as The D & O Diary has previously noted, here) that the London exchanges have "accepted scores of new listings of Chinese and Russian companies that may not have met New York exchanges’ stricter rules." The article quotes the head of the BDO Stoy Hayward firm’s fraud unit as saying that "I have no doubt that some businesses’ plans have been deliberately optimistic, and property, including intellectual property falsely valued."

As Jack Ciesielski notes on the AAO Weblog (here), commenting on the New York Post article linked above, "Investors should be thankful that seedier companies have found the U.S. markets too difficult to easily game because of Section 404." And as I previously have noted (here and here), lowering standards to attract weaker companies is not a sustainable advantage. The valuation premium that companies listing on U.S. exchanges enjoy – because of the stricter regulatory environment – is a real and sustainable advantage.

UPDATE: The With Vigour and Zeal blog (here) adds an important additional perspective on this post. The WVZ blog does concede that the BDO Stoy Hayward study may be relevant to the question whether U.S. exchanges are better off without the companies drawn to London by lighter regulation; however, the WVZ blog also emphasizes that the BDO Stoy Hayward study is concerned with a very wide variety of frauds, not all of which involve listed companies. Among other things, the accountants’ report is concerned with a species of tax fraud that is peculiar to the U.K. So, the WVZ blog concludeds, it is "therefore not wholly representative to discuss the report’s findings in the context of the securities markets" or in connection with the question of the competitiveness of the U.S. securities markets. I don’t disagree with the WVZ blog, but simply note that if the accountants’ study is not entirely relevant, it is not entirely irrelevant either. Nevertheless, I agree that the WVZ adds an important additional gloss to this post, and for that reason, readers should refer to the WVZ blog for a more complete picture of the implications of the BDO Stoy Hayward report.

Speaking of the London markets, Legalweek.com has a recent article (here) discussing the potential liability of the London Stock Exchange’s Alternative Investment Market’s Nominated Advisors (or Nomads) in U.S. courts under U.S. securities laws. Hat tip to the With Vigour and Zeal blog (here) for the link to the Legalweek.com article.

Photobucket - Video and Image Hosting Korea Adopts Securities Class Actions: Another cause the Paulson Committee cited as a reason foreign companies may be shunning U.S. exchanges is the U.S. litigation environment. But as I have previously argued (most recently, here), investors in other countries increasingly are demanding (and getting) the right to hold company management accountable in local courts, and as a result the differences between the U.S litigation environment and those of at least some other countries may be diminishing. The most recent example of another country moving toward a U.S. style class action litigation system is Republic of Korea, better known as South Korea.

According to a January 8, 2007 Korea Herald article entitled "Open Season for Securities-Related Class Actions" (here), South Korea adopted the Securities Related Class Action Act of 2005, subject to a "grace period" during which its enforcement was stayed. The grace period expired on December 31, 2006, meaning that companies listed on the South Korean stock exchanges (including the approximately 730 companies listed on the Korea Exchange), face potential securities class action exposure starting in 2007. At least based on the article, the new Korean class action sounds similar to the U.S.-style securities class action lawsuit, post PSLRA. The article’s author, a Korean attorney, speculates that as many as 30 of Korea’s 1,600 listed companies could face securities class actions annually.

An interesting discussion of the state of corporate governance reform in Korea, including a discussion of the new Act, can be found here.

The D & O Diary notes that one U.S.-listed Korean-based company, Pixelplus, was sued in a securities class action lawsuit in the U.S. (here) during 2006.

More on Short Selling in PIPE Financing Transactions: In a recent post (here), I reported on two recent SEC enforcement actions involving short selling by investment banks or broker dealers in connection with PIPE financing transaction. On January 4, 2007, the SEC filed yet another settled enforcement action (here) involving short selling in connection with a PIPE transaction, alleging alleged that a trader and a hedge fund entered into contracts to purchase shares in a PIPE offering and then sold those shares short. The SEC Actions blog has a detailed and interesting discussion (here) of the new enforcement action, as well as of the SEC’s position regaring short selling in connection with PIPE transactions, including current SEC rule making regarding short selling in PIPE transactions.

 

Photobucket - Video and Image Hosting There is no particular reason why I should bestir myself to defend ousted Home Depot CEO Robert Nardelli: He certainly bagged sufficient swag to soften the blows of even his most outraged attacker. Yet I think it is important to incorporate into the modern morality play that his departure has become a fair recognition that by some measures his tenure as Home Depot’s CEO was successful. From 2000 (when Nardelli joined the company) to 2005, Home Depot’s revenue nearly doubled, from $45.7 billion to $81.5 billion, and during that same period Home Depot’s profit increased, from $2.6 billion to $5.8 billion. Dividends quintupled. The company’s return on capital increased almost 20 percent, a full 10 percentage points above its cost of capital.

Nevertheless, the consensus view seems to be that his ouster is a victory for shareholders, and that they have shareholder activists to thank. A typical example is the January 5, 2007 New York Times article entitled “Gadflies Get Respect and Not Just at Home Depot” (here), which states that “shareholder activists could claim one of their biggest prizes yet when Home Depot announced the resignation of its chairman and chief executive.” The article also notes that since July, activists have also successfully pushed out the CEO’s at Pfizer and Sovereign Bank.

In touting Nardelli’s ouster as a shareholder activist success story, the Times article note that he had long been “a target of shareholder ire for his large compensation and the company’s flagging share price.” It is this latter point – Home Depot’s flagging share price – that really seems to be at the heart of Nardelli’s problems. A January 3, 2007 Fortune.com article entitled “Nardelli’s Downfall: It’s All About the Stock” (here) makes the connection explicit. Gretchen Morgenstern made the same point in her January 4, 2007 New York Times article entitled “A Warning Shot By Investors to Board and Chiefs” (here, subscription required), in which she says that Nardelli’s compensation was “completely at odds with the dismal performance of Home Depot stock on his watch.”

One question that needs to be asked is how much of what happened to Home Depot’s share price had to do with Nardelli and how much it had to do with where the share price was when Nardelli took over. As PointofLaw.com points out (here), Home Depot’s share price was already at stratospheric levels when Nardelli arrived.

But the more troublesome aspect of the criticisms about Home Depot’s share price is the clear implication that Nardelli would still have a job (although he would be $210 million poorer) if he had managed to get the share price to go up. It used to be the conventional wisdom that the market determined a company’s share price, not the CEO. Moreover, it has not been that long since corporate America faced a series of crises and scandals because too many CEOs seemed to think it was their job to engineer their company’s share price rather than to run their company. Corporate activists may be congratulating themselves for their “victory” at Home Depot, but they should be very careful about the lesson here. The danger, as pointed out on the ContrarianEdge blog (here) is that “the ousting of Bob Nardelli sent a wrong message to America’s CEOs : it taught them an incorrect lesson – manage the stock, not the company.”

No one (at least not me) is going to defend the size of Nardelli’s pay package. But as Alan Sloan points out in his January 4, 2007 Washington Post column “Don’t Blame Nardelli” (here), the problem isn’t Nardelli, it is “the contract that Home Depot’s Board gave him.” Home Depot’s board comes in lot of criticism over Nardelli’s compensation. A lot of other people also seem to want to blame the Home Depot board for the whole mess (see here).

Blaming directors for excessive CEO compensation has been a fruitful source of shareholder litigation in recent years. For example, shareholders sued the Disney Board for the $140 million severance paid to departing President Michael Ovitz. And the NYSE’s Board faces litigation for the $190 million pay package paid to departed CEO Richard Grasso. The names Disney and NYSE resonate here because of their mystic chords of connection with Home Depot. One of the defendant board members in the NYSE case is Kenneth Langone, who also happens to be a Home Depot board member. Langone also was a director of General Electric, and helped to recruit Nardelli to Home Depot from GE. According to a Janaury 5, 2007 New York Times article (here), shareholder activists blame Langone for both Grasso’s and Nardelli’s pay packages. The Disney connection to Home Depot is through Martin Lipton, of the Wachtell Lipton firm. According to a January 4, 2007 New York Times article (here), Lipton was not only hired to defend Nardelli and the Home Depot board against shareholder activist Relational Investors, Lipton did the same thing for Disney (and the NYSE, for that matter).

But the outcome of the Disney case should provide some some deterrence for shareholders itching to sue Home Depot’s board over Nardelli’s pay package and severance. Even though the shareholders took their case over Ovitz’s severance all the way to the Delaware Supreme Court, the Disney board ultimately prevailed. (See my article commenting on the Disney case here.)

While Nardelli’s pay package undeniably is eye-popping, there are some good reasons why CEOs deserve to be well paid. The first is that it is a tough job. According to one news report (here ), “Mr. Nardelli was an obsessive workaholic who rose at 4 a.m., logged 14-hour days and routinely worked through the weekend.” The second reason is that it is a tough job to keep. According to a January 4, 2007 Chicago Tribune article entitled “Pressure’s on for CEO’s to Deliver–Now” (here), the average tenure of a CEO is 48 months. Shareholder activists may decry CEO’s lavish severance benefits, but at one level high severance pay make perfect sense; CEO’s obviously want to provide as much deterrence as possible against a board’s quick hook, and also want protections against sudden unemployment. These comments should not be interpreted as a defense of excessive CEO compensation, but are merely intended to suggest that there may be more to CEO’s severance arrangements than mere greed alone.

All of that said, there is one aspect of Nardelli’s compensation history that I find undeniably troublesome. As noted in Gretchen Morgenstorn’s article (here), during the middle of 2004, Home Depot “quietly changed the measurement it used to calculate long-term incentive pay for executives.” Whereas the prior measure had used peer group comparisons of Home Depot’s earning per share, the new measure was based solely on Home Depot’s earning per share. Morgenstern’s article doesn’t mention it, but at the same time as this change was put in place, Home Depot was engaged in a massive share repurchase program. This obviously had the impact of driving up the company’s reported earning per share – and management’s bonus compensation. As I have previously noted (here), this practice of using share buybacks to boost EPS based executive compensation is the target of increasing criticism.

It is probably also worth noting that Home Depot and its board already face a number of lawsuits over other corporate governance and business practices. Shareholders have sued over the company’s options grant practices, which reportedly involve options backdating during a nearly 20 year period from 1981 to 2000 (see news reports here). And Home Depot and its board also faces a 2006 securities class action lawsuit (here), based on whistleblower allegations, that the Company misrepresented its financial condition by fraudulently inflating charges to vendors for defective and/or damaged merchandise; and pressured suppliers who complained about excessive chargebacks by threatening to reduce orders of their products.

A Word to the Wise: Gretchen Morgenstern’s description of Nardelli’s ouster as a “surprising defenestration” has drawn a certain amount of humorous criticism (here), but The D & O Diary takes it as a point of pride that we previously described the ouster of corporate executives over options backdating as “defenestration” – and our prior post (here) helpfully included the word’s etymology (with pictures!).

Latest Proof of How Cool the Internet Is: Want to see Nardelli’s contract with Home Depot? Here it is.

Photobucket - Video and Image Hosting In their Consolidated Amended Shareholder Derivative Complaint filed December 18, 2006 in the federal court in San Jose, the plaintiff in the Apple Computer shareholders derivative action have zeroed in on alleged options springloading practices. A January 3, 2007 Los Angeles Times article entitled “At Apple, Timing Led to Overnight Windfalls” (here) describes the allegations.

The Amended Complaint alleges that three Apple executives received a windfall on August 5, 1997 when they were granted options to buy over 2 million shares, the day before Apple CEO Steven Jobs announced during a keynote speech at the MacWorld conference that Microsoft would invest $150 million in Apple and share patented technologies. Apple’s agreement to put Microsoft’s Internet Explorer on Macintosh computers sent Apple’s share price up 48 percent in two days. The options vested in installments over a three year period, during which Apple’s share price tripled. The three Apple executives who received the shares were Chief Financial Officer Fred Anderson, Controller Robert Calderoni and Senior Vice President Jonathan Rubinstein.

The Amended Complaint also alleges that Jobs himself received two backdated options grants in 2000 and 2001, but that in March 2003, Apple canceled the options in exchange for 5 million shares of restricted stock. Jobs sold the restricted stock the day they vested, March 19, 2006, the day after the Wall Street Journal ran its front page article entitled “The Perfect Payday” (here) that launched the whole backdating firestorm.

Apple’s Backdating Disclosures: The Dance of the Seven Veils? In its December 29, 2006 press release (here), Apple announced the completion of its internal investigation of its stock options practices. The release contained a joint statement from the chair of the board’s special investigative committee, former Vice President Al Gore, and the audit committee chair, Jerome York, stating, among other things, that Apple’s board “has complete confidence in Steve Jobs and the senior management team.” In its 10-Q filed he same day (here), Apple detailed the results of its investigation, stating:

Based on a review of the totality of evidence and the applicable law, the Special Committee found no misconduct by current management. The Special Committee’s investigation identified a number of grants for which grant dates were intentionally selected in order to obtain favorable exercise prices. The terms of these and certain other grants, as discussed below, were finalized after the originally assigned grant dates. The Special Committee concluded that the procedures for granting, accounting for, and reporting stock option grants did not include sufficient safeguards to prevent manipulation. Although the investigation found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, he did not receive or financially benefit from these grants or appreciate the accounting implications. The Special Committee also found that the investigation had raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants.

The report does not identify the two officers, but press reports (here) suggest that they are Fred Anderson (who resigned as Apple’s CFO in 2004 and left Apple’s Board in September 2006) and former general counsel and corporate secretary Nancy Heinen, who resigned in May 2006.

In an earlier SEC filing, Jobs expressed his contrition for these practices. In Apple’s October 4, 2006 8-K (here), Jobs stated “I apologize to Apple’s shareholders and employees for these problems, which happened on my watch.”

Apple’s board exoneration of Jobs has drawn harsh criticism. A January 5, 2007 San Jose Mercury News article entitled “Apple is Giving Jobs a Free Pass, Critics Say” (here) quotes Lynn Turner, a managing director of shareholder advisory firm Glass Lewis and the former SEC chief accountant, as saying “Apple’s board derserves an ‘F’ for how it handled its backdating investigation.” A January 4, 2007 BusinessWeek.com article entitled “Is Steve Jobs Untouchable?” (here) suggests that Apple’s board and investors alike may prefer a go-softly approach with Jobs because of his iconic status and his franchise value to the company.

But while Apple’s board may prefer that Jobs is given a pass, there may be too many questions for Jobs to escape further scrutiny. In a January 6, 2007 Wall Street Journal op-ed piece entitled “Inside Jobs” (here, subscription required) Harvard Law School professor Lucien Bebchuk raises a host of concerns about the troubling unanswered questions in Apple’s board’s special investigation report.

And there are still the governments investigations (here). The SEC and the U.S. Attorney’s office are both investigating Apple’s options practices, and they undoubtedly will insist on answers to the unanswered questions. In addition, some commentators have suggested that government investigators may also be interested in Apple’s disclosures about its options practices. The BusinessWeek.com article linked above contains the comment that

Some lawyers say government investigators may be troubled that Jobs’s role in the backdating has appeared to grow with each of the four filings since Apple first reported last June, and could cause them to question the reliability of Apple’s findings. “One of the factors the SEC looks to is [whether there is] full and complete public disclosure, not the dance of the seven veils,” says one highly regarded securities lawyer.

With all of these questions, it is understandable that, according to today’s Wall Street Journal (here, subscription required), “When he hops onto the stage to kick off the MacWorld conference in San Francisco Tuesday, Apple Computer Inc. Chief Executive Steve Jobs will seek to return the spotlight to innovative gadgets and away from a stock-option backdating mess at the company that has nabbed headlines for months.” The D & O Diary suspects that this year, there won’t be a massive award of stock options to Apple executives the day before the MacWorld conference.

Special thanks to a loyal D & O Diary reader who prefers anonymity for the link to the Los Angeles Times article.

Photobucket - Video and Image Hosting While the number of securities fraud lawsuits declined in 2006 (see here and here), the average size of securities fraud lawsuit settlements increased by 37% relative to 2005, even excluding the impact of the Enron settlement, according to a January 2, 2006 study by National Economic Research Associates (NERA). The study, entitled “Recent Trends in Shareholder Class Action Litigation: Filings Plummet, Settlements Soar” (here), also found that there were more settlements over $100 million in 2006 than in 2005, which was itself a record-breaking year. There were four settlements in 2006 over $1 billion, even though prior to 2006 there had only been 3 settlements over $1 billion. Seven of the ten largest settlements have occurred in 2005 and 2006.

The average securities class action settlement in 2006 was $86.7 million, which is 17.7% greater than the 2005 average settlement of $73.6 million. (As The D & O Diary previously noted, here, the annual averages reported in NERA’s studies may differ from averages reported elsewhere, because NERA assigns settlements to the year in which they are first finally approved, while some other analysts assign settlements to the year in which they are first announced.) These averages reflect in part the inclusion of the mega-settlements over a billion dollars. If the annual averages are normalized by excluding the billion dollar settlements from both 2005 and 2006, the 2006 average of $34 million is still about 37% above the normalized 2005 annual average of $25 million.

But while these average figures are impressive, averages can be skewed by a relatively few data points at the extremes. As the NERA study notes, a median is “more descriptive of typical cases.” The median settlement also rose to $7.3 million in 2006, about 4.2% above the 2005 median settlement of $7.0 million. The $7.5 million 2006 median is also 21% greater than the five-year $6.2 million median for the period 2002-2006.

The NERA study also examines the declining frequency of securities fraud lawsuit; while this trend has been reported elsewhere (for example, in the Cornerstone study also released on January 2, here), the NERA study adds the interesting observation that the percentage decline is not uniform amongst the federal circuits. The NERA study notes:

The largest drop in absolute terms has come from the Ninth Circuit, where, compared to a peak of 68 in 2004, there have been only 27 shareholder class action suits filed through December 15, 2006. However, every circuit has fewer standard filings in 2006 than the average level from 1998-2004. The drop is smallest in the Second Circuit, which in 2006 has seen fully 87% of the filings it typically received over 1998-2004.5 The rest of the circuits as a group have received only about half of their typical 1998-2004 filings. All but two of the circuits had a decline of at least one-third from 2005 to the projected 2006 figures.

In examining the possible reasons for the decline in securities fraud lawsuit frequency in 2006, the NERA study cites this differential impact as possible evidence that improved corporate behavior as a result of Sarbanes Oxley is probably not the explanation. The decline would be more uniform if Sarbanes Oxley were the cause. (The study examines and rejects the hypothesis that the lack of geographic uniformity is a result of the regional distribution of companies in different industries.) The NERA study speculates that the Milberg Weiss indictment and the Lerach firm’s distraction with the Enron litigation may possibly explain the decline.

The study also notes that since the 1995 passage of the Private Securities Litigation Reform Act, the chances are much greater that securities fraud cases will be dismissed. More than 38% of the cases filed between 1999 and 2004 were dismissed (although this figure may be overstated because it includes dismissals without prejudice and cases that are still on appeal).

The NERA study noted that the biggest single factor determining settlement size is the magnitude of investor loss; average investor losses ballooned from $140 million to $2.5 billion in 2003. Other factors that can increase the size of the settlement include the involvement as plaintiffs of multiple classes of securities holders (such as bondholders or options investors, as well as equity shareholders); the presence of accounting improprieties (which increase expected settlements by more than 20%); and the presence of an IPO (which increases expected settlements by approximately a third). Companies in the health services sector also pay significantly higher settlements than defendants in other industries.

D & O insurers will likely cite the increasing annual average and median settlement levels to counter arguments that D & O insurance premiums should decline as a result of the declining claim frequency. It undoubtedly is hard for the carriers to imagine dropping prices while dollars are flying out the door to fund mega-settlement. But if the carriers were reserving appropriately (admittedly, a big “if”), they should have reserved for these losses years ago, and so the current payouts should not be affecting current calendar year results. In addition, the current settlements involve cases filed years ago. The premiums to be collected now will go to fund losses to be incurred in the future. The NERA study documents that the single most significant predictor of settlement size is the magnitude of investor losses; the Cornerstone study (here) documents that the investor losses in cases filed in 2006 are down significantly from the investor losses involved in the cases filed in the late 90s and early part of this decade. In other words, future settlements should be expected to start trending downward as the cases filed this year move toward resolution. And in any event there are significantly fewer cases to start with, so aggregate losses should also be expected to trend downward.

Nevertheless, as I have previously discussed at length (here), there may still be compelling reasons why carriers may be justified in continuing to resist price decreases. These other considerations include the fact that while the number of securities fraud lawsuits is down, overall claims activity is up (including, for instance, the nearly 130 shareholder derivative claims filed in connection with the options backdating scandal, and the wave of derivative lawsuits growing out of private equity takeovers and arising from activist hedge fund activity). There are other developing threats as well, including among other things, increased activity under the Foreign Corrupt Practices Act. (My prior post, here, details these additional evolving exposure areas).

But while carriers may reasonably try to contend that there are reasons to hold the line on pricing, carriers undoubtedly will continue to face pressure to lower their rates, particularly if securities fraud lawsuit activity remains at its current lower levels.

A CFO.com article discussing the NERA study can be found here.

Photobucket - Video and Image Hosting A dispute arising out of the Clifford Chance law firm’s brief attempt to establish a California presence by recruiting a number of partners from the late, lamented Brobeck, Phleger & Harrison firm has resulted in a ruling under New York law on the proper standard to use in allocating loss between covered and uncovered parties under a management liability policy, according to a January 3, 2007 Law.com article entitled “Judge Rebuffs Clifford Chance’s Bid to Recover Costs of Brobeck Settlement” (here).

According to the article, in 2002, Clifford Chance recruited 17 partners from Brobeck’s San Francisco office (including the firm Chairman, Tower Snow) to open a California office. Brobeck declared bankruptcy the following year. A San Francisco Chronicle article detailing the firm’s dissolution can be found here. The Brobeck bankruptcy trustee and retired Brobeck partners apparently pursued claims against Clifford Chance and the departed Brobeck partners, alleging that partners’ departure, induced by Clifford Chance, had precipitated Brobeck’s demise. In 2004, Clifford Chance agreed to pay $5.5 million to Brobeck’s bankruptcy trustee and an undisclosed amount to a group of retired Brobeck partners. The trustee’s claim and the circumstances surrounding the claim settlement are described here.

Clifford Chance sought to have its management liability insurer, Indian Harbor Insurance Company, pay the full amount of the settlement plus $2.3 million in legal fees. The insurer said it should have to pay only 40 percent of the settlement, arguing that the balance should be allocated to the former Brobeck partners, who were not covered under the Clifford Chance management liability policy.

In its motion for summary judgment, Clifford Chance argued that the court should apply the “larger settlement rule,” pursuant to which management liability insurers are barred from allocating loss to uninsured corporate entities unless those entities’ activities resulted in a larger settlement.

Manhattan Supreme Court Justice Bernard J. Fried found that there was no New York precedent for applying the “larger settlement rule.” The rule, he noted, had been developed in the Ninth Circuit (in the Nordstrom case) and in the Seventh Circuit (in the Caterpillar case) in cases involving the allocation of costs under policies that lacked explicit allocation provisions. The Clifford Chance policy contained language stating that the loss should be allocated between covered and uncovered parties taking into account “the relative legal and financial exposures of, and relative benefits obtained in connection with the defense and/or settlement of the Claim by the Insured and others.” Based on this language, the Court found that the appropriate test to apply is the “relative exposures” rule, pursuant to which loss is allocated between covered and uncovered parties according to their relative exposure to liability. The Court reserved for trial the question whether the insurer appropriately allocated 60 percent of the loss to the uncovered parties.

Disputes over allocation of loss between covered and uncovered parties have been relatively infrequent since the inclusion of entity coverage as a standard part of D & O liability policies in response to the Nordstrom and Caterpillar decisions. The inclusion of the corporate entity as an insured eliminated disputes that a portion of defense costs or settlement amounts were allocable to the corporate defendant, which would not have been covered under prior D & O policy forms. But in addition to the inclusion of entity coverage, insurers reacting to the Nordstrom and Caterpillar decisions also included as a standard feature of their policies allocation language of the type the Court applied in the Clifford Chance case. The interesting thing about the Court’s ruling is that shows how a court will interpret and apply the language when allocation disputes do arise. The Court’s ruling suggests that in future disputes, parties may be well advised to take into account the need for an allocation and attempt to negotiate rather than forcing a judicial resolution.

According to January 2, 2007 news reports (here and here), DaimlerChrysler AG has reached a settlement with its D & O insurers in connection with the $300 million settlement of the securities class action lawsuit that had been filed against the company.

The securities class action lawsuit was filed in May 2002, relating to the 1998 merger of Daimler Benz and Chrysler that formed the company. The securities lawsuit had alleged that the defendants issued statements assuring the markets that the transaction would be a "merger of equals," when defendants intended to turn Chrysler into a division of the merged company. The lawsuit cited an interview with former DaimlerChrysler Chairman Jurgen Schrempp in which he said that the transaction had been referred to as a merger of equals rather than as a takeover "for psychological reasons" only. In August 2003, the Company agreed to settle the securities lawsuit for $300 million (or about 240 million euros at the then applicable exchange rate). Further information regarding the securities litigation settlement can be found here.

The company sought to have its 200 milllion euros directors’ and officers’ liability insurance program cover the bulk of the settlement. According to news reports, only AIG agreed to contribute its limit (25 million euros). The eight remaining insurers on the D & O program declined to pay, apparently arguing that Schrempp’s comments showed that the misrepresentations were intentional, which led to litigation between the Company and the remaining insurers. (The remaining insurers were led by ACE and are each named in the news reports linked above.)

The lawsuit between the Company and the remaining D & O carriers was scheduled to go to trial on January 9, 2007 (here, in German), but according to the January 2 news reports linked above, the parties reached a settlement pursuant to which the eight carriers reportedly agreed to pay 168 million euros out of the remaining 175 million euros in limits.

According to Reuters (here), the head of ACE’s European Operations said that he "hoped the settlement would spark a discussion in Germany about whether Directors’ and Officers’ liability insurance coverage was too broad."

The settlement of the securities class action lawsuits was unrelated to the separate but similar individual lawsuit brought by Tracinda Corporation (owned by Kirk Kirkorian) in Delaware federal court. Tracinda claimed that defendants’ statements that the transaction was a "merger of equals" had deprived it of a merger premium for its Chrysler shares. The Tracinda lawsuit went to a bench trial between December 2003 and February 2004, and in April 2005, the court entered judgment in the defendants’ favor, rejecting Tracinda’s arguments. Tracinda’s appeal to the Third Circuit remains pending. (Details regarding the Tracinda action can be found here and here.)

In 2004, a separate action was also filed in Delaware federal court on behalf of current of former DaimlerChrysler shareholders who are neither citizens or residents of the United States and who acquired their DaimlerChrysler shares through a foreign stock exchange. The district court dismissed the complaint in January 2006. The plaintiffs’ appeal to the Third Circuit remains pending.

In addition, in 1999, former shareholders of Daimler Benz instituted a valuation proceeding against the merged company in Stuttgart district courts. The shareholders claimed that the exchange ratio used in the merger did not properly value their shares. An expert commissioned by the court issued a December 2005 report calculating a range of alternative values for the shares, and in August 2006, the court, in reliance on the expert’s report, ruled that the company must pay the shareholders additional compensation which amounted in the aggregate to about 232 million euros. The company continues to contend that the original ratio used was appropriate. Details regarding the Stuttgart valuation action can be found in DaimlerChrysler’s annual report, here (refer to pages 182 through 186).

Special thanks to the new With Vigor and Zeal blog (here) for the links to the news reports and other sources regarding the D & O insurance settlement.

An interesting Tuck School of Business at Dartmouth case study about the DaimlerChrysler merger, including an examination of the reasons why the merger failed, may be found here.

An excerpt from Taken for a Ride: How Daimler-Benz Drove Off With Chrysler, the book length examination of the merger, can be found here. The excerpt contains the following memorable description of Schrempp’s departure from the first meeting between the managers of the two companies:

Schrempp and the group bellowed song after song until the wee hours. The German co-chairman led one final chorus of ”Bye, Bye, Miss American Pie.” Then, with a wild gleam in his eye, Schrempp grabbed his ever-present assistant, Lydia Deininger, picked her up, and threw her over his shoulder. The room exploded in laughter as Schrempp snatched a bottle of champagne in his free hand, raised it in the air, and yelled out with a grin: ”See you later, boys!” Then he carried her off, not to be seen for the rest of the night.

 

More Last Words on Skilling’s Sentencing: We here at The D & O Diary would have thought that the last word on Jeffrey Skilling’s sentencing had already been written, but a January 1, 2007 post on The New Yorker’s website (here) by Malcolm Gladwell (author of Blink and The Tipping Point) sets out a dramatic retelling of the sentencing hearing, including Skilling’s lawyer’s unsuccessful attempt to have the sentence reduced 10 months so that Skilling could serve his sentence at a lower security facility. An interesting short commentary on the New Yorker column appears on Dealbreaker.com, here. The D & O Diary’s prior comments on the Skilling sentencing can be found here.

The Art of Conversation: The current issue of The Economist magazine includes an examination on the dying art of conversation. The article (here, subscription required) warrants reading in full, but here is a selected sample:

The more modern the manual of conversation, the more concrete its advice is likely to be. Ms Shepherd offers seven quick ways to tell if you are boring your listeners, which include: "Never speak uninterrupted for more than four minutes at a time" and "If you are the only person who still has a plate full of food, stop talking." Her checklist of things best not said to the parent of a newborn baby should be memorised for future use. It comprises: "What’s wrong with his nose?" "Should he be that colour?" "Isn’t he awfully small?" "Shouldn’t you be breast-feeding?" "Did you want a boy?" "Is he a good baby?" "He looks like Churchill!/She looks like ET!" "It’s really cute!"