Lecture Sixteen

What are the two ideas that corporate governance encompasses?

• Provide protections shareholder 

• Org rights and respons of those who own, mng, the corp 

What is the goal of audit?

Provide reasonable measure of assurance to shareholders that BOD and mgmt are honoring their fiduciary obligations to accurately report to shareholders what is happening to corps 

Tell me about shareholder rights and corporate governance in relation to the law? (2 things)

• Corp gov big issue for fed and state gov bc potential for investors to be scammed 

• Post these fin scandals has led to laws 

Fiduciary

A lawful obligation to what is in party B's best interest 

What are the three fiduciary relationships within a biz firm?

• Partners fiduciary relationship w/other partners  

• Shareholders and BOD 

• Shareholders and mgmt  

If it’s demonstrated that either the BOD or mgmt has acted to enrich themselves at expense of shareholders what could a shareholder do?

Shareholders can sue through shareholder derivative lawsuit  

What happens if a shareholder lawsuit is won by the shareholders?

• BOD or mgmt have to pay out of pocket money

• that money goes back to the treasury of the corp

Crisis

here people lose a lot of money usually lead to more reg to fix it so it won't happen again  

What were the three crisis that led to new rules to protect against stock mkt abuse and what laws did they lead to?

• .com bubble and accounting scandals = SOX

• Global fin crisis 07-09 = Dodd-Frank

• Depression in 30s = fed agencies to provide oversight to banks and protection for people involved in securities/SEC

Tell me about what led into the SOX act in 2002

In aftermath of corp scandals bad job reporting and audit by accounting firms and corporate shenanigans 

What are some highlights from the SOX act?

• impose acctg standards to prevent fin misreporting

  • lead audit partner rotate every five yrs

  • public co acctg oversight board created the spot checks audits work

• held mgmt respons for accurate fin reports

  • CEO/CFO had to certify accuracy of reports

  • Reqs surrendering profits from sale of stocks/profit = clawback

• strengthened power and responsibility of board of audit committees

• est heavy criminal penalties for violating the act

• audit firms prohibited from doing consulting work for corps while also auditing their books

Why were banks lending people money to buy a house despite being bad risks?

Moment bank lends money for the house the bank has an IOU and sells it to a place like Goldman Sachs and they make a collateral debt obligation that assembles a little bit of IOUs from all around and sells it to a retirement fund in WA state they will take this collateral debt to a dude who rates it and then buys it (dude who rates is paid by goldman sachs) 

What did dodds frank do?

• Say on pay for large corps but not binding top leaders don't have to follow the rec stockholders happens every 3 yrs 

• Consumer fin protection bureau

• Disclosure of CEO and top leaders pay and pay relationship w/median employ pay  

• Clawbacks

What was the best way tod believes we should be paying CEOs?

Deferred bonuses

• Wait a long time that nothing has to be restated and no shenanigan

Tell me about the post 30s regulatory enviroment?

• Dept of justice is empowered as only fed entity that can start a crim action that can result in jail time  

• SEC power to bring civil suits/provide injunctive relief against corps and corp offices 

• corp officers/corp can get in trouble through rule 10B5

What is injunctive relief?

Injunctive relief is like you aren't allowed to do something or act a certain way

Rule 10B5

Makes materially knowingly untrue related to known risks or misleading performances statements could be indirectly or indirectly comm  

• Engage in insider trading related to statements above 

What are the three main tools to coercive corp mngrs and BOD to act respons

• US sentencing reform act

• Shareholder lawsuits

• securities law

What are the three things a judge has to consider before putting or sentencing jail/probabtions (fed sentencing guidelines)?

• demo that there is reasonable compliance plan (internal controls) prior to misconduct

• voluntairly and timely disclose misconduct to gov when it was internally discovered

• cooperate ID specific indivs who engaged in misconduc

What are the fed sentencing guidelines designed to do?

Guidelines are designed to appeal to corp insiders fiduciary obligations to shareholders 

Tell me about shareholder lawsuits

Entirely w/in control of indiv shareholders not gov run they can initiate them by themselves 

• File them against BOD, mgmt, or other conspiring third parties

Tell me about securities law

• Available to gov and indiv shareholders and gov can bring them as a crim SEC as a civil  

• Rule 10B5

Tell me more about rule 10B5 + ex of when it could be applied

• applies all securities

• there is a safeharbor w/in the law = when statements are made in conjunciton w/a meaningful cautionary warning

• Ex: consider todco publicly traded on stock exchange tod knew info of drug not going to be approved and tell shareholders that actually will be = can apply 10B5 

To win a 10B5/securities lawsuit what should you prove?

• False statement about a material fact/omitted a material fact  

• Done intentionally  

• Plaintiff justifiably relied upon this false statement  

• Led to plaintiffs injury or fin loss 

Tell me about the boeing case:

• Background

  • Airbus to update the A30 that service dom flights w/new larger engine that would make it 15% more fuel efficient and pilot didn't have to retrain prob for boeing  

    • So obvious choice upgrade engine for boeing but boeing couldn't slide a new engine underneath the wing  

    • 3/20/19 found a way to put engine above the wing boeing noted that it would have sim benefits  

  • Moving up engine titled the nose upwards and they installed MCAS  

    • MAX training didn't cover MCAS 

  • Boeing wanted to be on side of envelope where not new plane and don't have to do expensive training  

    • SW nego a purchase a ton of maxes before delivery and understood that if flight sim needed was going to be very expensive so they included in their contract where boeing agrees to 1M penalty per plane if flight sim needed = 200M in total in contract penalties  

    • Boeing huge fin stake in making sure planes didn't req pilots of airlines to go do it  

  • MCAS more dangerous system despite catastrophic sim  

  • Mark played definitive role that there was min pilot training on the max released messages from Mark Forkner  

    • He personally emailed the FAA for MCAS to be removed from pilot manuel  

    • Later realizes that MCAS was more powerful and he deceived FAA but doesn't go back to fix mistake 

• Boeing settles jan 7^th of 2022 pays $2.5M w/o pleading guilty 

Did boeing get credit for what they did?

• Did not receive voluntary disclosure credit pursuant corp enforcement policy or sentencing guidelines bc it did not timely and voluntarily disclose to the fraud section the offense conduct described in the statement of facts 

• Did not get credit self-reporting = throwing Folkner underneath the bus?

Did the boeing case illustrate shareholder lawsuits? 

• Was a lawsuit where shareholders sued BOD and settled to tune of $237.5M  

• BOD failed supervise for purposes of safety and they failed to do so  

• Plaintiffs attorneys bc boeings BOD failed in fid respons to monitor safety and protect co