The Morning Ledger from CFO Journal cues up the most important news in corporate finance every weekday morning. Send us tips, suggestions and complaints: david.hall@wsj.com and matthew.quinn@wsj.com. Get The Morning Ledger emailed to you each weekday morning by clicking here. Follow us on Twitter @CFOJournal.
Former KPMG partner Scott London is now facing federal insider-trading charges. Prosecutors say Mr. London got more than $50,000 in cash and gifts for providing stock tips that helped his friend, jewelry dealer Bryan Shaw, make at least $1.2 million in illicit profits, the WSJ reports. Mr. London allegedly called Mr. Shaw sometimes two to three days before a company’s financial results were due out and read him a draft of the coming news release. The SEC says Mr. Shaw traded on that information at least a dozen times. Mr. London could face up to five years in prison and up to $250,000 in fines if he’s convicted of conspiracy to commit securities fraud. Authorities also say that Mr. London didn’t only pass tips on Herbalife and Skechers. He also offered up information on three other KPMG clients — footwear maker Deckers Outdoor, equipment rental provider RSC Holdings and Pacific Capital Bancorp, the WSJ notes.
So far, the scandal hasn’t cost KPMG any clients, the Journal’s Michael Rapoport reports. Reliance Steel & Aluminum and Volcano Corp. filed proxy statements indicating they continue to recommend that shareholders approve KPMG as their auditor. But things could still get worse. KPMG could face civil action from audit regulators and former clients over the case, Rapoport says. Herbalife and Skechers could attempt to claw back the millions of dollars in fees they paid KPMG for its now-withdrawn audits. Herbalife paid KPMG a total of $11.2 million in fees for the firm’s last three years worth of audits; Skechers paid $1.7 million for its 2011 audit and hasn’t yet disclosed its 2012 audit fees. For its part, KPMG says it plans to take legal action against Mr. London.
Also, former PCAOB member Dan Goelzer says the board could pursue action against KPMG on grounds that it failed to properly supervise Mr. London, or that it wasn’t truly independent as required when it acted as the auditor for the companies on which Mr. London provided tips.
Joseph Adams, CEO of accounting and audit firm McGladrey, tells CFOJ’s Emily Chasan that corporate auditors need to police themselves better if they want to protect their brands and reputations. Though most firms have processes and programs to maintain ethical standards, he said, it’s often the individual suspicions of partners that can keep auditor quality high. “The fear of every firm, as much as you can put any process in place, is a partner who doesn’t follow the rule.”
THE DAY AHEAD:
Earnings season revs up today with results from J.P. Morgan and Wells Fargo — reports that should give some insight on how banks’ revenues from trading fees and mortgages are holding up, the WSJ’s David Benoit writes. There isn’t expected to be more fallout from the London Whale and other J.P. Morgan headaches, but analysts at Keefe, Bruyette & Woods note one shouldn’t “underestimate a management team with its proverbial back against the wall.” The story with Wells Fargo will remain mortgages. The bank has claimed the biggest spot in underwriting home loans and likely still saw continued refinancing activity given low rates, but the gain is unlikely to be what it has been in recent quarters.
On the economic front, March producer prices are seen falling 0.4% — reversing a 0.7% increase in February. And the Reuters/University of Michigan April consumer sentiment index is expected to edge up to 79 from a final March reading of 78.6.
Markets flash: Asia ended mostly lower, but Japan continued to outperform other markets in the region thanks to the weaker yen. European shares are lower ahead of an EU finance ministers meeting. And DJIA futures are also down.
EXCLUSIVE ON CFOJ:
Fewer ‘no’ recommendations on say-on-pay votes so far. If early returns from this year’s proxy season are any indication, companies are learning how to take into account their shareholders’ concerns on executive pay, Vipal Monga writes. Proxy adviser ISS said it has come out against 10% of management compensation packages in the 473 recommendations it has issued so far this year. Although it’s still early in the proxy voting season, which traditionally peaks in April and May, the number is running below the 13.3% rate of “no” recommendations that ISS made for a total 2,378 recommendations last year. Carol Bowie, head of research for the Americas at ISS, told CFO Journal that more companies have been tying pay to performance, which could lessen concern by the advisers. As we noted earlier this month, concerns about a disconnect between executive pay and performance appear to be declining among shareholders.
New lease accounting proposal expected in May, but questions remain. A split FASB is moving ahead with its revised lease accounting standard and expects to issue a new proposal next month, Emily Chasan reports. Members voted 4-3 that its two-pronged approach to lease accounting would not be overly complex, but questions remain about how the dividing line will be drawn between the two types of leases, and what types of costs companies would incur to comply with the new rules. “A 4-to-3 vote is not a vote of confidence, especially with the chairman voting to proceed but acknowledging the obvious need for re-deliberations,” said Bill Bosco, a leasing expert who works with the Equipment Leasing & Finance Association.
CORPORATE NEWS:
JAB buys coffee maker for $10 billion. Joh. A. Benckiser, the European investment group that recently bought Peet’s Coffee & Tea and Caribou Coffee, just agreed to buy D.E. Master Blenders, a Sara Lee Coffee spinoff, for roughly $10 billion, the WSJ reports. D.E. Master Blenders is No.3 in the global coffee-roasting sector with roughly $4 billion in annual sales, behind Nestle and Kraft. JAB already owns a stake of at least 15% in D.E. Master Blenders, which, among other factors, appears to have discouraged any competing bidders since JAB’s interest in the deal became public. The agreement does include a provision that would allow the deal to be canceled if a superior offer for the coffee maker surfaces.
Cash-strapped Penney aims to raise $1 billion. J.C. Penney has hired bankers at Blackstone for advice on shoring up its fast-eroding cash, the WSJ reports. Bond analysts don’t think Penney’s operations will be able to generate enough cash to cover the company’s needs beyond a year. The company is looking to raise about $1 billion in cash. One option could be to sell a minority stake in Penney, and the company has reached out to and heard from possible investors including private-equity firms. The cash crunch comes as hundreds of stores are in the process of being renovated in line with ousted CEO Ron Johnson’s vision and will require capital to finish the work and make the stores shoppable.
Eli Lilly cuts work force. Eli Lilly plans to lay off about 1,000 sales representatives in the U.S., the WSJ reports. The restructuring aims to cut the drug maker’s costs in preparation for generic competition that will face two of its biggest-selling products. The layoffs will affect about 30% of Lilly’s sales force across the U.S., and include a combination of full-time Lilly employees and contract workers.
EXECUTIVE COMPENSATION:
Nasdaq CEO’s bonus gets trimmed after Facebook debacle. Nasdaq’s board slashed the bonus of CEO Robert Greifeld after the exchange group’s disastrous handling of Facebook’s stock-market debut. Mr. Greifeld’s 2012 award through Nasdaq’s executive corporate incentive plan was docked $542,100. His overall compensation for 2012 nevertheless climbed 18% from 2011 levels to $8.9 million, due to a more than $3 million increase in stock awards, the WSJ reports. Anna Ewing, Nasdaq’s chief information officer at the time of the Facebook flotation, took a $263,625 cut to her own award. The cuts are the toughest penalty so far for Mr. Greifeld following what the board said were “widely publicized systems issues” with the Facebook IPO that Wall Street firms have blamed for some $500 million in losses.
BP takes heat on executive pay. A major investor in BP launched a public assault on the company’s pay policies, saying executives were being rewarded handsomely for poor performance, the FT reports. Guy Jubb, global head of governance and stewardship at Standard Life Investments, said he was concerned that BP executives “have the potential to receive significant rewards for achieving unchallenging performance targets, which, as a matter of principle, we oppose.” Investor dissatisfaction with BP runs strong, the FT notes. The company’s share price is still around 30% lower than it was before the Gulf of Mexico accident. One shareholder pointedly asked the board: “You say the company is in a healthy state: why is it not reflected in your share price?” In the end, 93% of shareholders who voted approved BP’s remuneration report, 6% were against and a bit less than 1% withheld their vote. BP said the vote in favor was higher than at the last annual meeting.
Occidental stung by proxy adviser. ISS said Occidental Petroleum shareholders shouldn’t re-elect Executive Chairman Ray Irani or independent lead director Aziz Syriani at an annual meeting next month, arguing that the board they lead failed to manage the oil company’s search for a new chief executive. At issue is Occidental’s announcement in February that it would search for a new CEO to succeed Stephen Chazen, who took over less than two years ago from Mr. Irani. Mr. Chazen has said he wasn’t looking to go, and some investors want him to stay, the WSJ notes. Now, ISS is pointing some blame for the dustup at the company’s board, specifically its lead director and longtime chairman, who is scheduled to retire in 2014.”The board, the company and shareholders would be well served by a clean slate,” ISS said.
ECONOMY AND TAXATION:
Economists upbeat on growth prospects. The spring swoon has returned to the U.S. economy, but economists in the latest Wall Street Journal forecasting survey see the economy picking up as 2013 progresses. The survey respondents expect growth to pick up in the second half of the year. On the whole, they see 2013 growth at 2.5%, which would be the fastest pace since 2005. Growth is forecast to accelerate to 2.9% for 2014 and 3% for 2015. Even though the economy appears to be slowing in the current quarter, there are significant positives, including the housing market, that keep the odds of recession low. Economists put just a 15% chance of another downturn in the next 12 months.
IRS staff decline means fewer tax audits. The IRS plans to expend 18% fewer staff hours auditing large businesses with assets of more than $10 million in fiscal year 2013 (which ends Sept. 30) than it did in 2011, the Journal of Accountancy reports. The Transactional Records Access Clearinghouse , a data research organization at Syracuse University, notes ongoing reductions in IRS staff in the individual tax area, and says the number of IRS employees fell 23% between 1992 and 2012, while the number of tax returns filed increased by 27% during the same period. The lower numbers don’t take into account the effects of budget cuts that resulted from the sequester.
THE WEEKEND READER
Every Friday we select a handful of in-depth articles we think are worth a bit of your valuable weekend time, either because they peel back the layers on a compelling business story, or somehow make us look at business in a different light.
- How to save American finance from itself. Running a central bank is like flying a plane, writes Robert M. Solow, winner of the 1987 Nobel Prize in Economic Studies. Usually small adjustments will do just fine, but every so often there’s a crisis in which fundamental understanding, knowledge of history, and good judgment can make the difference between riding out the storm and crashing. In this New Republic article, Solow digs into a just-published account of a series of lectures Ben Bernanke gave last year on how the Fed (and the Treasury) managed to keep the financial crisis from getting much worse. Solow notes that Mr. Bernanke seems to count heavily on the provision in Dodd-Frank that establishes a committee of regulators charged with keeping an eye on “systemically important” financial institutions. Solow is a bit skeptical about whether that will actually work. But more broadly he argues that “financialization has gone too far.” He acknowledges that any complicated economy needs a complicated financial system: to allocate dispersed capital to dispersed productive uses, to provide liquidity, etc. But, he says, “there is no enhancement of economic efficiency” from trading. While it may provide a little useful public information about market opinion, it’s largely just a way to “transfer wealth from those with inferior information and calculation ability to those with more.”
- The software revolution behind LinkedIn’s gushing profits. Wired’s Ryan Tate credits LinkedIn’s Wall Street success partly to a “revolution” in how the company writes software. Months before its May 2011 IPO, the business-friendly social network recruited Google veteran Kevin Scott to introduce “continuous deployment,” where developers write and check code in “tidy, discrete little chunks.” Here’s the main takeaway: “LinkedIn’s big switch to continuous deployment has been linked to very concrete and visible financial success, helping lend credence to the practice and potentially helping to accelerate the delivery of software across the tech industry.” Making the switch also required another risk. For two months LinkedIn halted all development to train its staff and migrate code. “It was a pretty big risk the business took,” said Mr. Scott, “to look at its engineering team and say, ‘we’re going to completely change the way we do software.” The risk has paid off, with LinkedIn banging out enough new features to keep it the “darling” of Wall Street and many of the members who use it.
- China’s Internet: A giant cage. China “has achieved something few thought possible: the construction of a distinct national internet,” the Economist writes. The government has successfully kept Facebook, Twitter and YouTube away from users. Supplementing the “Great Firewall” is an “army of cyber-police, hardware engineers, software developers, web monitors and paid online propagandists to watch, filter, censor and guide Chinese internet users,” who operate with trusted Chinese Internet companies such as the social network Renren, the Baidu search engine and various Twitter-like services. Users there have nevertheless successfully waged a number of successful online campaigns, albeit leveled at low-level politicians. Other online causes, such as air pollution, have also caught the attention of the authorities and have led to the strange result of the Internet requiring China to be more efficient at being authoritarian. “This is the online blueprint for what scholars call “adaptive authoritarianism”, says the Economist, a movement that relies on a technological arms-race of monitoring and filtering equipment developed in tandem with mouthed assurances that the masses have online access.
CFO MOVES:
- Burger King Worldwide promoted Chief Financial Officer Daniel S. Schwartz to chief executive. He succeeds Bernardo Hees, who resigned to become CEO of H.J. Heinz Com pany. Succeeding Mr. Schwartz as CFO is Joshua Kobza, who was most recently senior vice president of global finance. As CFO, Mr. Kobza will receive a base salary of $350,000 and 200,000 stock options. His annual bonus target will be 120% of his base. Mr. Schwartz received compensation in 2012 valued at $4.1 million, according to aproxy filing.
- Green Dot said in a regulatory filing that Chief Financial Officer John Keatley will leave the company Sept. 1. He plans to relocate his family to Sweden, where he will serve as CFO for a Stockholm-based technology company. In the meantime, he will continue in his full-time duties and assist in the search for his successor. Mr. Keatley received compensation in 2012 valued at $1 million, according to a proxy filing.
- Hanmi Financial said interim Chief Financial Officer Shick (Mark) Yoon will now hold that position on a permanent basis. Mr. Yoon had held the interim job since November 2012.
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