GLOBAL ACCOUNTING STANDARDS, MYTHS AND THE NEWS CYCLE

President Obama frequently cites the “twenty-four hour news cycle” which pounces on everything and often becomes a source of misinformation, rumors and distortions rather than news. This has become such a regular part of his speeches that the pundits are now commenting on his commentary on the news cycle.

Those claiming that the SEC is following the lead of the administration – such as some of the critics of the Goldman enforcement action – should review SEC Chairman Mary Schapiro’s latest speech. In her Remarks at CFA Institute 2010 Annual Conference delivered on May 18, 2010, the Chairman states that a number of myths have evolved regarding the SEC’s commitment to international accounting standards. These come not from the twenty-four hour news cycle of Mr. Obama’s speeches but the lack of news coverage Ms. Schapiro referred to as a “news void . . .”

The Chairman began her remarks by reviewing a number of recent Commission initiatives. Once is the “Dear CFO letters.” The first of what is going to become a periodically used tool of Corporation Finance was sent out in March 2010 to large financial institutions. The letter requested information about repurchase agreements, securities lending transactions and other arrangements involving the transfer of financial assets. The purpose is to gather information to assess the need for accounting and disclosure changes.

To fill the news void about the SEC’s commitment to the adoption of global accounting standards, Ms. Schapiro then addressed four myths which have evolved:

Myth 1: The SEC’s does not have a strong commitment to the project. Citing comments from the Commission’s Statement in Support of Convergence and Global Accounting Standards from February, the Chairman noted that this myth is simply wrong.

Myth 2: The U.S. is dragging its feet on the project. Wrong again says the Chairman. While the FASB and the IASB have worked diligently, key issues remain. These include accounting for financial assets – the type which were at the center of the financial crisis – as well as principles involving revenue recognition, consolidation and leases. In this regard, the Chairman stressed the importance of the process established by the FASB and IASB which is designed to ensure high-quality improvements to accounting standards.

Myth 3: The U.S. is fixated on process. This myth is also inaccurate. The Commission will not, however, accept shortcuts that could undermine the larger goals of ensuring high quality global standards. It is critical during this process that the IASB and the FASB be shielded from undue political or commercial pressures. While the IASB process of using a Monitoring Board to safeguard against outside pressures slows the process, it helps ensure that the standards are high quality.

Myth 4: The U.S. is protecting its parochial interests. Wrong again. The Commission is committed to ensuring that investors around the globe are protected and that all who participate in the U.S. markets “come under the SEC’s umbrella of protection.”

Dispelling all myths, and filling in the news coverage void, the Chairman concluded by reiterating the Commissions commitment to global accounting standards.

ANOTHER INVESTMENT FUND SCHEME

Investment fund fraud cases continue to be a staple of the SEC and DOJ. The former chairman of Mayfair Capital Group, Stephen Green, was sentenced to 41 months in prison for investment fund fraud. U.S. v. Green, Case No. 1:09-mj-01880 (S.D.N.Y. Filed Dec. 14, 2009).

Mr. Green pleaded guilty in December to two counts of securities fraud. According to the information, over a four year period beginning in 2005, defendant Green made repeated false representations to lure investors into placing their funds in various limited partnership vehicles and asset management companies. Overall, Mr. Green raised from investors over $5.75 million which was diverted to his use.

Typical of the schemes used by Mr. Green to defraud investors is one involving Copal Partners L.P. That firm was represented to be a limited partnership with an ownership interest in a financial services research and analytic services business. According to defendant Green, Copal would go public on the London Stock Exchange by the end of 2006. Mr. Green told an investor that he held warrants in Copal. Those warrants could be converted into Copal shares after the firm went public, according to Mr. Green. To convert the warrants defendant Green claimed he needed $2 million. Mayfair Group was to invest $1 million while Mr. Green would personally put up $250,000. The investor agreed to put $750,000 in Mayfair India, a subsidiary of Mayfair.

Subsequently, Mr. Green told the investor he held a 7% equity interest in Copal. In fact no investment was ever made in Copal.

In sentencing Mr. Green the court also ordered him to pay $5,775,000 in restitution and to forfeit $5,775,000 in proceeds from his offenses. Following his prison term, Mr. Green will be required to serve three years of supervised release.