=DJ HP Judge's 'Ethical Wall' Comments Offer Wall St A Lesson
By Phyllis Plitch Of DOW JONES NEWSWIRES (This report was first published late Monday.)
NEW YORK (Dow Jones)--When a Delaware chancery judge threw out Walter Hewlett's lawsuit against Hewlett-Packard Co. (HPQ) last week, he gave the main drama playing out in the Wilmington courtroom a tidy ending: the company was free to consummate its $18.6 billion merger with Compaq Computer Corp.
But the judge also threw a couple of messier nuggets into his 42-page opinion concerning the circumstances surrounding vote-buying charges, one of two allegations pursued by Hewlett in his bid to nullify the shareholder merger vote. Both claims were ultimately dismissed by the judge.
In a few plain English sentences, Chancellor William Chandler III managed to keep alive questions about behind-the-scenes communications between Hewlett-Packard and Deutsche Bank - in a way that some securities lawyers took as a wake-up call.
Focusing on a conference call between H-P executives and Deutsche's proxy working group, Chandler found it troubling that Deutsche bankers facilitated and then one banker listened in on the call, a fact that "raises clear questions about the integrity of the internal ethical wall that purportedly separates Deutsche Bank's asset management division from its commercial division." Deutsche Asset Management, which held the shares, is a unit of Deutsche Bank AG (DB), which has another division that has a banking relationship with Hewlett-Packard.
Chandler went on to say there was no evidence that the bankers arranged the call "in response to a threat from HP management to withhold future business" or that H-P executives improperly coerced or enticed Deutsche into voting 17 million shares in favor of the merger, as Hewlett contended. Further, contrary to Hewlett's claim that the company was holding up future business to Deutsche as a carrot in exchange for Deutsche's vote, the bank's final decision to throw its votes in favor of the deal, "was made with regard to what the (proxy working group) believed to be in the best interests of the beneficial owners of those shares."
Nevertheless, his pointed comments about Deutsche's "ethical wall" hit home for legal advisers who get paid to make sure compliance procedures are such that clients avoid potential minefields.
"For the investment advisory business generally - it comes down to compliance," said one securities lawyer and former regulator. "The compliance lesson is to make sure ethical walls are working the way they should and to make sure there is no leakage in them." After Enron, Market Intermediaries Being 'Inspected'
Before the start of the three-day trial late last month, H-P said the San Francisco District office of the Securities and Exchange Commission "informally" contacted the computer maker, requesting documents and information concerning its relationship and communications with Deutsche. H-P also said that it had received a subpoena from the U.S. Attorney's Office for the Southern District of New York concerning Deutsche Bank's voting.
An H-P spokeswoman said that from Chandler's ruling, "it was clear that H-P didn't act improperly with regard to any of the claims made by the plaintiff." The SEC and the U.S. Attorney's office declined comment. A Deutsche Bank spokeswoman didn't return a call for comment.
Based on the evidence to emerge in the case, legal experts were hard-pressed to envision a resulting criminal action. But they noted that the SEC's interest in the case comes in the wake of a February letter from Chairman Harvey Pitt directed at proxy voting.
Pitt's private letter to a small investment firm addressed a long-standing question about the duty of investment advisers to vote proxies on behalf of their clients.
In his letter, Pitt said that "the federal securities laws do not directly regulate whether and how investment advisers vote proxies on behalf of their clients." The SEC's top cop didn't exactly offer a pass either.
"We believe, however, that an investment adviser must exercise its responsibility to vote the shares of its clients in a manner that is consistent with the general antifraud provisions of the Advisers Act, as well as its fiduciary duties under federal and state law to act in the best interests of its clients," Pitt wrote.
In the late 1980s, the Department of Labor made it clear that trustees of Employee Retirement Income and Security Act of 1974 (ERISA) plans had a fiduciary duty to vote proxies in the best interest of plan participants and beneficiaries.
But "there has never been an equivalent statement officially from the SEC under the Investment Advisers Act," said Ed Fleischman, a former SEC commissioner and now a senior counsel at law firm, Linklaters, referring to the 1940 SEC law governing investment advisers. "It's an area that hasn't had a spotlight shined on it before."
Scrutiny of proxy voting is yet another sign that in this post-Enron Corp. (ENRNQ) world, "there is a tremendous interest in inspecting all the institutional intermediaries in our capital market system," said William Allen, director of New York University's Center for Law and Business. "It's another example of how every part of the legal institutions of the capital market economy are being reviewed."
The mere fact that the SEC might be taking an interest in the issue, "will be a shot over the bow to remind people about the nature of their duty in exercising their proxy rights," said Allen, himself a former Delaware chancellor. "There's enormous power in these fiduciaries' hands. If a powerful government agency takes onto its agenda an issue respecting how that power is exercised, it can begin to have effects in the world."
-Phyllis Plitch; Dow Jones Newswires; 201-938-2357; phyllis.plitch@dowjones.com
(END) DOW JONES NEWS 05-07-02
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