As the challenges to Fannie Mae and Freddie Mac continue to be severe — based on new estimates of exposure to fair-value losses in their investments — the next hurdle may be finding a way to compensate top executives trying to lead the mortgage companies out of the wilderness.

Democratic and Republican lawmakers are beginning to see curbs on executive pay at the two quasi-government institutions as necessary to reduce constituent objections to any rescue plans, according to an Associated Press report.

This smacks of appeasement. Punish the executives so the plebes don't rebel. Didn't we learn anything from the French Revolution?

If an executive has done something wrong, fire him. If he has done something illegal, call the FBI. But knock off this little show of slashing their compensation and pretending its moral.

Senator Bob Casey, a Pennsylvania Democrat, said in a letter to Treasury Secretary Henry Paulson that "past practices of awarding huge bonuses and higher executive salaries call into question the prudence of extending an unlimited credit line of taxpayer money to the companies whose management practices have been questionable over recent years." He called for capping executive pay "at reasonable levels" for the two firms. He added that he believed the company boards should sue to recover earlier bonuses paid.

If this were to happen, an executive's compensation would be subjugated to the business judgements, in hindsight, of politicians. This is patently absurd. Politicians don't have any special knowledge of how mortgage companies/gas companies/insurance companies/tobacco companies/health care companies/ should work. Particularly Democrats who loathe executives on principle, such as Mr. Casey.

Fannie Mae's president ahd chief executive, Daniel Mudd, received compensation valued by the company at $12.2 million last year, including a $2.2 million bonus, according to the AP.

Good for Mr. Mudd. I hope he sent some overseas.

The wire service noted that Fannie Mae and Freddie Mac's critics, including both Republicans and Democrats, have often complained about rich compensation during good times, as well.

That's because they're morons.

I am of the opinion that an executive's compensation should not directly relate to the overall success of the company. If an executive has risen to the C-level, he has proved himself. Because he inherits a set of circumstances, many of which may not be under his control, he should not be required to sustain any expectations set by previous administrations. Being compensated by salary, rather than commission, or paid on an hourly basis, provides certain benefits - and the executive should not be deprived of these benefits merely by the virtue of his position.

I was staying for the past few days at the Beverly Hilton Hotel. It's a really nice place. A few years ago, it had gone kind of tatty, but they implemented a big revamp not long ago and did a terrific job. Sometimes when they buff a joint up after a long period of escalating decrepitude, they excise its character, history and whatever charm the old edifice had left. Sometimes, also, they fix up the lobby and leave the upstairs rooms still haunted by the ghosts of dead guys who were murdered in their bathtubs.

I stayed at one of those places a few weeks ago. In the lobby were pictures of all the great movie stars who were feted there, back in the day when you could fit all of the motion picture industry into one ballroom. How glam those pictures were! Clark Gable! Betty Grable! Tyrone Power! The Duke! All drunk off their butts, happy to be clustered like the pleiades around their glittering tables. My room upstairs, on the other hand, smelled of cheap cigars and the tired feet of washed-up private eyes hired to spy on the naughty couple down the hall.

The Hilton today is no such thing. Downstairs and up the walls are bedecked with pictures of the gang that loved to hang there when glamour walked hand-in-hand with talent and success. My favorite is in the Men's Room on the Lobby Floor. Frank, Dean and Peter Lawford, walking down the strip near the Golden Nugget, lean and happy, skinny little ties over their cool, flat tummies. Opposite this shot, Bogart stares out, slightly petulant, a just-read letter in his elegant hand, from a picture by Hurrell, circa 1935. Near the ballroom, where so many grand events were held when there were such things, Louis Armstrong, Tony Curtis and his then-wife Janet Leigh, Marilyn, James Dean... all shot pretty much right where you are standing as you look at them and wonder where all that, whatever it was, has gone.

On the ground level, Trader Vic's, long a sort-of tikki joke with cheesy drinks and flaming stuff on sticks, once dark and cramped under a low ceiling, has also been knocked open to the pool and sky, keeping what was cool and worthy of retro admiration, jettisoning the ironic eau de decomp that had collected around the old tropes over the years. Quite a scene there on Saturday night. The aqua lights of the gigantic swimming pool glow, illuminating the crisp, white cabanas and suites that ring its vast, watery depths. After a couple of Scorpion bowls, people can get kind of noisy. Good sushi. Very short skirts are apparently back, and stingy-brim hats and stubble for the guys.

There's no center in LA, and until you get it, you think that's a bummer. What it really means is that, like a giant beehive, every little cell in the honeycomb is just as potentially hot as the next. So improbably, where you are right then is just possibly where you ought to be. And the Hilton, right now, is no exception, particularly if you don't mind the slight sensation that the specter of Norma Desmond just brushed by your elbow. 

The rooms, too, are kind of marvellous. Mine was, at any rate. Not fussy. Clean and open, with a little patio you could lie out on to observe the action at the pool and bar down below.

I say all this to make a point as clearly as I possibly can: in the world of business, it really doesn't get any better. Did I mention I was there on business? Well, I was. And anybody who cannot appreciate an experience like this one in the line of duty should probably be shot, or perhaps be put away. Yeah, that's right. Anybody who can't be happy at the Beverly Hilton should be put in a mental institution.

So I was sitting on my little patio taking an hour in which I attempted to entertain not one phone call or a single message on my BlackBerry. The sun was hot. The breeze was cool. The sound of happy people splashing rose from the azure pool several floors below. On the patio above me, suddenly, came a voice. An ugly voice. Harsh. Grating. Aggrieved.

"I told SAM..." it said, "But SAM doesn't LISTEN... to ANYBODY!... And I am SICK... of HIM!... and I am SICK... of YOU... and everybody NOT LISTENING TO ME!" I don't know if I am capable of capturing the rhythm of the thing. Tremendous anger, righteous indignation, dripping with bitterness, and the feeling of having sustained a powerful wrong that had been visisted on him by countless enemies both seen and, more heinous, CLOSE BY... The complaints -- for the one-way discourse was made up of nothing but complaints -- were almost wrenched out of a spirit so tortured it could barely formuate complete sentences.

It went on like this for quite some time. After a while, I took my towel and went inside. I had a meeting to go to anyhow.

The next morning at 7AM, I was awakened by what at first I thought was the squawking of a giant crow. As my head cleared, I realized this was unlikely. Crows do not nest in the upper floors of urban hotels. The only birds I saw there, in fact, were tiny sparrows and the plastic owls they put on the rooftops to scare away other predators. Crows, maybe, come to think of it.

At any rate, this squawking -- enraged, deliberate, desperately unhappy -- was coming through two layers of heavy curtain and a hermetically-sealed sliding glass door.

"I don't want to SEE you EVER AGAIN!..." it was saying. "And if you see ME... or any member of my FAMILY!... I WANT YOU TO TURN AROUND!... AND GET THE F**K OUTTA THERE! I'm the one with the MONEY... and PEOPLE... are GOING... to LISTEN TO ME!!"

It went on. I opened the doors and stepped out on the patio to hear as much as I could of the torrent of invective pouring from the opulent space above me. All I saw was the back of a tiny, extremely bronzed bald pate bobbing up and down, and one edge of a small table at which the unnamed mogul in question was sitting. On the table was a glass of orange juice and a glass of prune juice.

I've been thinking since then about the number of people I know who are very rich, very successful, and what that access to power and affluence has had upon their characters. And I'm very slowly coming to a conclusion. Yes, we all know that money does not buy happiness. Of course, that's ridiculous. Of course it does. We know it does. We also know that lack of money very often buys misery. As my dad used to tell me, "Rich or poor, it's good to have money."

But thinking about the miserable loser on the floor above me, I find myself wondering whether there is a tipping point, where the accumulation of too much power, too much money, actually produces in their recipient the exact opposite of all that money is supposed to buy. That perhaps it's lonely at the top because the person you have become when you get there isn't fit for human consumption. That maybe it's better to be in the middle of things, because that where people are clustering together for warmth and still having a little bit of fun.

I'm home now, by the way, and it's good to be back. Maybe too much of a good thing is just that.

Many times, when small business owners are looking for an employment agreement form, they may just download a document or use an old template.  This works in the majority of cases when no legal disputes regarding employment arises.  Of course, attorneys and experienced managers understand that competent contract authoring is all about controlling how disputes are resolved - if there is no dispute, the contract language doesn't come into play.  To sophisticated managers, attorneys and investors, that seems a lot like crossing your fingers and hoping for the best.

Accordingly, it's critical that employers and attorneys find templates and work product precedent that are geared towards the relevant jurisdiction.  You can search across thousands of employment agreements by governing law provisions here.  In the case of California employment agreements, here is a great resource to browse thousands of California Employment Agreements, or you can combine full text searching across California employment agreements.

In our business, we've been fortunate enough to avoid any serious employment related disputes that have resulted in litigation.  However, we recently have had to deal with a specific example of a former consultant hiring away an employee despite a variety of non-compete and non-solicitation clauses, and the existence of appropriate contract language has been extremely helpful to us in negotiating an appropriate resolution.

Please let me know if you are aware of any additional resources we can share, or comment directly below.

Staying with illegal immigration issues on the Lou Dobbs show, and there were quite a few last night, we have the next part here. Senators Jim Webb and Jeff Sessions were guests on Lou Dobbs last night. It is really great to hear the other side of the fence covered now and then too. I'm getting tired of hearing from only those who demand both open borders AND amnesty for illegals.

So, from CNN's Lou Dobbs we have this next article:

DOBBS:Advocates of illegal immigration and open borders trying to silenceChris Simcox . He's the president of the Minutemen Civil Defense Corps. Several hundred protesters gathered Monday night at DePaul University in Chicago during his speech there. Look at this. I mean goodness, those protesters outside the lecture hall called Simcox a racist because of his leadership of the Minutemen at one time and for advocating border security.

Proponents of border security also were gathered at DePaul. They were demonstrating their support for Simcox and his first -- his First Amendment right to speak. I don't know what they're now teaching kids in college these days, but the idea of shutting down someone else's right of free speech is not exactly in the tradition of say protests and breaking away from orthodoxy in our nation's universities.

Maybe, maybe just a couple of professors there, a few people with a little influence in academia could bring that idea forward for those young people to consider. It is sort of interesting; you've got people trying to suppress First Amendment rights of a person who has been associated with the group, who's trying to insist upon the enforcement of U.S. law. It gets complicated doesn't it?

And powerful Democratic Senator Jim Webb, he's joining me to talk about perhaps the vice presidency, his battle against special interests and his brand new book, entitled, "A Time To Fight." I like the title.

DOBBS: Joining me now, one of our most distinguished and influential law makers, Senator Jim Webb, Democratic from the state of Virginia. He's here tonight to talk about his fight against special interests and lobbyists. His new book, "A Time to Fight."

I want to do this because he has such a distinguished career. It's worthy of points out and communicating what he's all about in terms of the accomplishments. He's a powerful advocate of the armed services. He served as Navy secretary in the Reagan administration. He served with the U.S. Marine Corps in Vietnam where his heroism earned him the Navy Cross, a silver star, two bronze stars, two purple hearts and in 1984 he actually won an Emmy Award for his coverage for PBS of the Marines' deployment in Beirut the previous year. Senator Webb has authored six best-selling novels.

His latest book is "A Time to Fight, Reclaiming a Fair and Just America" and he joins us now and I apologize if I embarrassed you with that introduction but I think a man who has accomplished all you have should get noted.

SEN. JIM WEBB (D), VIRGINIA: Nice to be with you again Lou.

DOBBS: It's super to have you here.

Let's go first to something that is important to millions of Americans and I think most Americans. Your efforts to get the G.I. bill rationalized and give the young veterans an opportunity for an education.

WEBB: I've watched your show quite a bit. I appreciate your efforts as well. Before I thought I would ever run for office, I believed that it was past the time for the Congress to start rewarding these people with the right opportunity for a full future the same way that we did when they came back from World War II. We may get that vote tomorrow, I'm hopeful.

DOBBS: As soon as tomorrow?

WEBB: Quite possible. Maybe in a straight, stand up vote. We'll see how things go. Your discussion about things that should not be in the supplemental bills, but I think this is appropriate for a bill like that.

DOBBS: I couldn't agree with you more. I think most people would agree with you. I would like to look at your book, "A Time to Fight." Your book is interesting in so many respects. It's a rallying cry. What do you hope people will take from it at this particular moment in our history?

WEBB: One of the things that I can do up here that is a little bit different, perhaps in the vein of Daniel Patrick Moynihan, is having spent most of my career in writing and thinking, I think I can bring some perspective to issues, rather than just the legislative day-to-day stuff. There's one section in this book about economic fairness and social justice and those issues and I was recalling the first time I was on your show was when my book "Born Fighting" came out, before I ever thought I would run for office.

We had quite an extensive discussion on issues like executive compensation. You pointed out for years and I point out in the book, the average corporate CEO made 20 times more than the average worker. Now it's 400 times. The troubling thing is this is only happening in this country. You can say part of this is globalization and I think the internationalization of the American economy certainly sent a lot of it into motion but the Japanese corporate executives make 10 times what their workers make. Germany it's 11 times and those are very productive economies so if we don't put this information out in a way that people can grab a hold of it then we can't make changes and I figured I would just go on record saying these things as a United States senator.

DOBBS: I want to read an excerpt, if I may: "We are not engaging in the type of constructive debate that might allow us to reach a fair set of solutions. We will only be able to do so as a by product of reflective thoughtful leadership that is anchored in a sense of true stewardship of our people."

The solutions that you articulate, I want to commend your book to everybody, "A Time to Fight." It's a time for elevated discussions. We don't always get to it in times of presidential primaries and a general election.

Do you think we'll get there in the general election?

WEBB: It's going to be hard to predict in terms of general election. One thing I've been trying to do here is work as much as we can across the aisle with people that see issues that can be solved rather than throwing lob bombs at each other. I was part of the Reagan administration. It was an interesting time. Reagan would argue with tip O'Neill and have a beer at the end of the day and not take it personally. I would like to get back to it. I'm working hard with people on the other side to do it.

DOBBS: We commend your new book; recommend everyone read it, "A Time to Fight." Senator Jim Webb. We wish you the best.

WEBB: Thank you, thank you.

There just wasn't anything for me to add or say to this interview. It was interesting and informative. I like this Senator's style. And I think the way he works is a great thing by trying to reach out and work with the other side of the fence here. I have to say much good luck to him.

Only thing is that the "other side" happens to be totally unreasonable, IMO, both in what they want and in how they are going about trying to get it. They discourage talking at every turn, depending instead on name-calling and guilt trips to knock down anyone with a different opinion. That isn't healthy discussion and it isn't conducive to bringing two sides together.

Now, as to the last of the totally wonderful Lou Dobbs show, we come to the Dianne Feinstein bit. Ooh was she unhappy with Lou Dobbs! But she should have been looking at the root cause of this instead. She should have been looking to the fact that it was CITIZENS who called in, wrote emails, and contacted their Congresswomen and men who made the difference, not Lou Dobbs, although he alerted us to her little deception here! But, as with all these people, she accepted NO personal responsibility for her actions and chose instead to blame others. BOOO to you Ms. Feinstein! I'm still NOT impressed with either your actions nor your words!!!

DOBBS:And Senator Dianne Feinstein is fighting with me. She sent me a letter. She doesn't like my position on her pro amnesty efforts and I'll have a few thoughts on the record and perhaps we can meet half way Senator Feinstein and me.

And I'll be joined by a leading opponent of amnesty for illegal aliens, Senator Jeff Sessions, an opponent to illegal alien funding.

DOBBS: Well, after considerable objection, the Senate leadership late last night removed a farm worker AG bill illegal amnesty amendment that had been attached to the Iraq war funding bill. But not before Senator Dianne Feinstein added her name to those, a growing list I might say, who want to stop me from speaking out on the issue of illegal immigration and border security all across the country. Senator Feinstein in a letter to me blasted me for reporting on her AG jobs amendment to the war funding bill, an amendment that would have provided amnesty for as many as three million illegal alien farm workers and their families.

In her letter, the senator said, "The legislation was not approved by the Appropriations Committee 'in the dark of night' as you said. The legislation was offered during an open meeting of the Senate Appropriations Committee in the early afternoon, with hundreds of people in attendance."

Well, Senator, the dark of night is a metaphor, regardless of the time of day, most of the senators didn't know what you were doing and the discussion of the amendment was not on any public calendar that I'm aware of. An issue of this importance to the nation deserves full public hearings, full debate on the floor of the Senate, not an attachment that I described as dishonorable to Iraq war funding bill.

Your letter states that legislation is not amnesty. It could pride legal status to millions of illegal aliens. If that's not amnesty, what is it? Fortunately Senator, your colleagues on the other side of the aisle and the voices of outraged Americans helped your leadership understand that it was in time to reconsider and to remove that ill conceived amendment from the Iraq war funding legislation.

Senator Feinstein declined our offer to join me here. We understand that. We hope she'll reconsider. It's a subject that we believe really deserves all the illumination we can bring to it. We'll continue to do our very best to bring light to this subject.

Again this is a pro-illegal alien, pro-amnesty, pro-lawbreaking Congresswoman who resorts *being outraged herself* in order to make her point. Not very Lady like I might add. Too bad the Congresswoman doesn't take her position seriously enough to stand up for Americans the way she does for Illegals. America wouldn't be in the condition it is in if these Congressmen and women were doing their jobs as they should be. And by declining to come on the show, she shuts off debate, clearly a sign she cannot win and so doesn't want to play...

Senator Jeff Sessions was on this program Monday night expressing his outrage at the AG jobs amendment and Senator Sessions, a leader in the fight to defeat the amendment, joining us here tonight.

First I want to say to you Senator, we all are grateful for your efforts and we commend you for it. Thank you for doing that and I just can't imagine how the Democratic leader ship, the leadership that participated in this would permit to it be attached to an appropriations bill, the Iraq war funding bill.

SEN. JEFF SESSIONS (R), ALABAMA: Thank you Lou for sounding the alarm. When we found out it had been added on, there was no notice on it. They had no hearings on the implications of the legislation. I'm confident that no member of the appropriations committee read that 110 page bill language. It has some very terrible things in it and it was not as stated fundamentally.

Senator Feinstein is a great person. I really admire her and like her. But we disagree fundamentally on this. This cannot be sneaked through without debate and the consideration of the American people. No form of legalization of millions of people, or any kind of legislation for that matter needs to be passed until we have the opportunity to put language in that tightens up the illegality in the current system. You said a little earlier the question is do we want a legal system or not?

How do you amend a system that's lawless already in people don't obey the law at all?

DOBBS: You know the reality is whether we're talking about the background checks that would have been required, the rather sort of list that went out there but there's no discussion that citizenship and immigration services, the agency that would be required to do all that, they are overwhelmed now. They can't function in support of and processing of legal immigrants into this country. It's a shame.

For Senator Feinstein and Senator Craig to sponsor such legislation with as far as I know, maybe you can correct me. I'm unaware by any research done by the Congressional Budget Office or Congressional Research Services on the issue of illegal aliens working in agriculture, where they're need most, at what price they would be paid. I know of none of that done.

SESSIONS: I couldn't agree more. Fundamentally this is a huge issue that impacts America in a whole lot of ways. We need a serious and objective analysis of what's needed. They've been listening to some very aggressive groups, special advocacy groups, and some very aggressive western growers who really, whose interests are not the same necessarily as the American interests.

DOBBS: They're sure not. At a time when this country is in an economic slowdown, people are going to talk honestly here. As somebody that has worked with illegal aliens working in fields, you know, many years ago, I can still remember the heat and the sweat and the hard work. If anybody wants to do something for those people immediately, I would hope they would attach to the legislation reasonable pay. Doubling the wages, the last research I saw would add about ten cents to a head of lettuce.

Now, if Lou Dobbs were so against field workers as these groups claim, why would he be asking that the owners of the fields be made to pay a decent wage to the field hands??? Someone please explain that to me? Of course you won't because you can't. You would rather leave this a racist issue, a hate issue and resort to calling names, you are much more comfortable on those terms. Gotcha!

We need to pay the people in those fields more money. They deserve living wages. I don't care whether it's $20, or $25 an hour. They deserve it and that's what we should be paying. That might get the western growers' attention. Nothing should be passed without mandating a significant increase in pay for the people doing that absolutely essential work.

How do you feel?

SESSIONS: I think that's right.

We're not allowing the free market to work. If it were working, wages would go up. But it's undercut because huge flows of illegal labor keep flooding in and alleviate the need for the businesses to pay higher wages. I don't think that's healthy. I agree with you.

DOBBS: Senator, where do we go from here? There are still some H2B provisions in this amendment some of those pages that are still attached to the Iraq funding bill. What will be the disposition there?

SESSIONS: A lot of us want to do some improvements to the H2B. But I don't think anybody that voted for us and a lot of people that have heard about it fully understand that it goes up five times the current law rate of unskilled workers that come under that program. Take the highest rate, 120-some odd thousand; it's two and a half times that at a time our economy is slowing down. I don't think it's smart to go that far.

DOBBS: Great when a genius gets a hold of legislation, isn't it? Senator, thank you. I won't ask you to respond to that, Senator.

Senator Jeff Sessions, again congratulations on your successful efforts to forestall the horrible decision. Our thanks.

SESSIONS: Thank you.

Once again an amazing show. Very informative. I'm sorry that those on the pro-amnesty side of the fence find this so threatening. But then they are up against the Citizens of the United States, the Laws of this great Nation, and some Congresswomen and men. They are also going against a lot of their own people who came to this country LEGALLY as those from You Don't Speak For Me stated. This is a battle you cannot win.

In Canada, as David Beatty winds down his term as Managing Director of the Canadian Coalition for Good Governance, he discusses findings showing that "[d]espite the belief that greed often lies behind bad governance, the companies with good, transparent boards appear to be the top performers." An examination of the CEO pay debate: "When the U. S.-based Institute for Policy Studies calculates that chief executives in 2006 earned 364 times more money than the average worker, that is just a statistic. But when the institute points out that as recently as 1980 the multiple was just 42 times, it becomes a trend worth pondering. Is it possible business has changed so much in 30 years that the average chief executive is really worth that much more, relatively, than he or she used to be?"

Michael Dorff recently posted his interesting paper, "The Rational Choice Myth: The Selection and Compensation of Critical Performers," on SSRN. Here's the abstract.

* * *

Some positions within an organization wield unusual impact over the entity's success. The decision makers who hire these critical performers face a daunting task: to distinguish among closely comparable finalists in a context where small differences in talent can produce enormous outcome divergences. I apply research from psychology and behavioral law and economics to argue that decision makers demonstrate unwarranted confidence in their ability to distinguish among nearly identical candidates. The illusion of validity, representativeness bias, insensitivity to predictability, and the fundamental attribution error all impede decision makers' ability to make these fine distinctions. Once they have made a selection, cognitive dissonance induces inappropriate confidence in the outcome's validity and promotes excessive compensation. Involving a group in the decision may worsen these effects by imbuing outcomes with the false veneer of market legitimacy through social cascades and by discouraging contrary views throug hexcessive consensus or groupthink.

I examine two types of critical performers with these insights: professional baseball players (where individual contributions to the enterprise can be measured directly) and public company CEOs (where they cannot). I conclude that in both contexts, these phenomena produce inefficient selection and compensation outcomes. While the relative absence of externalities argues against mandatory regulation in baseball, I propose changes in private ordering that should improve efficiency. In the corporate context, I argue that regulation is called for and propose a combination of mandatory compensation caps linked to firm size and a reverse auction among CEO finalists to determine the successful candidate.

But the New York Times today points out that new regs are not working all that well. From the story:

Once again, many — perhaps most — companies filled their proxies with a blizzard of words and numbers that did more to obscure their processes than to illuminate them. And most irksome of all, true links between pay and performance remained scarce.

Shareholders were mad about excessive compensation last year, when the economy was booming. This year, governance experts say, they are livid.

Banks are the biggest culprit. Though atrocious mortgage lending practices have led to billions in writedowns, some of the highest paid chiefs in the country came from the banking sector. Charles Prince, the deposed CEO of Citigroup, made a fortune by walking away, the Times reported.

And Washington Mutual decided that write-offs would not count when it calculated performance-based bonuses, a decision that one compensation expert referred to as calculating batting averages without counting strikes.

To be fair, the chief executive of Bear Stearns forfeited his bonus because of the subprime mortgage mess. Of course that's hardly a consolation to the company's shareholders, who watched in horror as JPMorgan Chase agreed to buy it for pennies on the dollar.

This raises a number of important questions, not the least of which involves insider trading:

1. Does he know something the rest of us don't?  In other words, is this the best offer that Bear Stearns is likely to get, beyond a doubt? Because if it's not, it seems unlikely that Cayne would want to dump everything now, given the impact this trade might have on the deal prospects.  And the street has bet that somehow Bear Stearns will fetch more than the $10/share on the table from JPMorgan currently, given that the stock is trading above $10/share.
2. How does this reconcile with typical executive behavior around a deal?  I mean, he dumped everything, and his wife sold another $500k in stock as well.  Isn't there some type of protocol that insiders should follow?  Please, comments welcome.
3. Is it possible that, in a strange (and maybe unexpectedly sacrificial way), the sale by Caynes may somehow be supportive of the deal?  Difficult to rationally accept, but maybe Caynes is saying that his sale is not a reflection of how the market will react to the deal, but it simply is a reflection of his personal situation, and if it were at all likely to affect the deal he wouldn't have sold his shares.

I haven't uncovered his executive comp deal yet, but I'll post it shortly.  In the meantime, look here if you want to see a lot of executive compensation agreements or other executive employment agreements.

This raises a number of important questions, not the least of which involves insider trading:

1. Does he know something the rest of us don't?  In other words, is this the best offer that Bear Stearns is likely to get, beyond a doubt? Because if it's not, it seems unlikely that Cayne would want to dump everything now, given the impact this trade might have on the deal prospects.  And the street has bet that somehow Bear Stearns will fetch more than the $10/share on the table from JPMorgan currently, given that the stock is trading above $10/share.
2. How does this reconcile with typical executive behavior around a deal?  I mean, he dumped everything, and his wife sold another $500k in stock as well.  Isn't there some type of protocol that insiders should follow?  Please, comments welcome.
3. Is it possible that, in a strange (and maybe unexpectedly sacrificial way), the sale by Caynes may somehow be supportive of the deal?  Difficult to rationally accept, but maybe Caynes is saying that his sale is not a reflection of how the market will react to the deal, but it simply is a reflection of his personal situation, and if it were at all likely to affect the deal he wouldn't have sold his shares.

I haven't uncovered his executive comp deal yet, but I'll be looking to sniff it out.  In the meantime, look here if you want to see a lot of executive compensation agreements or other executive employment agreements.

[This interesting article originally appeared in the March 15 Washington Spectator, a fiesty biweekly bulletin in the spirit of I.F. Stone's Weekly. It's a journal well worth reading. Subscriptions are a very reasonable $18 a year.]

"PITY THE POOR SHAREHOLDER!" ISN'T A CRY to get progressive blood pumping—except perhaps in indignation. But it should be. The battle for shareholders' rights in corporations is an integral part of the unending campaign for democracy in American society.

For years, supporters of free enterprise have claimed that the West has been moving toward a "shareholder democracy," in which many citizens—possibly even a majority—are also shareholders in the companies that dominate the economy. Left to their own devices for pensions, employees have come to own shares in mutual funds and personal pension plans. They "own" substantial portions of major companies, so at least the shareholder part is coming true.

However, even as share ownership spreads across the country, there is less democracy than ever before in the boardroom. Corporate executives have been gaining unfettered control over their companies and through them are exercising greater influence over the political process, to consolidate their organizational and financial control. Their influence is often exercised through checks written to political campaigns.

Some of that money is already visible in the primaries, where costs have far surpassed predictions we made in the Washington Spectator last year. The price tag for the Democratic nomination, for example, is far beyond $100 million, and the presidential candidates have already spent almost $600 million, with months to go before the general election campaign. Corporate finance has been the major funding source for almost all the candidates, as they go to corporate donors for the same reason the robber Willie Sutton went to banks: "That's where the money is." In fact, successful candidates do not have to make the trip. Corporations go to them, and often the same donors hedge their bets by sending contributions to the nominees of both major parties.

DOORWAY TO POWER—What's true for presidential candidates is also true for elected officials at the federal and state levels. Money comes their way too. These contributions, along with generously funded "non-political" campaigns such as those against the Kyoto accords or universal healthcare, have bought access for lobbyists and protection for management that cheats workers, pensioners and shareholders alike.

Equally significant, executives have looted pension funds, abandoned responsibilities for health benefits, off-shored production and slashed work forces while rewarding themselves beyond all measure—all under the cover of the political protection they have bought and paid for.

Their lobbyists thwart attempts at regulation in Congress and in state capitols, and sometimes actually draft the legislation they desire. If perchance interfering laws are enacted, industry personnel move through the revolving door to manage and staff the agencies, such as the FDA, USDA, the Environmental Protection Agency, Federal Communications Commission, and Securities and Exchange Commission—to ensure that laws passed do them little harm.

The lax enforcement of existing securities law by the SEC highlights the question: just who are the corporations? In law, and in the traditional mythology of the free enterprise system, corporations are entities owned by their shareholders. But between the SEC, the courts of Delaware (where most major corporations' jurisdiction-shopping has led them), and the federal judiciary, it has become clear that the shareholders have as much power as customers—the power to walk away if they do not like what the CEO and his associates are doing.

The federal courts, in a position as scandalous as their misreading of "original intent" that provides First Amendment free-speech rights to multimillion-dollar political spending, refuse to reconsider the position that the Fourteenth Amendment—adopted to secure the rights of former slaves—also provides "personhood" and citizens' rights to corporations.

It is usually rights and privileges and not duties that corporations invoke. Corporations litigate their own free-speech rights and even sue for libel to silence their critics. But when was the last time you heard of a corporation being imprisoned, let alone executed, for any crime it committed?

At most, financial penalties apply, which leads to the contradictory phenomenon of shareholder suits in which the company, allegedly a collective of shareholders, diverts shareholders' funds to pay for executive misdeeds. Indeed, the company, i.e., the shareholders, will pay the legal costs of management, either to defend against shareholder suits or to restrict shareholder rights to nominate board members or discuss company policies. Management not only escapes without penalty but is generously rewarded for its misdeeds.

Corporate apologists usually justify management "compensation" packages with rhetoric that ties executives' interests to the interests of shareholders—although management is often handsomely compensated even when the stock they are husbanding plummets. Looting pension funds, slicing off health benefits, slashing workforces, and shipping jobs overseas are equally well rewarded.

In 2006 Henry McKinnell of Pfizer "earned" $198 million for resigning as CEO of the company after its share price dropped 40 percent. That was to cushion the blow of his barebones existence on the $5.9 million annual pension his board had approved without informing shareholders. This February, American Express CEO Ken Chenault doubled his take to over $50 million while his company's stock went down by a quarter and its telephone operations were off-shored to India.

The airline industry, which stays aloft by persuading employees to work longer hours for less money, and persuading the courts and Congress to free companies from pension obligations, deserves special scrutiny. Consider that during American Airlines' 2007 annual stockholder meeting, CEO Gerard Arpey claimed that $160 million in company shares given to executives was a "motivational tool" to turn American Airlines around. It does raise the question of why the workers who fill, maintain and fly the planes are motivated by pay cuts and the executives by pay hikes.

Executives argue that their exorbitant pay is approved by directors, upon the recommendation of compensation committees, who are in turn advised by compensation consultants. This involves more smoke and mirrors than a cigar bar bathroom and gets to the heart of the lack of any real shareholder democracy. As Alan Greenspan admitted with uncommon clarity: "Few directors in modern times have seen their interests as separate from those of the CEO, who effectively appointed them and, presumably, could remove them from future slates of directors submitted to shareholders."

(Did such coerced loyalty motivate longtime Wal-Mart board member Hillary Clinton, who never protested lack of healthcare for employees or the company's ferociously anti-union policies?)

Compensation consultants' consistent recommendations of higher pay for the head honchos are always based on "prevailing industry standards"—always rising, because boards and consultants always justify higher executive pay by warning that rival companies may tempt away managers. Yet the same executives presumed to be in such demand have created elaborate structures that make it almost impossible for shareholders to get rid of them without highly rewarding them in the unlikely event that they do go.

COVER OF DARKNESS—As CEOs have given themselves higher pay packages than ever before, their influence on government has produced round after round of tax cuts that have only served to benefit those who already have money coming out of their ears. It has become the received orthodoxy that the solution to any problem is tax cuts. Democrats have insisted that proposed tax cuts benefit the less wealthy as well, but it would be nice to hear them call for increasing taxes on those in the upper brackets, or even to mention that the quickest way to guarantee long-term solvency for Social Security is to end the contribution cap that excludes payment of Social Security taxes on earnings above $90,000.

Bob Monks, a veteran corporate-governance activist, makes a convincing case for this in his latest book, Corpocracy. In it he outlines the mechanisms that protect CEOs' privileges and prerogatives and ensure that government bends to their will. "Out of control CEO compensation is the symptom, the smoking gun," Monks writes, "but corpocracy and the discontinuity it has created with our political traditions is the real disease, the ultimate reality."

Monks argues persuasively that the core of modern robber baronage is the Business Roundtable, an association that restricts its membership to CEOs of major companies. It is possibly the most effective union in the country. He points out that in 1970, before the knights of industry sat at the Roundtable, the average CEO earned thirty times as much as the average worker. Executive compensation is now 300 times that of average worker compensation, and growing—even before tax breaks are figured in.

Citing a BusinessWeek report, Monk relates that 10 percent of the shares of the top 200 companies has been set aside for executive compensation, and claims that this has amounted to a transfer of $1 trillion in "the largest peacetime movement of wealth ever recorded." Much of this money is moved under cover of darkness, so to speak, with compensation hidden in stock options that are hard to quantify and often invisible because management is not required to identify it in reports to shareholders.

The Roundtable and its allies have fought every attempt to require that the cost of stock options be "expensed," i.e., shown in the accounts where shareholders can see them clearly. One ally on this front, Senator Joe Lieberman (I-CT) led fifteen co-sponsors in a Senate resolution effectively calling for these executive extras to remain under the table. On a similar issue, when the SEC proposed to make it possible for shareholders to nominate directors on corporate boards, the Roundtable spent $13 million to thwart this very modest measure.

Monks sees this as part of a comprehensive campaign, whose blueprint can be found in a 1971 "Confidential Memorandum: Attack of American Free Enterprise System," written for the U.S. Chamber of Commerce by Lewis Powell months before Richard Nixon nominated him to the Supreme Court. Powell outlined a campaign to make American politics, education, and media more amenable to what he considered the neglected interests of American business.

Monks is too astute to subscribe to conspiracy theories, but while noting the interesting coincidence that the Business Roundtable was set up shortly after Powell's call for a long march of business through the institutions, he concludes: "At the least, every man and woman who heads up the Washington office of a Fortune 500 company should say a little prayer to Powell on the way to bed at night."

We could add that that what Powell has written has come to pass. You do not have to entertain 1930s visions of top-hatted capitalists ruling the world from Wall Street to understand that the country suffers from a dangerously unhealthy concentration of power. Money talks in American politics, and the imperial CEOs and their allies are the ventriloquists.

SHAREHOLDER REVOLTS—The good news is that despite the growing imperial power of management, there are unions, pension funds, foundations and socially conscious mutual funds that have achieved some successes in reining it in. Shareholder pressure was instrumental in breaking the cabal of global-warming deniers at the oil companies, for example, leaving Exxon pretty much alone in its denial. It is relevant that Exxon's management has been notoriously ruthless in thwarting shareholder resolutions and stage-managing annual company meetings.

But Exxon notwithstanding, these campaigns are beginning to have an effect. This year promises to be the busiest proxy season ever, with a record number of resolutions spurred partly by demands for justice; they are also informed by recession fears that corporate management and their shills in government have led us all to the edge of the precipice.

There is a long way to go. Many of the 28 resolutions filed by the Laborers' International Union this proxy season were kept off board agendas with the connivance of an SEC that allows boards to block votes on resolutions they declare "ordinary business" and to ignore the outcome if such votes occur.

Yet unions and activists once dismissed as "special interests" (unlike the most successful union of all time, the Business Roundtable) are now aligned with hedge fund operators like Carl Icahn, who told me a year ago: "The trouble in America is, these guys try to give themselves options at cheaper prices even when the stock goes down. And this great gap between what the regular employee earns and what the CEO earns, it's just ridiculous. Every day the gap gets bigger. But there's no accountability." Icahn makes the obvious point that lack of accountability produces lack of efficiency in most organizations. Warren Buffet's eloquently expressed views on executive pay, corporate democracy and social responsibility also put him firmly against the CEO cabal.

On the political side, the battle lines are clearer than ever, as the GOP has increasingly become the political wing of the Business Roundtable. John Sweeny of the AFL-CIO pointed out last November that the SEC's chairman Christopher Cox, "caved to political pressure to take away a fundamental investor right," the right to nominate directors.

As long as one of the major political parties is totally committed to advancing the interest of the super-rich, which the CEOs have now become—and the other is only half-hearted in resisting their power, democracy is at risk. In effect, like independent nominees for boards of directors, it often appears that candidates for political office, despite rare and refreshing examples, can now only appear on a slate if corporate interests approve them.

The secret that allows corporate domination to continue is those citizens and shareholders who fail to use their votes and influence to push for improvement. Citizens concerned about democracy should carefully read the middle section of their newspapers—the bit between politics and sports—and follow corporate politics, and where they have shares, or influence, vote for better policies, if they don't want their inactivity at annual meetings to negate their votes in the polling booth.

Based on what is known, it's widely believed that, using J.P. Morgan as the conduit, Bear Stearns swapped its bad assets (Alt-As) for U.S. Treasuries.  The Federal Reserve ends up with the BS bad assets; BS ends up with clean Treasuries.

This past December Bear Stearns increased the percentage of its revenues used to compensate its traders, executives, etc. to 57.6% of its revenues (up from 47.1% in prior year)?  Yes.  And guess what?  These same executives took $4.15 Billion out of BS as 2007 compensation.  http://dealbook.blogs.nytimes.com/2007/12/20/bear-stearnss-grim-bonus-math/

Look at this chart showing the latest retail CEO compensation compared to underlying corporate performance -- look at the 100% or more pay raises compared to the lousy underlying results - very interesting (from the National Retail Federation) → ceopay08update.pdf

And Robert Reich's summary of why the American middle class cannot continue to cope →  http://www.ft.com/cms/s/0/5deb45aa-ce7e-11dc-877a-000077b07658.html

So in that vein, I'll tell you my New Year's Resolutions of 2008. I believe that every single one I will be able to keep.

I resolve not to look at my BlackBerry during meals, or certainly not unless it's really, really necessary and in no event more than four times a meal, mostly when nobody is looking, unless it's unavoidable.

I resolve not to give any sub-prime loans to anybody. This unfortunately makes it impossible to lend any money to anybody I know, pretty much.

I resolve not to accept an excessive exit package if for some reason I am terminated from my corporate job.  That's easy to say, of course, so I'll be specific. I consider any amount more than $100 million in cash and future options that vest in the next three years to be highly questionable.

I will not use my cell phone to tell people where I am. "I'm at the corner of Lexington and 53rd now... okay, now I'm at Park." That kind of thing. It's amazing how many public conversations you hear involve discourse of that depth and sagacity. I'm not doing that.

Nor am I getting a little bluetooth thingie to put in my ear. I am by nature dorky enough and don't need any additional dorkitude to augment mine. So that's out.

I resolve to eat any macadamia nuts that are in any minibar that is in any hotel room that I inhabit on company business, and attempt to expense them.

I will not use PowerPoint, except in jest.

I will not, during this year, get any drunker than the drunkest person at any table.

I resolve to be kind to my subordinates, whenever possible, and to not lose my temper, except when absolutely unavoidable. If I do get angry, I will try not to yell. If I do yell, I will apologize for it afterward. Unless I really don't want to.

I resolve to be kind to my bosses, whenever possible, and not to lose my temper, except when absolutely unavoidable. If I do get angry, I will try not to bite my tongue. If I do bite my tongue badly enough, however, I will take off work early and have a drink.

I resolve to attend no meeting that I don't have to. Further, I will do everything possible to destroy meetings that take place for no reason, even if I am not invited, since things may transpire at those meetings that do not meet with my approval. I will always be punctual to any meeting that I do attend, as long as there is food.

I will upgrade my computer situation at least twice during the year. I'm not sure how. But I need something new every six months or so or I feel like I'm missing something. I will get any gizmo that seems too sexy to resist also. Unclear right now what that might be. But I am resolute.

Finally I resolve to read every single one of the comments that come into this page all year, every day, even the person who keeps sending me insulting comments under my own name, and post all but the most egregious, and even then I may post those if they are relatively clean and funny. I will continue to appreciate all of you for being here, without getting all mushy or anything.

And oh yeah. I'm going to try to look on the sunny side of life a bit more in '08.  Of course, some resolutions are easier to keep than others. We'll see, huh?

NEW YORK (Associated Press) - The chief executive of communication and aviation electronics maker Rockwell Collins Inc. received compensation valued by the company at about $6.4 million in fiscal 2007, according to a proxy statement filed Friday with the Securities and Exchange Commission.

Clayton M. Jones, who also serves as chairman and president, received a base salary of $945,000. He did not receive a bonus but did get $3.4 million in non-equity incentive plan compensation. ...

More information from 12/26 GazetteOnline, Rockwell Collins chief earned $6.4 million in '07

Porsche was struggling to survive when Wiedeking took the reigns in 1992. It was generating losses, its market capitalization had plunged to a mere 300 million, and bankruptcy was a real risk. Ferry Porsche, patriarch of the family that still controls the eponymous firm, wanted to reward Wiedeking with voting shares held only by the Porsche and Piëch families. When other family members objected, a compromise was struck whereby Wiedeking would receive 0.9% of Porsche's profits in lieu of shares.

The most striking feature of this deal is not that profits have since risen to almost €6 billion, but that Wiedeking accepted substantial downside risk to get that upside. Unlike Nardelli & Co, Wiedeking had to agree to put all of his personal assets at risk, pledging them for the benefit of Porsche. Nardelli's biggest risk was that he would only make his million dollar base salary. Wiedeking would have ended in personal bankruptcy had his turnaround effort failed. This symmetry of a manager's pay package turns a manager into an entrepreneur rather than a stock option collector.
Wiedeking has an uncommon management style. When Porsche built a new factory a few years ago, he turned down some €50 million in government subsidies. He is sensitive to managers spending too much time on the golf course - job candidates are said to have been rejected after mentioning a low golf handicap in their interview. This year, each worker will receive a bonus of €5,200. Wiedeking's willingness to lead Porsche with a disregard for management textbook methods explains the turnaround the rise of Porsche's market capitalization to €25 billion. It also gave him the confidence to enter into his revolutionary pay arrangement.

It would be easy to dismiss Wiedeking's employment contract as a typical European quasi-socialist experiment. However, private equity firms have required for many years that managers co-invest some of their personal assets into the companies they bought out, thereby creating significant downside risk for the managers if their efforts fail. Asymmetric risk works in private equity, and Porsche has shown that it is possible to incentivice managers at public companies with downside risk in addition to the upside. It is about time that boards of public companies and their compensation consultants adopt such symmetric compensation policies in public companies.

Thomas Kirchner and the Pennsylvania Avenue Event-Driven Fund (PAEDX) do not own shares of Porsche.
:: :: :: :: :: :: :: :: :: ::

I would also accept bacon.

• Gisele Refuses To Strut Stuff For Dollars, Only Euros - Business on The Huffington Post

This brings two thoughts to mind:

• Do any of you really understand the whole subprime thing? I mean, I kind of get it, because I've read a bunch about it, but perhaps one of you out there can explain it to the rest of us simply. Please do. And thanks.
• Do any of you think that that name "Wachovia" is a subliminal message? If you prounouch the "ch" as a soft sound, you could say that it's a bank that will "watch over ya." I like a bank like that. You think it's a coincidence? If, on the other hand, you fail to bank there, it's just possible (if the "ch" is hard, like a K) that the world will "walk over ya." Who wants that? I want a bank that protects me from stuff like that!

Anyhow, back to business. The thought for today is Mr. O'Neal's exit package. If a merger with Wachovia had taken place, he would have been paid as much as $274 million, according to the LA Times. That's a lot of money, even by today's standards. Even one percent of that sounds nice.

As it is, upon leaving, he'll walk about with about $154 million in pension payments, stock options, and direct holdings in the company. That's in addition to the nearly $50 million he made last year. Of course, I know how newspapers factor in all kinds of future goodies into these numbers, but by any measure we've got another case of somebody who has made his fortune being canned.

God! Please send me one of those jobs!

A group of pension funds will receive $117.5 million to settle their class action suit against Mercury Interactive Corp. for losses caused by stock options backdating.

The deal is the largest to date in a stock options backdating suit, the San Jose Mercury News reports. Previously the record was an $18 million settlement, according to the law firm representing the funds, Labaton Sucharow.

Mercury had already agreed to pay another $28 million to settle civil fraud charges related to the backdating that were filed by the Securities and Exchange Commission, the Wall Street Journal reports (sub. req.). The agency has also filed civil charges against four former Mercury executives, including former general counsel Susan Skaer.

For more see ABA Law Journal Online.

The article should say, "Workers at a higher level than the regular joe-schmoe think that CEOs are overpaid."

That would be more accurate. PS - Where's the news in that?

Here's what I read in the FT's article: my boss doesn't deserve to be paid as much as he earns -- wah wah.

It's not that I disagree. Most CEOs are overpaid, and CEO compensation rarely tracks with an organization's financial performance. Much can be said about the regular workers in the rest of the organization. It's not like many of us are evaluated based on thoughtful and relevant objectives. We just earn less than our CEOs so it's not as noticeable.

FT.com / Companies - We are overpaid, say US executives

By Steven Yahn

When it comes to the complex and, at times, sensitive matter of stock-option grants for top executives, HR can ill afford to trust that everything will be just fine if they let others worry about the details. With the mushrooming of federal probes into questionable options grants -- as well as a few high-profile allegations of direct HR involvement in fraudulent cases of options-grants backdating -- it's time to jump in with both feet.

For more see Human Resource Executive Online.

This latest action could indicate a shift in the SEC's enforcement policy.  By filing charges against an executive with oversight duties who failed to act, the SEC has  broadened its enforcement net to include executives who were on notice of improper conduct and failed to take "appropriate action." The case should serve as a disincentive for executives to "turn the other cheek" and give more vigor to corporate compliance programs.

Here is a copy of the Complaint filed against Michael J. Byrd in the U.S. District Court for the Northern District of California, San Francisco Division.

The SEC filed fraud charges against the attorney, Lisa C. Berry, for her role in "illegally backdating stock option grants" from 1997 to 2003, first as GC of KLA-Tencor and then as GC of Juniper Networks.  The SEC alleges that the misconduct resulted in the concealment of hundreds of millions of dollars in executive compensation expenses relating to undisclosed in-the-money option grants.

In related actions, the SEC settled fraud charges against Juniper and KLA.  Without admitting or denying the allegations, Juniper consented to a permanent injunction against violations of the antifraud and other provisions of the federal securities laws.  KLA had previously settled charges brought by the Commission.

The cases show how poor corporate governance and weak internal controls lead to self-dealing, breaches of duties, and securities fraud.  The Complaint specifically alleges that

"Beginning in the second half of 1999, [Berry] routinely prepared backdated stock option grants to issue options to groups of recently hired employees of Juniper. For these new hire grants, the executive collected the names of recently hired employees and had lists prepared. The executive then selected as the exercise price of the new hire grants the closing price of Juniper's stock on a date in the past, reflecting the low closing price during a particular period around the time the employees were hired. For each backdated grant fkom 1999 through 2003, the executive then created Stock Option Committee meeting "minutes" that falsely stated that the Stock Option Committee had met on the date of the low closing price and granted options on that date."

"The executive signed the backdated committee "minutes" as a Stock Option committee member. In addition, for each backdated grant the executive either presented the minutes to the other Stock Option Committee members for signature or stamped the minutes with a signature stamp the executive maintained bearing the other Stock Option Committee members' signatures."

"Once the executive selected a backdated grant date and a corresponding exercise price, the executive informed Juniper's stock administrator, who then entered the grants into Juniper's stock option tracking software using the backdated date as the grant date. Juniper did not reflect in its books an expense related to the in-the-money portion of the options."

Here is a copy of the Complaint filed against Berry in the U.S. District Court for the Northern District of California, San Jose Division and the Complaint settled with Juniper. 

By the middle of last month, Securities and Exchange Commission lawyers were growing frustrated with running into claims of attorney-client privilege in their probe of troubled chipmaker Marvell Technology. The company had investigated its past stock options grants and found a widespread pattern of misdating. But Marvell's former general counsel told Marvell board members that the internal investigation was biased, and that accusation piqued the interest of the SEC.Lawyers there wanted to interview the former general counsel, Matthew Gloss, according to attorneys briefed on the case. But Marvell, they said, claimed that whatever Gloss had to say about the internal probe was covered by attorney-client privilege.That put SEC lawyers in a tough position: The commission adopted a policy late last year of not asking for privilege waivers, even in situations -- like the Marvell case -- in which they clearly expect them.Privilege waivers are on unsteady ground these days. More than ever, the commission is dependent on companies cooperating with SEC probes by conducting internal investigations -- and waiving privilege to disclose the results. Yet intense criticism of government intrusion on attorney-client privilege has reached Capitol Hill, where pending legislation would prohibit the SEC from rewarding companies that turn over privileged material.

Afraid of losing that cudgel altogether, SEC lawyers and defense attorneys say, the commission has been trying to kill the perception that to cooperate, companies must waive privilege -- especially since the U.S. Department of Justice issued a policy letter in December toning down its pursuit of privileged material in criminal cases.

Privately, lawyers at the SEC say they're still trying to sort out how to negotiate with companies unwilling to give regulators the privileged information they seek.

It's hard these days for the SEC to tread lightly because so much of its caseload -- especially in the San Francisco Bay Area -- involves probes of stock option grants. The 140 or so companies under scrutiny make up the most privilege-intensive wave of investigations the SEC has seen this decade.

"A lot of the options backdating cases do get into questions of whether you followed the advice of your general counsel or not," said Robert Friese, a partner at Shartsis Friese in San Francisco and chairman of an American Bar Association securities enforcement committee.

In many cases, Friese said, it's impossible for companies to cooperate with the SEC without opening a window into privileged communications.

So defense lawyers are skeptical of the SEC assertion that a company refusing to waive privilege won't automatically be viewed as uncooperative.

"The official policy is to give you a credit for waiving," said Jordan Eth, a securities litigator at Morrison & Foerster. "Not getting a credit is something quite close to a penalty."

The Marvell case, said defense lawyers and SEC attorneys, is notable -- perhaps singular -- for the bias accusation accompanying its internal probe. But the tension is not: The attorneys said that with the SEC lawyers unable to demand waivers of privilege, the defense bar has become emboldened in other cases, especially with the hope of federal legislation that could altogether preclude waiver requests.

LAWYERS IN THE CROSSHAIRS

The Justice Department policy on privilege has been discussed ad nauseam since 2003, when a memorandum from then-Deputy Attorney General Larry Thompson outlined prosecutors' expectation that companies broadly waive privilege to prove their cooperation in criminal probes.

That approach was exceedingly controversial because it intrudes on a basic tenet of the legal system. But while the debate over it generated much press coverage, there's been relatively little attention given to the SEC's adoption of similar procedures in its civil probes -- even though the SEC pursues many more corporate fraud cases than the Justice Department.

Kathleen Bisaccia -- a former SEC administrator who spent 14 years at the commission before joining the private investigation firm Kroll last year -- said the advent of privilege waivers and internal corporate probes vastly altered the way civil securities probes were handled.

"When I joined the staff, we had to do all of this on our own," she said. "We never had companies go out and say, 'We'll do a financial analysis for you.'"

The advent of internal investigations, Bisaccia said, also coincided with a new focus by the SEC on "gatekeepers" -- the lawyers, accountants and other professionals whose job it is to make sure companies handle securities issues properly. Whereas in the past the commission had been "very hesitant to sue lawyers," Bisaccia said, by the late 1990s, "lawyers sort of became an OK target."

And when the options probes began in the spring of 2006, it quickly became clear that in-house and outside counsel would be witnesses and targets in many of the cases.

Six months later, the government's criminal probes of those companies hit a snag when then-Deputy Attorney General Paul McNulty issued an eponymous memo saying Justice would back off on requesting privilege waivers, requiring assistant U.S. Attorneys to get clearance from Washington before making such demands.

There's no such public document for the SEC. But attorneys there say there's a policy in place in response to the McNulty memo to not ask for such waivers -- and to explicitly tell lawyers that they're not expected.

That guidance, though, wasn't enough to satisfy corporate and defense lawyers; their push to get Congress to ban federal agencies from requesting or even rewarding privilege waivers worries SEC leaders and lawyers.

IT PAYS TO PLAY BALL

While companies bristle at the notion that they'd be expected to cough up privileged materials, cooperation, especially in cases in which companies are willing to fire executives they blame for wrongdoing, has obvious advantages.

For example, KLA-Tencor's backdating problems were severe enough that it restated about $400 million in expenses and fired its CEO -- yet managed to avoid SEC fines altogether. The company shared details of a notoriously aggressive internal probe by Skadden, Arps, Slate, Meagher & Flom partner Richard Marmaro with the SEC.

In revealing privileged communications between the company and its inside and outside lawyers, KLA gave the commission fodder to sue former CEO Kenneth Schroeder and ex-GC Lisa Berry for securities fraud, but escaped with only token injunctive relief.

Similarly, Juniper Networks -- where Berry also served as GC, and which had a restatement of nearly $900 million -- also got off with a settlement that didn't include a fine. But Berry was charged by the SEC for behavior at Juniper as well, based on the company's probe.

In those cases and others like them, said defense lawyers, companies willing to fire executives may want to waive privilege to convince SEC lawyers that problems have been rooted out. The same goes for individuals -- like Marvell's Gloss -- who argue that information covered by a company's privilege can help them out of trouble.

"When you represent an individual, you want to get that information in front of the SEC," said Leigh Kirmsse, a partner at Howrey who represents executives in options cases.

She and other defense lawyers said companies have been trying, with some success, to navigate around privilege issues by presenting their internal probes as narrative or visual presentations to the SEC, and not providing documents.

One enduring concern, the lawyers said, is providing fodder for private civil suits -- the cost of which can negate the benefit of dodging an SEC fine.

A broad privilege waiver, Friese said, means the documents are widely available. "It opens up the door for the private plaintiff bar," he said.

PRIVILEGED INFORMATION

In the case of Marvell, said lawyers briefed on the situation, the privilege dance between the SEC and a company hoping to keep its problematic investigation under wraps was eventually resolved, if only temporarily.

The company had already let Gloss tell the SEC about options problems that were the subject of the investigation, said people briefed on the case, but balked when the regulators wanted to question him about the probe itself.

After weeks of negotiations, Marvell's lawyers at Wilson Sonsini Goodrich & Rosati agreed with the SEC on a carefully delineated waiver that specifies which questions Gloss would be asked.

Lawyers briefed on the case said that, with that hurdle in the past, the case is moving forward now. In recent weeks, they added, federal criminal prosecutors have also shown increasing interest in Marvell.

A Wilson Sonsini spokeswoman said Steven Schatz, the partner representing Marvell, couldn't comment on the privilege discussions.

Gloss' lawyer, Miles Ehrlich of Ramsey & Ehrlich, also wouldn't get into details of the waiver issue. "Matt has been fully cooperating with the SEC, and will continue to do so, consistent with his ethical obligations as Marvell's former general counsel," he said.