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Entries by Audrey Johnson (3)


Asset Freeze Granted in SEC v. Bar Works Capital

In SEC v. Bar Works Capital, LLC, No. 17-cv-04396-EMC, 2017 BL 370327 (N.D. Cal. Oct. 16, 2017), the Securities and Exchange Commission (“SEC”) sought an asset freeze against Bar Works Capital (“Bar Works”) for allegedly purchasing 615 Sacramento Street, San Francisco, California (“Property”) with fraudulently-obtained funds. The court determined the SEC offered sufficient and proper evidence to support this claim and imposed an asset freeze on the Property.  

The SEC requested preliminary relief in the form of an asset freeze after an enforcement action arose against Capital alleging violations of federal securities laws in the Southern District of New York. The defendants in this security suit, Bar Works, Inc. and 7th Avenue Bar Works, allegedly solicited $4,666,647 from approximately eighty-six investors to convert former bar and restaurants in central city locations into full-service work spaces. The complaint asserted Richard Haddow, Capital’s manager and the owner of the defendants in the securities suit, transferred these funds to a separate account used to purchase the Property, instead of applying the money towards the proposed new venture. The court issued a default judgment against Capital on September 13, 2017, because it failed to timely answer the SEC’s complaint.

A party requesting an asset freeze must show that it may succeed on the merits, it will suffer irreparable harm in the absence of preliminary relief, the balance of equities tips in the party’s favor, and an injunction is in the public interest.

The court determined the SEC presented substantial and uncontroverted evidence establishing the investor funds were used to purchase the Property in Capital’s name because the defendants maintained complete control over the investor’s money from the initial deposit to the purchase of the Property. Second, the court found a potential for irreparable harm in the absence of preliminary relief because the defendants had previously dissipated assets or transferred them beyond the United States’ jurisdictions from accounts involved in this case prior to the commencement of the securities suit. The court determined irreparable harm may also stem from other third-party claimants, seeking to impose liens against the Property. Third, the court decided the equities weighed in favor of granting the asset freeze because investors may not be able to recover moneys wrongfully obtained from them otherwise and Capital failed to respond with reasons why a temporary asset freeze would cause them to suffer harm. Lastly, the court held the SEC’s role as a statutory guardian charged with protecting public interest in security law enforcement supported the imposition of an asset freeze because the purpose of such disgorgement remedies is to deter security law violations.

For the reasons above, the court ordered the asset freeze on the Property.

The primary materials for this case are available on the DU Corporate Governance website.


The Director Compensation Project: Costco (COST)

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation. We are for the most part including companies from 2017’s Fortune 500 and using information found in their 2017 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a). In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. The NYSE imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 (C.F.R. §240.10A-3) (see Rule 303A.06) and requires consideration by the board of directors of certain specified factors in designating directors for the Compensation Committee. See NYSE Rule 303A.02(a)(ii).

Finally, as the Commission has noted with respect to director independence:

All compensation committee members must meet the general independence standards under NYSE’s rules in addition to the two new criteria being adopted herein. The Commission therefore expects that boards, in fulfilling their obligations, will apply this standard to each such director’s individual responsibilities as a board member, including specific committee memberships such as the compensation committee. Although personal and business relationships, related party transactions, and other matters suggested by commenters are not specified either as bright-line disqualifications or explicit factors that must be considered in evaluating a director’s independence, the Commission believes that compliance with NYSE’s rules and the provision noted above would demand consideration of such factors with respect to compensation committee members, as well as to all Independent Directors on the board.

Exchange Act Release No. 68639 (Jan. 11, 2013); see also Exchange Act Release No. 68641 (Jan. 11, 2013).

Independent directors are compensated for their service on the board. The amount of “total compensation” can be seen from examining the director compensation table from the Costco (NASDAQ: COST) 2017 proxy statement. According to the proxy statement, the company paid the directors the following amounts:


Fees Earned or Paid in Cash


Stock Awards


All Other Compensation




Susan L. Decker





Daniel J. Evans





Hamilton E. James





Richard M. Libenson*





John W. Meisenbach






Charles T. Munger





Jeffrey S. Raikes





Jill S. Ruckelshaus





James D. Sinegal





John W. Stanton**





Mary Agnes (Maggie) Wilderotter





*Richard M. Libenson has been engaged as a consultant to the Company. For such services, a corporation that he owns was paid $300,000 during fiscal 2016. That amount has been unchanged for 16 years. In addition, the Company paid premiums on long-term disability insurance in the amount of $8,331 and premiums for health care insurance in the amount of $20,101. Mr. Libenson is not standing for re-election. He will serve a three-year term as Director Emeritus beginning in January 2017. For that service he will receive compensation (including equity compensation) equivalent to that received by board members.

**John W. Stanton was elected to the board in late October 2015 and only served a portion of the fiscal year in 2016.

Director Compensation. During the 2016 fiscal year, Costco held five board of director meetings. Each current director attended 100% of the total number of board and committee meetings on which he or she served, with the exception of Mr. Evans, who missed one Board meeting. Non-employee directors earn $30,000 per year for serving on the board and $1,000 for each Board and committee meeting attended. This year, directors also received 2,150 restricted stock units. Directors are reimbursed for travel expenses incurred from board service.

Director Tenure. Mr. Meisenbach and Mr. Sinegal are the longest serving board members as they joined the board at the company’s inception. Mr. Stanton and Ms. Wilderotter began their board tenure in 2015 and have served for the shortest amount of time. Seven board members hold board positions with other companies. Ms. Decker serves as a director for Berkshire Hathaway Inc. and Vail Resorts, Inc. Mr. Evans is the chairman of Daniel J. Evan Associates. Mr. James acts as the President and Chief Operating Officer of The Blackstone Group. Mr. Meisenbach is the President and CEO of MCM, a financial services company. Mr. Munger is Vice Chairman of the Board of Directors for Berkshire Hathaway Inc. and a chairman for the Daily Journal Corporation. Mr. Stanton is the Chairman of First Avenue Entertainment LLLP, Trilogy International Partners, and Trilogy Equity Partners. Ms. Wilderotter serves on the board of Juno Therapeutics, Inc. and Hewlett Packard Enterprise. She also holds a position on the President’s Commission on Enhancing National Cybersecurity.

Executive Compensation. W. Craig Jelinek, Costco’s President, Chief Executive Officer and Director since 2015, earned the highest compensation with a total of $6,503,276 in 2016. He earned a base salary of $700,000, stock awards of $5,563,064, bonus compensation of $81,600, deferred earnings of $57,227, and other compensation totaling $101,385. Jeffrey H. Brotman, the Chairman of the Board, earned $650,000 in base salary, stock awards of $5,563,064, bonus compensation of $81,600, deferred earnings of $78,842, and other compensation comprised of $108,248. In total, Mr. Brotman earned $6,481,745, the second highest amount of compensation. Other compensation included personal benefits such as executive life insurance, health care insurance premiums, and Company matching contributions to deferral plans.


Sanctions Imposed for E*TRADE Entities’ Self-Reported Record Retention Violations

In In Re E*TRADE Securities LLC and E*TRADE Clearing LLC, No. 17-07 (CFTC Jan. 26, 2017), the U.S. Commodity Future Trading Commission (CFTC) accepted a settlement offer (“Offer”) from E*TRADE Securities LLC and E*TRADE Clearing LLC (collectively “E*TRADE Entities”) regarding self-reported violations of CFTC record retention and supervision requirements. The CFTC found both entities violated supervisory duties and failed to preserve and maintain audit trail logs for customers. As a result, the CFTC mandated future compliance with retention policies and payment of a civil fine.  E*TRADE agreed to enter into the Order without admitting or denying any of the findings or conclusions therein.

According to the Order, the E*TRADE Entities learned as a result of an internal review conducted in January 2014 that they had not preserved certain customer electronic audit trail logs. E*TRADE Securities used a third-party vendor to generate these logs on a monthly basis. The vendor stored each record for a ten-day period and allowed E*TRADE Securities to download and save the information. The vendor informed E*TRADE Securities of this retention policy by email, however, E*TRADE Securities employees did not take additional steps to preserve audit logs.

E*TRADE Securities began downloading information daily from the third-party vendors once it discovered the retention error and attempted to recover the missing log data. In the same time frame, E*TRADE Clearing learned its internal database did not store audit logs automatically. E*TRADE Securities could not recover audit logs from October 2009 through October 2011, and from June 2012 through December 2012. Both companies could not recover audit logs from March 2013 through January 2014. E*TRADE Securities updated its Manual in March 2015 to reflect the record keeping requirements.  Both entities “self-reported” the recordkeeping violations to the CFTC.

Section 4g(a) of the Commodity Exchange Act (CEA), 7 USC §6g(a), requires every person registered as a futures commission merchant (FCM), introducing broker (IB), floor broker, or floor trader to keep books and records available for inspection of transactions, and customer and commodity positions. Similarly, Regulation 1.31, CFR § 1.35(a)(1), mandates that FCMs and IBs keep full and complete records of pertinent data and memorandum of all transactions “relating to its business of dealing in commodity futures.” Under 17 CFR § 1.35(a)(3)(ii), registrants must have written operational procedures to ensure proper electronic document retention. Commission Regulation 166.3, 17 CFR § 166.3 requires registrants to develop deterrent and detection procedures to identify CEA violations. Lastly, according to FC Stone, LLC, CFTC No. 15-21 2015 WL 2066891 (May 1, 2015), registrants must diligently supervise all business activities of its officers, employees, and agents.

The CFTC determined the E*TRADE Entities’ permanent loss of more than three years of records, attributable to a failure to ensure proper record retention, violated both Section 4g(a) of the CEA and Regulations 1.31(a) and 1.35(a). The Order also identified two breaches of Regulation 166.3: the E*TRADE Entities’ failure to implement reliable procedures to retain audit trail logs, and E*TRADE Securities’ failure to address the third-party vendor’s notice regarding retention periods.

For the above reasons, the CFTC directed the E*TRADE Entities to immediately end any record retention violations and ordered payment of a $280,000 civil monetary penalty. The Order recognized the E*TRADE Entities’ cooperation in this matter.

The primary materials for this case may be found on the DU Corporate Governance website.