BLEG: titles on SEC filings

Can a CEO be a non-playing captain?

It occurs to me that my previous post assumed something I don’t actually know: that the title “Chief Executive Officer,” used in an SEC filing, has a defined legal significance. If a ten-person company wants to call its supply clerk “Senior Executive Vice President for Logistics Management,” no one has any kick coming. But is it legally possible to be a non-playing CEO? If so, please tell me.

I’m hoping for answers from people with specific knowledge of securities law.

Footnote Note that the question of Romney’s executive duties goes to his veracity in disclaiming any direct control over various things Bain Capital did. The moral question is trickier. Assuming he wasn’t making the decisions himself, did he still have responsibility for them?

What’s undisputed is that it was Romney’s enterprise and that he was its sole stockholder. You might think that the owner of a whorehouse counts as a pimp even if someone else is physically collecting the money.

But, as I say, that’s a different question. The question for now is whether he either deceived the voters by claiming he wasn’t involved or deceived the SEC by claiming the CEO title.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

30 thoughts on “BLEG: titles on SEC filings”

  1. What gets me is the implicit message: “Vote for me based on my business experience, which included leaving my company to run itself for 3 years while I retained control on paper and pursued other interests!”

    Is he promising to run the country the same way?

  2. Post-Sarbanes-Oxley, there is a concrete definition. It’s not necessarily of the phrase “Chief Executive Officer,” but it is of the responsibilities of the individuals who are required to sign financial statements and certain other important items. They can give themselves the title Kitchen Staff Supervisor if they like, but by signing the filings, they attest that they are the responsible individuals.

    What the precise legalities were prior to 2002 I’m not really sure.

    1. Don’t have the forms to hand, but if memory serves the terms are principal executive officer, principal financial officer and principal accounting officer. Lower case each time; the SEC cares about function, not title.

  3. I myself haven’t had time to catch up on the details of this current hoo-ha. Except to say that if an SEC filing listed Mitt Romney as the sole owner of an entity then that entity is almost certainly not Bain Capital writ large. Romney had multiple business partners in the firm who held equity since the founding. In all likelihood the SEC filing in question was for some sort of legal entity created for some sort of technical legal purpose having to do with compliance with securities law, taxes, etc.

    For example, an investment firm that ran multiple partnership funds might have reason to maintain a separate corporation for the purposes of doing things like paying the rent on office space and the like, even though 100% of the investment decisions are made under the aegis of one of the specific partnership funds (which would be “LLCs” not “Incs.”). The individual LLCs after all wouldn’t separately pay rent for office space – that would be silly.

    In any event we’ll no doubt learn more. But if the possibilities are “Mitt Romney committed securities fraud with no clear reason to do so (I.e. no financial gain at stake)” or “reporters mis-interpreted complex financial and legal documents that they are not experienced in reading” well, Occam’s toothbrush or something like that. After all, Mitt Romney was NOT listed as a key employee in the prospectuses of the Bain Capital managed funds that had their inception during the period in question, so it’s highly unlikely anyone was trying to fool anyone else.

    1. If he wasn’t a “key employee”, what was Bain still paying him $100,000 a year for?

      1. He wasn’t a “key employee” of the individual funds. He was the CEO of Bain Capital, the parent of the funds, and the outfit that was paying him.

    2. Very elegant, but totally wrong. The Romney campaign hasn’t challenged the statement in the SEC filings that Romney was the sole shareholder (and chairman and president and CEO) of Bain Capital itself, not some LLC. Presumably the other managers were getting their cut in other forms. So he (and you) now have three choices:

      1. Claim that Romney’s signed statements to the SEC were false.
      2. Claim that the CEO of a company has no responsibility for the way it was run.
      3. Debate Bain’s record on the merits, rather than pretending that Romney had nothing to do with the outfit in which he made his fortune.

      1. You forget about the principle of quantum political dynamics.
        As long as the facts are kept in a box isolated from observation, the Romney particle exists in a superposition of all possible states. The waveform can collapse into a single state upon observation.

        But because of the multiple universe interpretation, different observers in diverging universes (red / blue, for example) can see different results. You can observe an interference pattern by projecting the results onto suitable media, like Fox.

    3. But if the possibilities are “Mitt Romney committed securities fraud with no clear reason to do so (I.e. no financial gain at stake)” or “reporters mis-interpreted complex financial and legal documents that they are not experienced in reading” well, Occam’s toothbrush or something like that.

      You need to open your mind (or your mouth) to other possibilities. Like perhaps, your Wall Street boy lent himself to that which he condemns:

      Earlier this year, Mitt Romney nearly landed in a politically perilous controversy when the Huffington Post reported that in 1999 the GOP presidential candidate had been part of an investment group that invested $75 million in Stericycle, a medical-waste disposal firm that has been attacked by anti-abortion groups for disposing aborted fetuses collected from family planning clinics. Coming during the heat of the GOP primaries, as Romney tried to sell South Carolina Republicans on his pro-life bona fides, the revelation had the potential to damage the candidate’s reputation among values voters already suspicious of his shifting position on abortion. But Bain Capital, the private equity firm Romney founded, tamped down the controversy. The company said Romney left the firm in February 1999 to run the troubled 2002 Winter Olympics in Salt Lake City and likely had nothing to with the deal.

  4. What difference does it make? There are no legalities and the people who sign these form truly have no responsibility for what they contain. These forms are really little more than press releases being sent to Wall Street’s trade association-cum-lobbyists.

  5. “You might think that the owner of a whorehouse counts as a pimp even if someone else is physically collecting the money.”

    I have a Lord Petyr Baelish on line one, objecting to any and all comparisons to Mitt Romney.

    1. I doubt that statement. These kinds of people are the sort who would say they just rent out the beds to independent contractors, like in a hair salon. And of course, no health bennies.

      To repeat the immortal Kinsley line, the scandal here is what’s legal.

  6. Dunno about SEC law, but in Delaware corporate law, the only relevant governing entity is the board. Delaware theology has an indistinct notion of “officer,” but no notion of “chief officer.” Indeed, you can sometimes find very strange governance structures. There was one bank in which the chairman of the board was also an officer, subordinate to the CEO, who was not a board member. I guess it worked for them.

    1. Officers of the corporation typically have fiduciary responsibilities to the corporation, and certain officers are the ones who can accept service of legal papers. But I think when someone is president, chairman of the board and sole stockholder in addition to being CEO, you’ve pretty much run out of other places for the buck to stop.

  7. The answer is, of course, neither. It is very common for SEC filings to lag the actual state of things. In addition, Romney took leave (officially) to run the Olympics and then permanent leave to be Governor of Massachusetts. To be a bit enlightened on the subject simply read page A4 of today’s WSJ (or hire a fact checker to do same).

    1. Redwave,
      I agree, although page A4 was anonymously sourced and I’d feel more comfortable if it were on the FT, rather then the WSJ. But that is not the point.

      If you are right (and you probably were), Romney spent a bit of time reigning over Bain. Mr. Obama’s predecessor was also notorious for reigning, and the voters decided that they didn’t like him much for it. Reigning is not exactly a Presidential trait, unless one has the mad skillz of Saint Ronnie. If the topic is political damage, rather than evidence of personal integrity, Bain is a disaster for Romney.

      I think that this is going to be the first Presidential election since–1960?–where the Republican comes across as less manly than the Democrat. For some reason, voters like manly Presidential candidates, or at least those who come across as manly. Can Obama make this stick? Will this outweigh the crappy economy? We find out in November.

    2. It also seems relevent to the discussion that Mitt Romney claimed to have regularly returned to Massachusetts for business trips after 1999, and sat on the boards of 3 firms controlled by Bain. He swore this to establish his eligibility to be Governor. This seems more than a lag in SEC filing.

      This did not even need to be a big issue, but Mr Romney’s reflexive tendency to lie has helped this situation to carry on much llonger than necessary. Even my 8 year old knows that consequences for lying always wind up being the most severe even if she gets away with it for a while.

      1. It also seems relevent to the discussion that Mitt Romney claimed to have regularly returned to Massachusetts for business trips after 1999, and sat on the boards of 3 firms controlled by Bain. He swore this to establish his eligibility to be Governor.

        This seems critical to me.

  8. People who sign documents filed with the SEC are responsible for their accuracy. The press reports are unclear whether Romney himslef signed any of the documents that represent he was President and/or CEO. If he didn’t, he’s not liable for any inaccuracy they contain (pre-Sarbanes Oxley). And there wasn’t any requirement that President and/or CEO had to do anything in particular. It’s not uncommon for a CEO to take a long leave of absence but retain the title, as apparently occurred here.

    Opoen issues: How much was he paid by Bain duringhis leave? The reposts say “over $100,000,” but i’d guess it was quite a lot over $100,000.

    And let’s get back to the $102 million IRA. The assets were almost cerntialy undervalued when they were put into that acount, which is tax fraud. But even if that can’t be proved, it’s worth poionting out, several times a day form now until the eleciton, that Money pays no taxes at all on $102 million of his financial assets. I’m pretty sure that wasn’t even considered when it was reported that he paid aobut 15% of his 2010 income in taxesm so the real number wil lbe quite a long bdistance below 15%.

    1. I agree about the assets going into the IRA. What’s more, since he could only have started with $2,000 (or maybe as much as $6,000), I’m curious to see when and how assets were added. Also, whether the IRA was able to buy these presumably non-marginable specially created “securities” using credit and, if so, who provided the credit and what were they told (or what did they know) about the supposed value of the assets the “purchase” of which were being “financed” and then how they were appraised within the account. It seems impossible to have done this without committing many, easily provable, federal crimes every single year.

  9. I’m confused by all this yadayada about Romney’s “SEC filing” for a corporation in which he was the only stockholder.

    Why would that corporation, not publicly traded, file anything with the SEC?

    1. I’m ignorant about all of this, but given that it was buying and selling companies, some of them possibly publicly traded, might it have to fulfill some regulatory oversight akin to that expected for a brokerage, or to declare the nature of the entity buying a big part of a publicly traded company?

      1. Yes, these were Schedule 13D beneficial ownership reports, which Bain had to file with the SEC when it bought more than 5% of a company’s voting stock.

        1. Wouldn’t they also have to file something since they were selling partnerships in their investment funds? As I understand it, Bain was the organization that solicited investors for the partnerships, used the money invested to buy companies, and then managed those companies, well or badly.

          Depending on circumstances, I think they may have been required to file with the SEC in connection with the investment funds.

          And it’s entirely possible that Romney could have had a hand in the first two activities described while in Salt Lake City, and left details of the third to others.

  10. Section 240.3b7 of the Rules promulgated under the 1934 Exchange Act, which states, in its entirety, that:

    “The term executive officer, when used with reference to a registrant, means its president, any vice president of the registrant in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions for the registrant. Executive officers of subsidiaries may be deemed executive officers of the registrant if they perform such policy making functions for the registrant.”

    By definition, Mr. Romney performed a policy making function. In fact, he was the “chief” policy maker.

    However, I am willing to give anyone who disagrees an opportunity to cite to any still valid case, SEC Release, No-Action Letter, etc. that states that the “chief executive officer” of a company is merely a figurehead and does not have overall responsibility for management of the company.

    Absent such a citation, I would hope that Mr. Kessler will admit that he is wrong and grant Mr. Romney four Pinnochios.

    I would also point out that Mr. Jeff Skilling adopted a variant of this approach in his criminal defense, as have many others, arguing that as CEO he really wasn’t responsible for the actions of his underlings. I believe that Mr. Skilling is a long-term (24 years) guest of the Federal penal system.

  11. Why would the SEC be involved in assuring that people are doing the work their title implies? The notion is just plain silly. HR titles are internally defined and duties are by employment contract or board of director job description. SEC filings are made so that if there is securities fraud.

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