Compliance Hotline

Former Chairman and CFO of Anicom Indicted in Corporate Fraud Scheme

Scott Anixter, former chairman of the board of the now-defunct Anicom, Inc., and former Chief Financial Officer Donald Welchko were indicted in Chicago for allegedly engaging in a corporate fraud scheme by inflating sales and revenues by tens of millions of dollars beginning approximately 3 years before the company went bankrupt. According to the indictment, Anixter and Welchko, along with various co-schemers, allegedly created fictitious sales of at least $24 million, understated expenses, and overstated net income and earnings by millions of dollars, knowing that the materially false financial information was being provided to investors, auditors, lenders and security regulators.

Anicom was a national distributor of wire and cable products, such as fiber optic cable, based in Rosemount, Illinois. Anicom's shares were publicly traded on NASDAQ until trading was halted on July 18, 2002, when Anicom announced that it was conducting an investigation into possible accounting irregularities and that investors should not rely on its 1998 and 1999 financial statements.

Both Anixter and Welchko were each charged with three counts of securities fraud, five counts of bank fraud, five counts of making false statements to financial institutions, and seven counts of making false statements to the SEC. Welchko alone was charged with an additional count of making false statements to the SEC, four counts of falsifying Anicom's financial books and records, and a single count of obstruction of justice in connection with the SEC's investigation.

If convicted of securities fraud, Anixter and Welchko each face a maximum penalty of 10 years in prison and a $1 million fine on each count. The remaining charges against Welchko and Anixter carry the following maximum penalties on each count: bank fraud and making false statements to financial institutions — 30 years' imprisonment and a $1 million fine; making false statements to the SEC — 5 years' imprisonment and a $250,000 fine; and falsifying books and records — 10 years' imprisonment and a $1 million fine. The obstruction charge against Welchko carries a maximum penalty of 5 years' imprisonment and a $250,000 fine. The fine may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

SEC Proposes Allowing Shareholders Increased Role in Nominating Directors

The SEC voted on Oct. 8 to approve rule proposals that would require public companies to include in their proxy materials the names of nominees for director that are submitted by certain shareholders, as well as certain disclosure relating to those nominees. www.sec.gov/rules/proposed/34-48626.htm.

The proposed rules would require companies subject to the SEC's proxy rules, including registered investment companies, to include in their proxy materials the names and certain other information regarding security holder nominees for election as director. The requirement would arise in cases where state law establishes the right of a shareholder to nominate a candidate for such an election, and one or more specified events has occurred, providing evidence of shareholder dissatisfaction with the effectiveness of the company's proxy process.

The number of nominees about whom a company would be required to include information in its proxy materials would depend on the size of its board of directors. Companies having eight or fewer board members would be required to include information regarding one nominee. Companies with between nine and 19 board members would be required to include information regarding two nominees, and companies with boards of 20 or more members would be required to include information regarding three nominees.

The proposed procedure would require a company to include information regarding a security holder nominee for election as a director where: State law provides security holders with the right to make such a nomination; the procedure is applicable to a particular company (for example, the procedure would not be applicable to foreign issuers); the security holders submitting the nomination meet specified eligibility requirements; and the nominee meets specified eligibility requirements.

The SEC is now soliciting comment on these proposals, which must be received by Dec. 22, 2003.These proposed rules changes follow another set of major changes proposed August 8, 2003, including: requiring more robust disclosure of the nominating committee processes of public companies, including the consideration of candidates recommended by shareholders; and requiring specific disclosure of the processes by which shareholders may communicate with the directors of the companies in which they invest.

Notice Requirement for LLCs in NY Upheld

The Appellate Division, First Department of New York unanimously reversed a lower court ruling and held that a law requiring newly formed limited liability companies to publish a series of legal notices before bringing any court action is constitutional. Barklee Realty Co. LLC v. Pataki, 2003 N.Y. Slip Op. 17544 (Oct. 16).

In New York, state law requires that in order to form a limited liability company, the articles of organization must be published in local newspapers. In fact, LLC section 206 requires the publication for 6 successive weeks in two local newspapers designated by the clerk of the county where the new company has its principal office, followed by the filing of an affidavit with the Department of State stating the publication has been made. The owner of two real estate firms challenged the law. The motion court agreed with the plaintiff, finding that publication of the notices for 6 weeks “does not in any way enhance the adjudication of justice.”

The appellate court reversed, holding that the publication requirements do not have to enhance the adjudication of justice to be valid. They need only be rationally related to the promotion of a state interest. The court found that “section 206, rather than being extraordinary in any way, is typical of similar laws in New York and elsewhere that condition access to state courts on compliance with various administrative requirements.” While the motion court found that the required manner of publication of a limited liability company's articles is costly, unnecessary and an ineffective method of getting the desired information to members of the public, the appellate court held that “it was for the Legislature alone to assess the wisdom and utility of publication as a means of disseminating such information.” Further, in evaluating “whether a given law bears a rational connection to promotion of a legitimate state interest, courts are not to consider the wisdom or efficacy of that law or whether it is superior to other alternatives.”

Former Chairman and CFO of Anicom Indicted in Corporate Fraud Scheme

Scott Anixter, former chairman of the board of the now-defunct Anicom, Inc., and former Chief Financial Officer Donald Welchko were indicted in Chicago for allegedly engaging in a corporate fraud scheme by inflating sales and revenues by tens of millions of dollars beginning approximately 3 years before the company went bankrupt. According to the indictment, Anixter and Welchko, along with various co-schemers, allegedly created fictitious sales of at least $24 million, understated expenses, and overstated net income and earnings by millions of dollars, knowing that the materially false financial information was being provided to investors, auditors, lenders and security regulators.

Anicom was a national distributor of wire and cable products, such as fiber optic cable, based in Rosemount, Illinois. Anicom's shares were publicly traded on NASDAQ until trading was halted on July 18, 2002, when Anicom announced that it was conducting an investigation into possible accounting irregularities and that investors should not rely on its 1998 and 1999 financial statements.

Both Anixter and Welchko were each charged with three counts of securities fraud, five counts of bank fraud, five counts of making false statements to financial institutions, and seven counts of making false statements to the SEC. Welchko alone was charged with an additional count of making false statements to the SEC, four counts of falsifying Anicom's financial books and records, and a single count of obstruction of justice in connection with the SEC's investigation.

If convicted of securities fraud, Anixter and Welchko each face a maximum penalty of 10 years in prison and a $1 million fine on each count. The remaining charges against Welchko and Anixter carry the following maximum penalties on each count: bank fraud and making false statements to financial institutions — 30 years' imprisonment and a $1 million fine; making false statements to the SEC — 5 years' imprisonment and a $250,000 fine; and falsifying books and records — 10 years' imprisonment and a $1 million fine. The obstruction charge against Welchko carries a maximum penalty of 5 years' imprisonment and a $250,000 fine. The fine may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

SEC Proposes Allowing Shareholders Increased Role in Nominating Directors

The SEC voted on Oct. 8 to approve rule proposals that would require public companies to include in their proxy materials the names of nominees for director that are submitted by certain shareholders, as well as certain disclosure relating to those nominees. www.sec.gov/rules/proposed/34-48626.htm.

The proposed rules would require companies subject to the SEC's proxy rules, including registered investment companies, to include in their proxy materials the names and certain other information regarding security holder nominees for election as director. The requirement would arise in cases where state law establishes the right of a shareholder to nominate a candidate for such an election, and one or more specified events has occurred, providing evidence of shareholder dissatisfaction with the effectiveness of the company's proxy process.

The number of nominees about whom a company would be required to include information in its proxy materials would depend on the size of its board of directors. Companies having eight or fewer board members would be required to include information regarding one nominee. Companies with between nine and 19 board members would be required to include information regarding two nominees, and companies with boards of 20 or more members would be required to include information regarding three nominees.

The proposed procedure would require a company to include information regarding a security holder nominee for election as a director where: State law provides security holders with the right to make such a nomination; the procedure is applicable to a particular company (for example, the procedure would not be applicable to foreign issuers); the security holders submitting the nomination meet specified eligibility requirements; and the nominee meets specified eligibility requirements.

The SEC is now soliciting comment on these proposals, which must be received by Dec. 22, 2003.These proposed rules changes follow another set of major changes proposed August 8, 2003, including: requiring more robust disclosure of the nominating committee processes of public companies, including the consideration of candidates recommended by shareholders; and requiring specific disclosure of the processes by which shareholders may communicate with the directors of the companies in which they invest.

Notice Requirement for LLCs in NY Upheld

The Appellate Division, First Department of New York unanimously reversed a lower court ruling and held that a law requiring newly formed limited liability companies to publish a series of legal notices before bringing any court action is constitutional. Barklee Realty Co. LLC v. Pataki, 2003 N.Y. Slip Op. 17544 (Oct. 16).

In New York, state law requires that in order to form a limited liability company, the articles of organization must be published in local newspapers. In fact, LLC section 206 requires the publication for 6 successive weeks in two local newspapers designated by the clerk of the county where the new company has its principal office, followed by the filing of an affidavit with the Department of State stating the publication has been made. The owner of two real estate firms challenged the law. The motion court agreed with the plaintiff, finding that publication of the notices for 6 weeks “does not in any way enhance the adjudication of justice.”

The appellate court reversed, holding that the publication requirements do not have to enhance the adjudication of justice to be valid. They need only be rationally related to the promotion of a state interest. The court found that “section 206, rather than being extraordinary in any way, is typical of similar laws in New York and elsewhere that condition access to state courts on compliance with various administrative requirements.” While the motion court found that the required manner of publication of a limited liability company's articles is costly, unnecessary and an ineffective method of getting the desired information to members of the public, the appellate court held that “it was for the Legislature alone to assess the wisdom and utility of publication as a means of disseminating such information.” Further, in evaluating “whether a given law bears a rational connection to promotion of a legitimate state interest, courts are not to consider the wisdom or efficacy of that law or whether it is superior to other alternatives.”