By Bobby Guy

For the senior living company looking to expand its portfolio, distress sales can provide a unique opportunity to purchase a diamond in the rough at a very favorable price.

Article available at this link from the May/June 2008 issue of ADVANCE for Long-Term Care Management.

By Wynne James and Joseph Woodruff

In our last posting we discussed that overtures from illicit investment promoters often begin with the “cold call.”  We think that investment calls from people representing companies you’ve never heard of should be cause for immediate rejection.  If they’re so successful, why do they need your money (particularly when they’re paying salesmen 10-15 percent of what you invest, plus overhead)? 

Nevertheless, let’s assume your sense of adventure, not to mention the allure (and, too often, promise) of amazingly high profits, leads you to throw caution to the wind.  We do think you ought to try to check out the company promoting its investments.  How can you do that? 

The first thing to understand is that you’re being sold a security, just like a stock or bond.  That means that the company is subject to federal and state securities laws.  Without going into the complexities of those laws, and they are complex, there are a few things you can do to investigate the company trying to sell you an investment. 

First, the most handy and helpful informational tool available is Google.  Enter the name of the company and the president of the company (if you don’t have it, ask for it – and if you’re told it’s not important, well, there’s a red flag).  You’d be amazed at the information available on Google.  Look for newspaper articles, actions by state securities regulators and anything else that pops up.  Two cautions: 1)  if you see articles about the company doing really big deals, particularly international deals, think twice.  Too often these companies have names the same as or very close to that of very successful, large companies.  Adopting very similar names is a way to get credibility.  2)  If you see articles that make the company look like an industry leader, consider that it may have been placed by or on behalf of the company – simple public relations. 

Other places you can look include the websites of large newspapers in the area of the company’s offices.  You may have to go to the newspaper’s “archive” section, since newspaper websites rarely maintain stories on their primary pages for more than a few weeks. 

You might also check the websites of state securities regulators.  These are easily accessed on Google by typing in the name of your state plus the words “securities division.”  Once you’re in the state website, look for the areas on “enforcement actions,” “administrative actions” or “cease and desist orders”.  The absence of any information about a company on any particular state securities division website is not an endorsement.  These regulators, while conscientious and capable, are often understaffed and rarely start an investigation unless someone has made a complaint.  Further, there is no centralized national informational data base, but we suggest you check the securities division websites of at least the state in which you live and the state in which the company has its main offices.  Since these searches don’t really take a lot of time, you might also check the securities division websites of big states in which there are a lot of potential investors – such as California, Pennsylvania and Illinois. 

What we’ve given you is a place to start, and we’ll continue to give you tips on how to investigate (and evaluate) a potential investment.  Remember that high investment returns are almost always a result of high risk, but don’t compound or increase the risk by investing with a company that only wants your money. 

By James Bristol

As reported in recent postings [April 24 and May 19], executive pay has entered the political debate in this presidential election year. New sounds bites have been recorded from a June 10th speech by Senator John McCain in Washington to the National Federation of Independent Business (NFIB), an organization that supports small businesses. The speech included a call to federal prosecutors to crack down on abuses and advocated “say on pay” legislation, i.e., that all aspects of executive pay be subject to approval by shareholders. McCain said, "Something is seriously wrong when the American people are left to bear the consequences of reckless corporate conduct while the offenders themselves are packed off with another $40 million or $50 million for the road."

Senators Obama and Clinton have either introduced or supported legislation that would require say on pay and impose new limits on executive pay. McCain’s comments indicate his position has less emphasis on congressional action. Regardless of who wins the election in November, however, it seems that executive pay will be on the radar screen in Washington for a while.

This political development may be echoing a trend in the world economy. Say on pay is the law in other countries, like the United Kingdom and Australia. As we’ve recently posted, however, the concept gets less traction in shareholder meetings. To date, only eight US companies have agreed to follow the say on pay path: Tech Data, MBIA, Par Pharmaceuticals, Littlefield, Risk Metrics, Verizon and Blockbuster. Shareholder support in 2008 was down from 2007, however.

Why is shareholder review of executive pay failing to garner the attention that shareholder activists – and perhaps presidential candidates – are expecting? Risk Metrics (corporate parent of ISS) organized a roundtable discussion in April to address this and related issues. The attendees noted that say on pay generally is perceived as positive in other markets but has not resulted in pay declines or measurable improvements in pay for performance. Shareholder advisory votes may have forced boards to consider the business rationale for their pay practices. On the other hand, there is concern that annual advisory pay votes would require investors to expend more resources to analyze compensation and could stifle boards' creativity in crafting performance-driven programs.

Others in the industry have voiced similar concerns. There is concern that shareholders would not be well equipped to analyze the details of executive compensation. This could give a board an out. Rather than be burdened with weighing difficult and competing considerations, they can be absolved from fiduciary obligations by throwing a proposal on the proxy and watching shareholders provide a rubber stamp approval. If mandatory shareholder review of compensation becomes law, the clear winner would be proxy advisory firms.

By Jennifer Weaver and Nate Gilmer

On June 9, 2008, the United States Supreme Court limited the scope of the False Claims Act (FCA) with its opinion in Allison Engine Co. v. United States ex rel. Sanders, a decision that potentially calls into question the applicability of the FCA to Medicaid claims.

For more information, please see the Waller Lansden bulletin at this link.

By Chris Phillips

Once upon a time, there was an issue that came up in every card association sponsorship and processing agreement and in any sophisticated merchant agreement negotiation (that is, one where the merchant read their terms and conditions and actually tried to make a change).  Every card processing agreement includes a covenant to abide by Card Association Rules (commonly know as "The Rules," this included Visa Operating Regulations and Bylaws and the MasterCard Bylaws and Rules, though it might also include Amex rules, Discover rules, debit network rules, etc.). 
 
There was one very good reason everyone included this - The Rules said that an agreement to follow The Rules had to be in the contract.  Or at least, that's what the bigger fish always said to the smaller fish (it had the added virtue of being true).  But the quirky thing was, most of the parties agreeing to be bound by The Rules couldn't get a copy of them.  Sure, the banks had the rules and the processors had the rules, but for ISOs, sub-ISOs, merchants, etc., forget about it.  Sometimes, neither party to the contract knew what was really in there. 
 
Absurd, you might say.  How could you be bound by The Rules if you couldn't read them?  How would you know if you violated them?  What's more, violation of The Rules was usually a Big Deal (triggering termination of the agreement, cutoff of residuals, fines, etc.).  So, there would be a dance.  Smaller Party would agree to be bound by The Rules if they were provided by the Bigger Party.  "Sorry," Bigger Party would say, The Rules are confidential.  "We could show them to you, but then we'd have to kill you."  Or something like that.  In the end, Smaller Party would suck it up and agree to be bound by The Rules, sight unseen.  If they were lucky, maybe the Bigger Party would allow immaterial violations of The Rules without triggering a really Big Deal as long as the violations were cured in a reasonable period of time.  One helpful large acquiring bank did provide a handy-dandy summary of The Rules in just a few pages, but that was about as goo      d as it would get.  Maybe a magazine article would quote The Rules, or an ISO would go to the ETA convention and listen to the Associations talk about changes in The Rules, or new enforcement actions under The Rules. 
 
Well, Virginia, there is a Santa Claus, and after much hand wringing, both Visa and MasterCard (no longer the club of banks they once were) have both made their Rules (or at least most of them) public.  MasterCard, to its credit did this a few years ago (large excerpts anyway), but Visa just gave up the ghost last month (in fairness, it had earlier allowed merchants to access The Rules if they would executed a confidentiality agreement).  (I could link to them for you, but that would be too easy, wouldn't it?)
 
Now everybody knows what those of us who worked for banks and processors knew.  The Rules are long, complex, alternatively granular and vague and generally not that surprising.  Most of the stuff that affects an ISO or merchant's daily life was already in their Agreement elsewhere (as required by The Rules, of course).  But if you're taking that plane ride to Sydney or need a hefty doorstop that pulls double duty as the foundation of our wonderful retail system, warm up the printer - it's all there for you. 

By Wynne James and Joseph Woodruff

Welcome to the Investment Scams Blog. This is our first posting. We hope this will be informative, with the goal of saving you money and heartache. Every investment has risk, but investing with untrustworthy people or companies adds a component to an investment you shouldn’t have, and it virtually guarantees you’ll lose your money.

Why are we doing this Blog? We’ve been representing investors who’ve lost money in these deals for some time, and we’ve tried to put together a profile of the average investor who gets taken to the cleaners. We haven’t been able to do it. Perhaps some psychologist can, but the average person would probably have some trouble locating it. Our experience indicates that all types of people, men and women, of all ages, and interestingly enough, people with little money and people with millions, end up investing. So we’ve decided to focus on what to look for. If you’ve got a personality that isn’t risk averse, then we’re going to try to help you take risks somewhat intelligently. We don’t know what a good deal is or isn’t, and we’re not experts in any industry. But we’ve picked up some ways that shady characters entice investors, and we’ll share and discuss those with you. Think of these as caged canaries in a coal mine: if you see that canary getting woozy, break off discussions and get out.

We also want your comments and feedback. We’ll post them and answer your questions if we can.

So let’s start with the way illicit companies often start: with the cold call. You get a call from some guy you don’t know about a great investment opportunity. He may talk to you for a while, perhaps even several times, about your investment philosophy, but eventually he’ll tell you about a great deal that’s too good to pass up. Where did this guy get your name? You probably don’t know this, but these companies can purchase lists of thousands of prospects. He’s very likely working off a script that’s been provided to him (we’ve seen actual samples), and one of the requirements of his job is to make 300-400 phone calls a day.  He’s also very likely had some training in how to generate your interest and trust.

The chances are very high that his calling you is a violation of federal and state securities laws (but only if you make an investment – more about that on a later posting). Legitimate companies don’t have salesmen making hundreds of cold calls all over America (and some other countries). So, a very good rule of thumb – don’t invest with anyone who cold calls, no matter how nice and personable he may be.

So that’s it. Pretty simple, although some other things we’ll tell you will be a little more complicated. Helping you avoid loss is our goal.

By James Bristol

Representatives from the IRS and the Treasury Department have been making rounds in recent weeks to talk about compliance with section 409A of the Internal Revenue Code transitional guidance. The presentations have been conversational in tone and have included deep drilling on technical niceties that make for dense reading. The following notes include information provided by Treasury in May to the AICPA National Conference on Employee Benefit Plans in Las Vegas and the ABA Section of Taxation conference in Washington, D.C.

Who Bears The Penalty? 409A compliance rests on the shoulders of the employer. The penalty for 409A errors falls, however, on the employee. In many cases, there is a 20 percent additional tax on top of immediate taxation of amounts that were intended to be deferred. The employer gets a tax deduction (hardly a penalty). It is odd that the penalty for noncompliance falls on those who may have no role in achieving compliance.

Transition Election. 409A generally does not permit acceleration of a distribution. A participant may extend the deferral date in some circumstances. Until the end of 2008, however, participants can change a previous distribution election. For example, if a plan provides for ten-year installment payments at age 65, a new election could be permitted for a lump sum payment on termination of employment. This is known at the IRS as a “19C” election.

Dividend Equivalents on Stock Options.  Generally not allowed. Typically, these give the employee a cash payment on option exercise. In 409A, this has the effect of lowering the exercise price, making the option exercise price less than market value on the grant date. It seems to make no difference if dividends are paid periodically, upon vesting or upon exercise.

Grandfathered Deferrals.  Amounts deferred before 2004 are not subject to section 409A but are grandfathered under prior deferred compensation rules. Grandfathering is lost if there is a material modification of the agreement. There appear to be many opportunities to materially modify an agreement. For example, making the transition distribution election described above is a material modification.

Plan Documents.  409A requires a written plan document that includes certain specified language. The plan document need not be a single piece of paper. For example, a deferral agreement coupled with one or more “plan” documents will be considered a single plan and will be taken together to determine if the plan contains the language needed for 409A compliance.

409A Correction Program.  IRS Notice 2007-100 provides a limited correction program for inadvertent operational failures. A permanent and more extensive program is possible/likely in the near future.

Restricted Stock and 409A.  Section 409A does not apply to compensation that is taxed under section 83 of the Internal Revenue Code. So, what happens when there is a compensation deferral election and the form of payment is restricted stock? Answer: since the restricted stock payment is taxed under section 83, the deferral election to receive restricted stock is not subject to 409A. This is also true if the employee can elect among two or more forms of payment that are subject to section 83. There is not yet an IRS position on whether the employee can elect to get cash or restricted stock. One Treasury official stated that it was a close call, but that his personal opinion was that the choice between cash and restricted stock should not trigger 409A.

Two Years/Two Times Pay Exception.  Generally, deferred compensation payments to “key employees” cannot begin prior to six months following separation from service. There are a few exceptions to this rule, including a payment that is no more than two times annual salary and paid within two years of separation. Apparently, the IRS was focused on early retirement windows. While acknowledging that this could be used for a payment under an individual separation agreement, the IRS reiterated that this exception only applies to funds that would not otherwise be payable under any other program.

Toggling.  It is okay to for distributions to be triggered by different events, but the triggers can’t be subject to timing manipulation. For example, it is okay for a plan to provide payment upon the separation from service, age 65 or a change in control—whichever comes first. Impermissible “toggling” would occur if an employee could choose among these events. The IRS is making a point that toggling can occur in less obvious circumstances, such as a choice between payment at age 55 with 10 years of service or at age 65 with five years of service.

By Vinita Ollapally

On May 2, 2008, the Centers for Medicare and Medicaid Services (CMS) issued its Interim Final Rule with Comments Implementing Medicare, Medicaid, and SCHIP Extension Act of 2007 to the Long Term Care Hospital Prospective Payment System (Final Rule).  The Final Rule increases the standard Federal rate for long term care hospitals (LTCHs) for Rate Year 2009 by 2.7 percent from the rate established for 2008.  CMS estimates that the changes in the Final Rule will result in total payments to LTCHs of $4.47 billion, which is approximately $110 million over the 2008 rates.

LTCHs are generally defined as hospitals that have an average Medicare inpatient length of stay greater than 25 days.  Medicare pays LTCHs a single, predetermined amount under the LTCH prospective payment system (PPS), which uses Medicare-severity long term care diagnosis related groups (MS-LTC-DRG) to determine payments.  These are the same MS-DRGs that are used to determine payments for inpatient stays in acute care hospitals, but the payment amounts are different to reflect different hospital resources required to treat patients during long stays.  In unusually costly cases, Medicare may pay a LTCH an additional amount, called an outlier payment, in addition to the LTCH PPS payment for the MS-LTC-DRGs.  In order to be eligible for an outlier payment, the LTCH’s estimated costs in treating the patient must exceed the MS-LTC-DRG by a fixed-loss amount.  The Final Rule increases the fixed-loss amount for high cost outlier cases from $20,738 to $22,960.      

The CMS press release on this rule is available at this link. 

The final rule is available at this link.

By James Bristol

As we recently reported, executive compensation has hit the campaign trail in this presidential election season. The drum beat continues. Senator Hillary Rodham Clinton (D-NY) recently introduced the Corporate Executive Compensation Accountability and Transparency Act (S. 2866). It includes the following:

• Mandate “say on pay” advisory vote for shareholders. This mirrors the bill that was passed in the House in 2007.
• No more than $1 million of compensation could be deferred in a year under section 409A of the Internal Revenue Code (notice the echo of section 162(m)).
• If a company is required to restate its financial statements as a result of misconduct, the CEO and CFO would be required to pay to the company any gains on equity compensation, bonuses and incentive compensation.

The bill also requires disclosures on compensation consultant engagements that are aimed at potential conflicts of interest. This has been a hot topic for Rep. Charlie Rangel (D-NY), chair of the House Committee on Oversight and Government Reform.

This and Senator Obama’s recent remarks on say on pay legislation indicate what types of reforms are in store next year for executive compensation, particularly if a Democrat wins the election.

Say on Pay Update

Meanwhile, the pressure from shareholder proposals to adopt say on pay seems to be waning, if only slightly. As a reminder, “say on pay” provides shareholders with a vote (usually advisory, not binding) on executive compensation proposals. Last year, many such shareholder proposals garnered significant support. Several companies saw the writing on the wall and voluntarily adopted an advisory vote procedure. Aflac’s proposal from management garnered more than 90 percent of the vote.

The number of say on pay proposals this proxy season was down, however. Approval of such proposals – 21 vs. more than 50 in 2007 - was also lower than last year. This seems to have come as a surprise to say on pay advocates. Shareholder proposals were approved for Apple and Lexmark, but rejected in financial services companies (with significant subprime mortgage exposure), including Citigroup and Merrill Lynch where there was well-publicized “outrage” at executive pay received by executives who presided over significant losses. There was also a well-publicized hearing in front of Charlie Rangel. Still, the shareholders balked.

Speculation

Regardless of the headlines that have been blaring “runaway” pay for some executives, the issue does not seem to have a simple or obvious solution. The risk for CEOs is immense and shareholder pressure to perform is unrelenting. Finding an experienced and capable manager who will actually take the risk is daunting. It is easy for everyone to agree that a successful manager deserves significant rewards and an unsuccessful manager does not. Yet there are many devils in the details that seem inappropriate for shareholder micromanagement. With respect to congressional oversight, such as sections 409A, 280G and 162(m) of the Internal Revenue Code, it seems that further measures from the federal government will only create more work for tax advisors to … uhm … find creative solutions for compliance with statutory limitations.

By Kim Harvey Looney

On May 1, 2008, CMS issued a press release titled “CMS Proposes More Accurate Payment Rates for Medicare-Skilled Nursing Facilities in Fiscal Year 2009.” 

CMS is proposing a recalibration of the case-mix adjustment.  What this really means is a decrease in payments to SNFs.  The proposed change stems from refinements that CMS made to the case-mix indices (CMIs) in 2006 to better account for resources used in the care of medically complex patients.  While the 2006 expansion of the Resource Utilization Group (RUG) model was intended to be budget neutral, Medicare expenditures actually increased as a result of the change.  Instead of the 19 percent estimated by CMS, patients were classified in one of the newly created RUG groups more than 30 percent of the time.  CMS's proposal to recalibrate is being done in order to “reestablish budget neutrality on a prospective basis.”  The proposed recalibration, however, would cause a reduction in payments to nursing homes of $770 million, or 3.3 percent.  While CMS estimates that most of the SNF PPS payments would be offset by the proposed market basket update to Medicare payments of 3.1 percent, SNFs can still expect to see a slight decrease in payment of $60 million, or 0.3 percent. 

Public comments on the proposal will be accepted until June 30, 2008.  More information is available on the CMS web site at this link.