Legislature(2003 - 2004)

03/09/2004 08:01 AM House STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 527-ALASKA SECURITIES ACT                                                                                                  
Number 1015                                                                                                                     
CHAIR WEYHRAUCH  announced that  the next  order of  business was                                                               
HOUSE BILL  NO. 527,  "An Act relating  to the  Alaska Securities                                                               
Act, including reports,  proxies, consents, authorizations, proxy                                                               
statements,  and other  materials,  civil  penalties, refunds  of                                                               
proceeds  from violations,  restitution,  and investment  adviser                                                               
representatives; and providing for an effective date."                                                                          
Number 1020                                                                                                                     
MARK  DAVIS,   Director,  Division   of  Banking,   Securities  &                                                               
Corporations,  Department  of  Community &  Regional  Development                                                               
(DCED), testified on  behalf of DCED to outline  three things [HB
527]  would accomplish  that the  division thinks  are important.                                                               
He continued as follows:                                                                                                        
     First,  we are  proposing  lowering the  jurisdictional                                                                    
     threshold  for  the   reporting  (indisc.)  corporation                                                                    
     "proximators,"   from    500   shareholders    to   250                                                                    
     shareholders,  and [eliminating]  the assets  threshold                                                                    
     of  $1  million.   Currently,  the  book value  of  the                                                                    
     corporations is somewhat at  issue, and we're proposing                                                                    
     just  going  on  the  number of  shareholders.    We've                                                                    
     received  some  complaints   from  smaller  corporation                                                                    
     shareholders   that   they   are   not   sensitive   to                                                                    
     shareholder  rights.    We're  proposing  lowering  the                                                                    
     threshold  to bring  those smaller  corporations within                                                                    
     the division's  proxy jurisdiction.  I  would emphasis,                                                                    
     however, that it only affects proxy matters.                                                                               
MR.  DAVIS,  in  response  to   a  question  from  Representative                                                               
Gruenberg, clarified that [the  corporations being discussed] are                                                               
only  Native  corporations.    He   continued  his  testimony  as                                                               
     Second,  the  bill would  raise  the  maximum level  of                                                                    
     fines the  division has the  authority to  impose under                                                                    
     the Alaska Securities Act.   Presently, the upper limit                                                                    
     of  fining authority  is $25,000  for multiple  knowing                                                                    
     offences, and we're proposing  an increase to $100,000.                                                                    
     That  would bring  it  in line  with  the federal  law,                                                                    
     which is 15  U.S.C. 771(a), which allows  for a maximum                                                                    
     fine of $100,000.                                                                                                          
     I would  note that the states  are all over the  map on                                                                    
     this  issue.   One  state  -  Montana -  shows  $5,000.                                                                    
     Other states, such  as Missouri, are as high  as a half                                                                    
     a  million dollars.   But  we're proposing  $100,000 so                                                                    
     that  we're in  line with  the federal  securities law.                                                                    
     There's  been no  change to  the civil  penalties since                                                                    
     1988, and  we would be  able to bring  more significant                                                                    
     enforcement  actions,   we  think.     We   have  added                                                                    
     investigators to the division, and  we are in line with                                                                    
     doing more  investigations in conjunction with  the SEC                                                                    
     [U.S. Securities and Exchange Commission].                                                                                 
Number 0901                                                                                                                     
CHAIR WEYHRAUCH  noted that Eliot  Spitzer, the  attorney general                                                               
of New  York, often "leads  the curve" on corporate  misdeeds and                                                               
wrongdoing  investigations.    He  revealed  that  Mr.  Spitzer's                                                               
aggressive advocacy for  consumers and residents of  New York, in                                                               
bringing   to  light   misdeeds   by  mutual   funds  and   other                                                               
corporations, has effected  his own personal decisions  on how he                                                               
invests  his money.   He  also  expressed outrage  that "some  of                                                               
these activities  occurred."  He asked  Mr. Davis if there  is an                                                               
incentive for  the attorney  general of New  York to  bring those                                                               
kinds  of  enforcement  actions  -  because  of  the  enforcement                                                               
penalties that he  may bring to bear - that  could benefit Alaska                                                               
and provide an incentive for  Mr. Davis's office or [an incentive                                                               
for] the  attorney general's  office to be  the kind  of attorney                                                               
general that Mr. Spitzer seems to be.                                                                                           
Number 0818                                                                                                                     
MR.  DAVIS responded,  "Well, I  really can't  speak for  General                                                               
Spitzer, but  I ...  think that  if we have  the ability  to make                                                               
significant fines, that  if we fine violations, then  we can make                                                               
something  stick."   He stated  that [Alaska]  suffered from  the                                                               
World  Plus Ponzi  scheme several  years ago,  and that  case was                                                               
brought by the SEC.  He said  he would have preferred that it had                                                               
been brought  by state authorities.   He indicated that  the goal                                                               
is for aggressive state enforcement.                                                                                            
MR. DAVIS continued as follows:                                                                                                 
     That  dovetails  with this  other  part  of this  bill,                                                                    
     which is restitution.  Federal  securities laws in most                                                                    
     states have restitution, and  restitution orders are an                                                                    
     important  part  of  getting  the  money  back  to  the                                                                    
     victims' pockets.   There's been  criticism in  the ...                                                                    
     business press  of the  SEC settlement  Act -  and that                                                                    
     includes [Attorney] General Spitzer  - that the SEC put                                                                    
     the money  back in  the federal  treasury and  not into                                                                    
     the pots  of the investors.   So,  our goal here  is to                                                                    
     add more "enclosurement" and put the money back.                                                                           
Number 0772                                                                                                                     
CHAIR WEYHRAUCH said  he wonders if [the  legislature] could give                                                               
[the  division]  any  tools  to  do what  needs  to  be  done  to                                                               
anticipate problems  that would  benefit the Alaska  consumer, as                                                               
well as benefit the state treasury.                                                                                             
MR. DAVIS responded that certainly  greater fines would be useful                                                               
for the treasury.  He noted  that three employees have been added                                                               
to the "security  section" since he's been appointed.   He added,                                                               
"And I  think that we  obviously would welcome oversights  of our                                                               
budgetary process."                                                                                                             
CHAIR  WEYHRAUCH emphasized,  "If I  can increase  the fines  and                                                               
penalty enforcement actions available to  the State of Alaska and                                                               
the state  receives a positive  revenue benefit from  that, while                                                               
absolutely punishing  these people, I'm  going to look  for every                                                               
possible way to do it."                                                                                                         
REPRESENTATIVE GRUENBERG said he echoes  that.  He said he thinks                                                               
[HB 527] is a marvelous bill,  and he would like the committee to                                                               
consider  what  it  can  do  to  provide  some  "tough  on  crime                                                               
protection,"  particularly for  the Alaska  consumers.   He asked                                                               
Mr. Davis if his division  has authority over the Alaska Takeover                                                               
Bid Disclosure Act.                                                                                                             
MR. DAVIS replied he doesn't know.                                                                                              
Number 0667                                                                                                                     
VINCE  USERA, Senior  Securities  Examiner,  Division of  Banking                                                               
Securities  & Corporations,  Department of  Community &  Economic                                                               
Development  (DCED), in  response  to Representative  Gruenberg's                                                               
question, said, "We do."                                                                                                        
REPRESENTATIVE   GRUENBERG   offered    his   recollection   that                                                               
[Alaska's] Takeover Bid Disclosure  Act is unconstitutional under                                                               
a  U.S. Supreme  Court decision.   He  asked Mr.  Usera if  he is                                                               
aware of that decision.                                                                                                         
MR.  USERA  answered yes  and  added  that  he agrees  with  that                                                               
Number 0605                                                                                                                     
REPRESENTATIVE GRUENBERG said  he would like to  work with "these                                                               
folks" and see if an amendment to  the bill could be made to cure                                                               
the  constitutional  problem  with  a  new  Alaska  Takeover  Bid                                                               
Disclosure Act.                                                                                                                 
MR.  USERA  responded that  he  would  be  pleased to  work  with                                                               
Representative Gruenberg.                                                                                                       
Number 0566                                                                                                                     
FRED TRIEM, Attorney  at Law, testifying on his  own behalf, told                                                               
the  committee that  his practice  focuses almost  exclusively on                                                               
representing  individual  Alaska  Natives who  sue  their  Native                                                               
corporation  on account  of mistreatment.   He  noted that  he is                                                               
involved in a  case in Juneau today which  involves an impairment                                                               
of shareholder voting rights.                                                                                                   
MR.   TRIEM  stated   he  supports   [HB  527],   but  with   two                                                               
qualifications.   He stated his  first concern that  the proposed                                                               
legislation  is  underinclusive and  will  leave  behind a  large                                                               
number of Native people simply  by virtue of the arbitrary cutoff                                                               
of  250 shareholders.    He suggested  the  committee expand  the                                                               
scope of the  legislation and protect everybody.   He opined that                                                               
a  corporation with  250  shareholders is  no  more deserving  of                                                               
having its  shareholders protected than another  corporation with                                                               
50-100.    He revealed  there  are  some outrageous  things  that                                                               
happen  in Alaskan  Native corporations,  for which  there is  no                                                               
present protection.   He offered an example  involving the Tetlin                                                               
Native Corporation,  near Tok, where  the land was  conveyed from                                                               
the  Native  village corporation  to  the  local tribal  council,                                                               
reducing ownership from 125 to 60 people.                                                                                       
MR. TRIEM explained that, "under  the current scheme," individual                                                               
shareholders  are not  really able  to  protect their  interests,                                                               
because, "under  the doctrine of rationale  shareholder apathy, a                                                               
lot of  shareholders - each  owning a  ... small fraction  of the                                                               
corporation in stock  that cannot be alienated ... -  have no way                                                               
to  pay  for reinforcement  action  if  it's brought  privately."                                                               
They  cannot hire  an attorney  because their  stock is  worth so                                                               
little  and   produces  so  little   income  that   "a  rationale                                                               
shareholder would be apathetic."                                                                                                
MR. TRIEM suggested that the  only protection that "these people"                                                               
can  have  is  through  the  Division  of  Banking  Securities  &                                                               
Corporations.   He  opined that  it's  arbitrary to  cut off  the                                                               
corporations  that have  fewer than  250 shareholders.   For  the                                                               
record,  he  noted  that  there   are  about  270  Alaska  Native                                                               
corporations.   The  number was  approximately 310,  but some  of                                                               
them have  coalesced by mergers, either  among those corporations                                                               
or between  village corporations  and the  regional corporations,                                                               
of which there are 12 in Alaska.                                                                                                
Number 0327                                                                                                                     
MR.  TRIEM  turned to  his  second  suggestion for  amending  the                                                               
proposed  legislation, which  he  said focuses  on  the issue  of                                                               
penalties.  He  told the committee about a  corporation that held                                                               
an annual meeting, at which  some shareholders brought a petition                                                               
to  recall the  directors.   He opined  that it  was a  stroke of                                                               
genius when  the directors printed  the ballot without  any boxes                                                               
on it; therefore,  there was no way for the  shareholders to vote                                                               
yes or no on  the recall.  He said they almost  got away with it,                                                               
but some  shareholders complained.   The division found  that the                                                               
conduct  was  intentionally  wrong   and  "fined  them  a  couple                                                               
thousand dollars."   He  first asked the  committee to  guess who                                                               
paid the  fine, then revealed  that it was the  shareholders that                                                               
paid it.   He explained  that "they" got the  corporate treasurer                                                               
to write  the check.   He concluded  that, by foiling  the recall                                                               
election, the  directors managed  to get  the corporation  to pay                                                               
for their wrongdoing  so they could stay in office.   He revealed                                                               
that  that is  the theme  of the  case in  which he  is presently                                                               
MR. TRIEM suggested  that the legislation include  a provision to                                                               
allow the  division to  directly fine the  wrongdoers.   He asked                                                               
the committee  to consider  the salaries  made by  the directors.                                                               
He  noted that  the [U.S.]  Census  data shows  that the  average                                                               
Alaska Native has a cash  income of approximately $10,000-$11,000                                                               
a year.   In comparison, he noted that the  top three officers at                                                               
Cook  Inlet  Region,  Inc. have  each  averaged  compensation  in                                                               
excess of $ 1 million, for  the years 1999-2001.  He posited that                                                               
the directors have the money to  pay for the crimes themselves if                                                               
only the law  would allow it.  He indicated  that there should be                                                               
a "big limit."   He added, "We  don't want to ...  stick with the                                                               
little one that we've got now, because it has no teeth."                                                                        
Number 0120                                                                                                                     
CHAIR WEYHRAUCH  emphasized that [HB  527] was not  introduced to                                                               
target  Native   corporations,  shareholders,  or   officers  and                                                               
directors.    He  told  Mr.  Triem, "We  want  to  have  as  much                                                               
objective  testimony  as  possible,  as well  as  addressing  the                                                               
concerns that you've raised that sound serious."                                                                                
Number 0072                                                                                                                     
REPRESENTATIVE  HOLM  stated he  is  curious  as to  Mr.  Triem's                                                               
concept  of  unpaid members  of  boards  of directors  and  their                                                               
"ability  to  pay."    He  opined  that  those  who  do  not  get                                                               
compensation -  unpaid members of  boards - certainly  should not                                                               
be  fined  at  the  same  level  as  those  [who]  are  enriching                                                               
themselves.  He asked for Mr. Triem's comments.                                                                                 
TAPE 04-34, SIDE A                                                                                                            
Number 0001                                                                                                                     
MR. TRIEM said  he doesn't think the division  would impose heavy                                                               
fines on  unpaid volunteer directors.   Conversely,  he clarified                                                               
that  he  is suggesting  that  when  the  directors do  have  the                                                               
financial  ability  to  pay  fines,  those  fines  should  be  in                                                               
proportion to their personal wealth.   He said the current Martha                                                               
Stewart  case  is  a  widely   publicized  example  of  balancing                                                               
financial penalties with wealth.                                                                                                
Number 0069                                                                                                                     
REPRESENTATIVE  BERKOWITZ said  that corporate  malfeasance seems                                                               
to  be  a universal  problem.    He  said  he doesn't  think  any                                                               
suggestion  that  it is  particular  to  Native corporations  was                                                               
intended.  He  said he wants to raise an  issue for the committee                                                               
to  address  as it  contemplates  the  bill,  which is  that  the                                                               
penalties, in  some ways, when  tied just  to a straight  fine or                                                               
numerical  amount,  "don't  get   to  the  potential  benefit  of                                                               
committing the  crime."  He  suggested some kind  of disgorgement                                                               
of the  profits or the benefits  ought to be required  as part of                                                               
the criminal  penalty.  He added,  "I don't know how  it works in                                                               
the federal system; I haven't looked around it."                                                                                
REPRESENTATIVE  BERKOWITZ concurred  with Mr.  Triem's suggestion                                                               
to hold  officers individually liable  for acts and  allowing for                                                               
someone to look at securities issues  that are "ultra vires."  He                                                               
said, "If  you want to  deter wrongdoing,  then you need  to hold                                                               
people accountable.  It's unfortunate  when people act outside of                                                               
the  scope of  their  responsibility and  rely  on the  corporate                                                               
structure to  protect individual wrongdoing, and  anything we can                                                               
do to get at that, we ought to do."                                                                                             
Number 0194                                                                                                                     
MR. TRIEM suggested the committee  could amend the legislation in                                                               
another way,  which would  be to allow  the division  to sanction                                                               
directors for  their misconduct, not  just with a  monetary fine,                                                               
but also  to remove  them from  office, or  to prevent  them from                                                               
serving  on  the  board.    He   added  that  the  SEC  has  that                                                               
regulation, and the superior court  can do that, because there is                                                               
a statute  that allows it.   However, he clarified that  there is                                                               
no administrative authority.                                                                                                    

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