Other
Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Concerning the Conduct of Certain Former Officers and Directors of W. R. Grace & Co.
July 6, 2023
SECURITIES EXCHANGE ACT OF 1934 Release No. 39157/September 30, 1997
REPORT OF INVESTIGATION PURSUANT TO SECTION 21(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
CONCERNING THE CONDUCT OF
CERTAIN FORMER OFFICERS AND DIRECTORS OF
W. R. GRACE & CO.
I. INTRODUCTION
The staff of the Division of Enforcement has conducted an
investigation into whether W. R. Grace & Co. ("WRG") violated certain
provisions of the federal securities laws and whether certain former
officers and directors of WRG contributed to any such violations. The
Commission has found that WRG violated various statutes and regulations
requiring disclosure of specified information in proxy statements and
periodic reports and has issued an Administrative Order ordering WRG to
cease and desist from committing future violations of those statutes and
regulations.<(1)> The Commission has determined that WRG's violations
resulted from the conduct of certain of WRG's former officers and
directors. In particular, these individuals contributed to these
violations by failing to take steps which they should have taken to ensure
full and proper disclosure. The Commission is issuing this Report of
Investigation pursuant to Section 21(a) of the Securities Exchange Act of
1934 (the "Exchange Act") to address the conduct of these
individuals.<(2)> WRG and three of these individuals have consented
to the issuance of this report without admitting or denying any of the
statements set forth herein.<(3)>
In the Administrative Order against WRG, the Commission found that
WRG, in its 1992 annual report on Form 10-K ("1992 Form 10-K") and its 1993
proxy statement, did not fully disclose the substantial retirement benefits
it had agreed to provide J. Peter Grace, Jr., effective at his retirement
as chief executive officer on December 31, 1992. The Commission further
found that WRG, in its 1993 annual report on Form 10-K ("1993 Form 10-K")
and its 1994 proxy statement, omitted to disclose a proposed related-party
transaction pursuant to which a group headed by Grace, Jr.'s son, J. Peter
<(1)> In the Matter of W. R. Grace & Co., Exchange Act
Release No. 34-39156. WRG consented to the
issuance of this Order without admitting or denying the
findings therein.
<(2)> Section 21(a) of the Exchange Act authorizes the
Commission, in its discretion, to publish information
"concerning any . . . violations" and to investigate
"any facts, conditions, practices or matters which it
may deem necessary or proper" in fulfilling its
responsibilities under the Exchange Act.
<(3)> A fourth individual, J. Peter Grace, Jr., died on April
19, 1995..
Grace III, sought to acquire Grace Hotel Services Corporation ("GHSC"), a
wholly-owned subsidiary of WRG involved in hotel food service management.
As a result, WRG violated Sections 13(a) and 14(a) of the Exchange Act and
Rules 13a-1, 14a-3 and 14a-9 thereunder.
The Commission is issuing this Report of Investigation to emphasize
the affirmative responsibilities of corporate officers and directors to
ensure that the shareholders whom they serve receive accurate and complete
disclosure of information required by the proxy solicitation and periodic
reporting provisions of the federal securities laws.<(4)> Officers
and directors who review, approve, or sign their company's proxy statements
or periodic reports must take steps to ensure the accuracy and completeness
of the statements contained therein, especially as they concern those
matters within their particular knowledge or expertise. To fulfill this
responsibility, officers and directors must be vigilant in exercising their
authority throughout the disclosure process.
In this case, both Grace, Jr., then the chairman of WRG's board of
directors, and J. P. Bolduc, then WRG's chief executive officer and a
member of WRG's board of directors, knew of Grace, Jr.'s substantial
retirement benefits and the proposed transaction with Grace III. Eben
Pyne, a non-management member of the board, also was aware of Grace, Jr.'s
benefits. Charles Erhart, another non-management member of the board, was
aware of the proposed related-party transaction. All four of these
officers and directors reviewed all or portions of the relevant documents,
and all but Pyne signed the relevant reports. Although the record does not
demonstrate that Bolduc, Pyne, and Erhart acted in bad faith, the
Commission concludes that they did not fulfill their obligations under the
federal securities laws. Bolduc, Pyne, and Erhart each assumed, without
taking the steps necessary to confirm their assumptions, that WRG's
procedures would produce drafts of disclosure documents describing all
<(4)> The Commission previously has noted that corporate
directors must act aggressively to fulfill their
responsibilities to ensure that their company's public
statements are candid and complete. See Report of
Investigation in the Matter of the Cooper Companies,
Inc. As It Relates to the Conduct of Cooper's Board of
Directors, Exchange Act Release No. 35082 (December 12,
1994). See also Report of Investigation in the Matter
of National Telephone Co., Inc., Exchange Act Release
No. 14380 (Jan. 16, 1978); Report Regarding the
Investigation of Gould, Inc., Exchange Act Release No.
13612 (June 9, 1977); and Report of Investigation in
the Matter of Stirling Homex, Exchange Act Release No.
11516 (July 2, 1975). Each of these Reports focused on
the failure of non-management directors to act
effectively when confronted with evidence of
management's involvement in possible securities fraud.
The present matter, in contrast, deals with the
obligations of officers and directors where a company's
violations do not constitute fraud. .
matters that required disclosure.<(5)> Each also assumed, without
taking steps necessary to confirm their assumptions, that other corporate
officers, including counsel, had conducted full and informed reviews of the
drafts. Bolduc, Pyne, and Erhart each had a responsibility to go beyond
the established procedures to inquire into the reasons for non-disclosure
of information of which they were aware.
II. BACKGROUND
At the time of the events discussed in this Report, WRG was a New York
corporation with its principal executive offices in Boca Raton, Florida.
WRG's primary businesses were packaging, specialty chemicals and health
care services. WRG's securities were registered with the Commission
pursuant to Section 12(b) of the Exchange Act and its common stock was
listed on the New York and Chicago Stock Exchanges. On December 31, 1992,
89,892,000 shares of WRG common stock were issued and outstanding, and WRG
had 20,869 common shareholders of record.<(6)>
GHSC was a wholly-owned subsidiary of WRG during the relevant period.
GHSC was in the business of providing food and beverage service to hotels.
J. Peter Grace, Jr. was the chief executive officer of WRG from 1945
until 1992, when he retired from that position. He was chairman of WRG's
board of directors during substantial periods from 1945 until his death on
April 19, 1995.
J. P. Bolduc, age 56, was the president and chief executive officer of
WRG from 1992 until his resignation in March 1995. During the relevant
period, Bolduc was also a member of WRG's board of directors.
Eben W. Pyne, age 78, was a director of WRG from 1960 until 1995. He
also served as chairman of the Compensation, Employee Benefits and Stock
Incentive Committee of WRG's board of directors during 1992. Pyne did not
<(5)> Indeed, this matter demonstrates that corporate
disclosure mechanisms cannot compensate for the
failures of individuals. WRG's procedures failed
because, among other reasons, Grace, Jr. did not
disclose some of his retirement benefits and the
proposed transaction with his son in questionnaires
which WRG distributed to officers and directors to
gather information for disclosure in WRG's proxy
statements and periodic reports.
<(6)> On September 30, 1996, WRG's packaging and specialty
chemicals businesses were reorganized as a Delaware
corporation as part of the spin-off and combination of
its National Medical Care subsidiary with the dialysis
business of Fresenius AG, a German health care
corporation.
======END OF PAGE 3======.
stand for re-election to WRG's Board of Directors in 1995.<(7)>
Charles H. Erhart, Jr., age 72, spent his entire business career with
WRG. From 1968 to 1990 he served at various times as WRG's chief financial
officer, vice chairman, chairman of the executive committee and president.
After his retirement as an officer of WRG in 1990, he served as a director
of WRG. Erhart also did not stand for re-election to WRG's board of
directors in 1995.
J. Peter Grace III, age 54, is a son of J. Peter Grace, Jr. He was
chairman of the board of directors of GHSC from its formation in July 1990
until he resigned in November 1994.
III. GRACE, JR., BOLDUC, AND PYNE FAILED TO TAKE STEPS TO ENSURE THAT
GRACE, JR.'S RETIREMENT BENEFITS WERE FULLY DISCLOSED.
During the latter part of 1992, Grace, Jr.'s health was deteriorating.
Pursuant to delegated authority from WRG's board of directors, WRG's
Compensation, Employee Benefits and Stock Incentive Committee (the
"Compensation Committee") entered into negotiations with Grace, Jr., which
resulted in his retirement from WRG as its chief executive officer,
effective on December 31, 1992. Pyne, then chairman of the Compensation
Committee, met several times with Grace, Jr. during November and December
1992. The negotiations resulted in an agreement in principle with respect
to Grace, Jr.'s proposed retirement benefits. Among the provisions of this
agreement in principle was an understanding that Grace, Jr. would continue
to receive in retirement various substantial perquisites which he had
received while chief executive officer. On December 7, 1992, WRG's board
of directors approved Grace, Jr.'s proposed retirement benefits.
Subsequently, Grace, Jr. and Pyne, on behalf of WRG, executed a letter
agreement dated December 21, 1992 (the "Retirement Agreement"), which
reflected the terms of this agreement in principle.<(8)> The
Retirement Agreement provided, among other things, that immediately
following Grace, Jr.'s retirement:
[A]ll other benefits and arrangements currently provided to you
[Grace, Jr.] as chief executive officer (including, but not
limited to, the use of office space and corporate aircraft) will
continue to be provided to you.
<(7)> Since 1995, WRG's Board of Directors has been reduced
in size from twenty-four members to its current size of
nine members.
<(8)> Bolduc and Pyne each assert that they assumed that this
letter agreement, because it was drafted by WRG's legal
counsel, would receive full consideration in WRG's
disclosure process.
======END OF PAGE 4======.
Pursuant to this provision of the Retirement Agreement, Grace, Jr.
received the following benefits, among others, from WRG in 1993: (a)
continued use of a Company-owned and maintained apartment with a market
value estimated by WRG to be in excess of $3 million, with services of a
cook, who was a WRG employee; (b) use of a company limousine and driver on
a 24 hour basis; (c) the services of full-time secretaries and
administrative assistants; (d) the use of corporate aircraft for personal
and business travel; (e) home nursing services; and (f) security services.
While there was general knowledge within management that Grace, Jr.'s
Retirement Agreement provided for the continuation of benefits that he had
received before retirement, specific information about Grace, Jr.'s
benefits was not generally available to WRG's management. Only non-
management directors were involved in the negotiation or approval of Grace,
Jr.'s retirement benefits. Members of WRG's then-current management,
including Bolduc and WRG's secretary and chief disclosure counsel, were
asked to leave board and/or Compensation Committee meetings at which Grace,
Jr.'s retirement benefits were discussed. However, Grace, Jr. and Pyne met
with Bolduc in December 1992 to discuss Grace, Jr.'s retirement benefits
after the negotiations over these benefits were completed. At that time,
Bolduc became aware of each of the "other benefits" that WRG was providing
to Grace, Jr.
The Company provided Grace, Jr. with directors' and officers'
questionnaires ("D&O Questionnaires") in the course of preparing its 1992
Form 10-K and 1993 proxy statement and its 1993 Form 10-K and 1994 proxy
statement.<(9)> These questionnaires contained questions asking
whether Grace, Jr. received certain benefits from the Company during the
preceding year, including, among other things, use of Company property,
including apartments; housing and other living expenses (including domestic
service) provided at his principal and/or vacation residence; and other
perquisites. Grace, Jr. incorrectly responded "no" to these questions.
The final version of WRG's 1993 proxy statement contained language
discussing Grace, Jr.'s Retirement Agreement, including a statement that
Grace, Jr. would receive "certain other benefits." WRG filed the
Retirement Agreement as an exhibit to its 1992 Form 10-K, but did not
further describe Grace, Jr.'s "other benefits," nor did WRG disclose the
costs of providing them in any of its proxy statements or periodic reports
<(9)> During the development of WRG's annual reports and
proxy statement disclosure, the Company used
information from annual questionnaires sent to (a) all
WRG officers and directors and (b) the chief financial
officers of WRG's reporting units.
======END OF PAGE 5======.
filed with the Commission before 1995.<(10)>
Because WRG's senior management was excluded from the negotiation and
approval of Grace, Jr.'s retirement benefits, WRG's disclosure counsel made
arrangements for Pyne to review the executive compensation section of WRG's
draft 1993 proxy statement, and Pyne did so. Bolduc, in his capacity as
WRG's CEO, reviewed drafts of WRG's 1993 proxy statement and signed WRG's
1992 Form 10-K, which incorporated the proxy statement's section on
executive compensation by reference. Grace, Jr., in his capacity as
chairman, also signed the 1992 Form 10-K. Although Grace, Jr., Bolduc, and
Pyne knew about the "other benefits" WRG had agreed to provide Grace, Jr.
upon his retirement, they did not question the absence of information about
these "other benefits" in WRG's disclosure of Grace, Jr.'s retirement
benefits. Even if Bolduc and Pyne, as each asserted, assumed that WRG's
legal counsel (whose office had participated in drafting the Retirement
Agreement) had considered the adequacy of the disclosure concerning Grace,
Jr.'s benefits, they should not have relied upon that assumption. They
should have raised the issue of disclosure of Grace, Jr.'s "other
benefits," for example, by discussing the issue specifically with
disclosure counsel, telling counsel exactly what they knew about the
benefits, and asking specifically whether the benefits should be
disclosed.<(11)> As a result, WRG's 1992 Form 10-K and 1993 proxy
statement failed to disclose specific information about the "other
benefits."
IV. GRACE, JR., BOLDUC AND ERHART FAILED TO TAKE STEPS TO ENSURE THAT
THE PROPOSED GHSC TRANSACTION WAS DISCLOSED.
In February 1993, WRG decided to dispose of GHSC because GHSC's
restaurant operations were not one of WRG's "core" businesses and GHSC had
failed to meet certain financial targets. This decision was part of a
general program to concentrate WRG's assets in certain core industries and
to divest certain non-core businesses. During February or early March
1993, Grace III, who was then the chairman of GHSC, proposed to WRG that he
acquire GHSC from the Company.
Negotiations between Grace III and WRG took place over the next few
<(10)> After information concerning Grace, Jr.'s "other
benefits" became public, WRG disclosed in its 1995
proxy statement that the benefits provided to Grace,
Jr. pursuant to the "other benefits" provision cost the
Company $3,601,500 in fiscal year 1993, of which
approximately $2,700,000 was attributable to Grace,
Jr.'s having access to corporate aircraft.
<(11)> This might have established that counsel was not in
fact fully informed about these benefits or that Grace,
Jr. had incorrectly filled out his D&O questionnaires
regarding these benefits.
======END OF PAGE 6======.
months. On November 5, 1993, Grace III and WRG executed an agreement in
principle expiring on April 15, 1994, which set forth the terms for the
acquisition of GHSC by a new company to be formed by Grace III and others,
later known as HSC Holding Co., Inc. ("HSC"). Grace III and his other
investors agreed that they would execute a note for $1.3 million in
exchange for ownership of GHSC. In addition, Grace III and HSC agreed that
they would raise $2.5 million in a private placement of equity securities
to a group of investors to fund the ongoing operations of the new company.
During the negotiations, Bolduc was kept apprised of the status of both the
negotiations and the terms of the agreement in principle. In early 1994,
Grace III had a conversation with Erhart concerning HSC's private
placement. Furthermore, in early 1994, Grace III sent both Grace, Jr. and
Erhart a draft copy of a private placement memorandum, which discussed the
agreement in principle and to which a copy of the agreement was attached.
After the expiration of the agreement in principle, WRG informed Grace III
that it would remain receptive to consummating the sale were he able to
obtain financing. The transaction was abandoned by WRG in late 1994
because, among other things, Grace III and HSC were unable to obtain the
necessary equity financing from the private placement.<(12)>
As in past years, the D&O Questionnaires circulated to Grace, Jr. and
the Company's other directors and officers for purposes of preparing the
Company's 1993 Form 10-K and 1994 proxy statement contained a question
concerning any transactions or proposed transactions since January 1, 1992,
"to which the Company . . . was or is to be a party and . . . which you
and/or any of your associates have direct or indirect
interest."<(13)> The term "associates" was defined to include family
members. Grace, Jr. knew about the November agreement in principle setting
forth the terms and conditions of the proposed related-party transaction as
well as Grace III's efforts to raise the required equity investment.
Nevertheless, his response to this question on the D&O Questionnaire for
the Company's 1993 Form 10-K and 1994 proxy statement was "None."
During early 1994, Erhart and Bolduc reviewed drafts of WRG's 1993
Form 10-K and 1994 proxy statement, which omitted any discussion of the
<(12)> During late 1994, WRG alleged that Grace III and HSC
had misappropriated approximately $1.3 million
belonging to GHSC to fund the operations of HSC. In
1995, WRG increased its claim by approximately
$133,000. Pursuant to a negotiated settlement and
arbitration award, Grace III and HSC repaid
substantially all of the money claimed by WRG.
<(13)> A questionnaire sent from WRG to GHSC in early 1994
requested substantially the same information concerning
related-party transactions or proposed related-party
transactions involving GHSC. In response to this
request, an officer of GHSC incorrectly stated "Nothing
to report".
======END OF PAGE 7======.
proposed related-party transaction. Furthermore, Grace, Jr., in his
capacity as chairman, Erhart, in his capacity as a director, and Bolduc, in
his capacity as CEO, signed WRG's 1993 Form 10-K, which incorporated by
reference the 1994 proxy's disclosure of related-party transactions.
Although Grace, Jr., Bolduc, and Erhart knew about the proposed related-
party transaction, they did not question the absence of disclosure
concerning it. Even if Bolduc and Erhart, as each asserted, assumed that
WRG counsel had considered whether the proposed transaction had to be
disclosed,<(14)> they should not have relied on that assumption.
They should have raised the issue of disclosure of this proposed
transaction specifically with disclosure counsel.<(15)> As a result,
WRG's 1993 Form 10-K (filed on March 28, 1994) and 1994 proxy statement
(filed on April 11, 1994) failed to disclose any information about the
proposed GHSC transaction.
V. CONCLUSION
Serving as an officer or director of a public company is a privilege
which carries with it substantial obligations. If an officer or director
knows or should know that his or her company's statements concerning
particular issues are inadequate or incomplete, he or she has an obligation
to correct that failure. An officer or director may rely upon the
company's procedures for determining what disclosure is required only if he
or she has a reasonable basis for believing that those procedures have
resulted in full consideration of those issues.<(16)>
Grace, Jr., Bolduc, Pyne, and Erhart did not fulfill their obligations
under the federal securities laws. Grace, Jr., Bolduc, and Pyne knew or
should have known that Grace, Jr.'s retirement benefits were not fully
disclosed in drafts of WRG's 1993 proxy statement and 1992 Form 10-K.
Grace, Jr., Bolduc, and Erhart knew or should have known that the proposed
GHSC transaction was not disclosed in drafts of WRG's 1994 proxy statement
and 1993 Form 10-K. As noted, Grace, Jr. failed to identify information
relating to both of these issues in his D&O questionnaires. Grace, Jr.,
Bolduc, Pyne, and Erhart, given their positions as directors or senior
officers and their particular knowledge of these transactions, should have
inquired as to whether the securities laws required disclosure of this
<(14)> WRG's Office of Legal Counsel participated in drafting
the letter of intent between Grace III and GHSC.
<(15)> Such action might have revealed that Grace, Jr. had
incorrectly filled out his D&O questionnaire concerning
the proposed transaction.
<(16)> Procedures or mechanisms established to identify and
address disclosure issues are effective only if
individuals in positions to affect the disclosure
process are vigilant in exercising their
responsibilities.
======END OF PAGE 8======.
information. This inquiry could have included seeking the specific and
fully informed advice of counsel. If they were not reasonably satisfied as
to the answers they received, they should have insisted that the documents
be corrected before they were filed with the Commission.<(17)>
WRG's violations resulted, in part, from its corporate culture, which
reflected Grace, Jr.'s substantial influence over the Company.<(18)>
Given this circumstance, Bolduc, Pyne, and Erhart should have been more
attentive to issues concerning disclosure of information relating to Grace,
Jr. or the Grace family. Bolduc, Pyne, and Erhart did not adequately
follow through on fostering accurate and complete disclosure, which should
have been their touchstone as members of WRG's board of directors or as
officers of WRG.
Since Grace, Jr.'s death, WRG has substantially revised the
composition of its board of directors. Because of the unique circumstances
presented here (including the death of Grace, Jr.), the Commission has
determined not to issue cease-and-desist orders or take other action
against Bolduc, Pyne, and Erhart in this matter. However, the Commission
remains resolved to take enforcement action, where appropriate, against
individual directors and officers who have violated or caused violations of
the federal securities laws.
<(17)> Bolduc, Pyne, and Erhart would each bear this
responsibility even if, as each asserted, each assumed
that WRG's internal mechanisms for preparing the
relevant disclosure documents, including review of
counsel, would address these issues.
<(18)> There is some evidence that Bolduc recognized that
Grace, Jr. exercised a degree of influence over WRG
which was inappropriate for a public corporation and
attempted to limit that influence.
======END OF PAGE 9======.
September 30, 1997
DISSENT OF COMMISSIONER STEVEN M.H. WALLMAN
In the Matter of W.R. Grace & Co.
The Section 21(a) report In the Matter of W.R. Grace & Co.(the
Report ) articulates a certain legal standard,<(19)> and then
applies that standard to these facts. I take issue with that standard
<(19)> As stated in the Report:
The Commission is issuing this Report of
Investigation to emphasize the affirmative
responsibilities of corporate officers and
directors to ensure that the shareholders
whom they serve receive accurate and complete
disclosure of information required by
the proxy solicitation and periodic reporting
provisions of the federal securities
laws. Officers and directors who review,
approve, or sign their company s proxy
statements or periodic reports must take
steps to ensure the accuracy and
completeness of the statements contained therein,
especially as they concern those
matters within their particular knowledge
or expertise. To fulfill this
responsibility, officers and directors
must be vigilant in exercising their
authority throughout the disclosure process.
======END OF PAGE 10======.
specifically to the extent it suggests that officers and directors must
ensure the accuracy and completeness of company disclosures. Moreover, I
do not agree that, when the appropriate legal standard is applied to the
particular facts of this case as described in the Report itself, there has
been a violation of law on the part of the three individuals cited.
Certain of the disclosures of W.R. Grace & Co. (the Company )
relating to perquisites and related party transactions were not in
compliance with applicable requirements. The Company has consented to the
issuance of a cease and desist order with respect to these matters.
As for individual liability, the record suggests that were J. Peter
Grace, Jr. ( Grace, Jr. ) still alive, further examination as to whether he
was a cause of the Company s improper disclosures would be in order. But
in attempting to find other individuals who were responsible for the
Company s conduct, I disagree with the Commission s conclusion that, on
this record, J.P. Bolduc ( Bolduc ), Eben Pyne ( Pyne ) and Charles Erhart
( Erhart ) failed to fulfill their obligations under the federal securities
laws.<(20)> To conclude otherwise is to impose strict liability for
such a disclosure failure -- which simply is not the law.
In this case, as stated in the Report, Grace, Jr. exerted an unusual
amount of control over the Company. But the Company also had policies and
procedures in place designed to satisfy the Company s disclosure
obligations. The Company prepared and distributed appropriate director
and officer questionnaires requesting information concerning, specifically,
the receipt of perquisites and other benefits, and actual and proposed
related party transactions. The Company also surveyed the chief financial
officers of the Company s operating units for the same information. Draft
documents were circulated among senior management (including Bolduc) and
members of the board for their review and comment. A substantial number of
people were involved in the creation or review of the relevant disclosure
documents. From the record, there do not appear to have been any red
flags or warnings to indicate that this system -- which included the
employment of respected and competent securities counsel -- was breaking
down, or was inadequate to produce documents that would comply with the
federal securities laws. Yet, even though appropriate procedures were in
place, and followed, insufficient disclosures were made.
The Report states that the violations resulted from the conduct of
Bolduc, Pyne and Erhart. In particular, according to the Report, these
three individuals contributed to these violations by failing to take steps
which they should have taken to ensure full and proper disclosure. The
Report describes the specific knowledge that these three individuals
<(20)> I understand that Grace, Jr. received
compensation and perquisites that many believe were
inappropriate, and that many believe the board
or others in management should have taken action
to reduce those benefits. But we at the Commission
do not administer the corporate law, which is the
proper venue for those complaints.
======END OF PAGE 11======.
possessed of the relevant facts, their assumption that the system for the
creation of disclosure documents was working appropriately, and their
failure to reach behind and beyond the established procedures to inquire
into the reasons for non-disclosure of information of which they were
aware.
Whether disclosure of certain matters is required under the federal
securities laws is a legal (or mixed legal and factual) determination that
ultimately has to be made by counsel after being informed of the relevant
facts. Bolduc, Pyne and Erhart were aware of the documents relevant to the
two questioned disclosures at issue in this case: the non-binding letter of
intent with Grace, Jr. s son (of which Bolduc and Erhart were aware) and
the retirement agreement with Grace, Jr. (of which Bolduc and Pyne were
aware). The existence of these documents also was known to various
attorneys in the Office of Legal Counsel ( OLC ) -- the office whose job it
was to prepare disclosure in accordance with legal requirements, and the
same office that drafted these documents.
Bolduc, Pyne and Erhart were each aware that OLC was preparing
disclosure based on these agreements. And Bolduc, Pyne and Erhart do not
appear to have had any reason whatsoever to believe that the appropriate
legal distinctions were not being made by OLC attorneys.
The two questioned disclosures in this case both turn on fine line
legal interpretations. Bolduc, Pyne and Erhart were not lawyers; they were
not versed in SEC line item disclosure requirements; they were not possibly
capable of making the fine judgment calls on whether disclosure of the
items at issue here was sufficient or warranted. These decisions were the
domain of counsel. Bolduc, Pyne and Erhart were not in a position to
second-guess this type of disclosure and had every right to rely on a
system designed to produce appropriate disclosure. If there were any
attorneys in OLC who were unsure, or unaware, of the significance, or
specifics, of the terms of either the retirement agreement or the non-
binding letter of intent, and clarification was needed to make a
determination of what the law required in terms of disclosure, then it was
the responsibility of those attorneys to ask the appropriate questions.
The issue then is simple: did legal counsel have the necessary facts
to do the job that was required -- and if not, did these three individuals
know (or, perhaps, should these three individuals have known) that counsel
did not have the necessary facts.
It is clear that disclosure counsel in particular was well aware of
the facts regarding Grace, Jr. s retirement package since he was supplied
with an actual copy of the retirement agreement -- an agreement filed
publicly as an exhibit to the Company s Form 10-K. The agreement
specifically provided that:
All other benefits and arrangements currently provided [Grace,
Jr.] as chief executive officer (including, but not limited to,
the use of office space and corporate aircraft) will continue to
be provided to [him].
======END OF PAGE 12======.
There was no change in the benefits being granted Grace, Jr. from previous
years -- what he received as CEO he was to continue to receive in
retirement.<(21)> Disclosure counsel, knowing these facts, then
apparently made the determination that the description of these continued
benefits as certain other benefits was adequate disclosure under Item
402(h) of Regulation S-K, and presented drafts with that disclosure to
Bolduc and Pyne.
Bolduc and Pyne knew that disclosure counsel had reviewed this
certain other benefits language and the retirement agreement and appeared
to be in possession of all relevant facts, including that Grace, Jr. was
now retired. Bolduc and Pyne relied on disclosure counsel to make the
legal determination as to what the law required regarding disclosure of the
retirement agreement, including the level of detail regarding disclosure of
any specific terms or conditions.<(22)> Given the plain language of
both the disclosure and the relevant portion of the retirement agreement, I
fail to see where the red flag exists that would require non-lawyers to
question the explicit determinations of their disclosure counsel as to the
level of disclosure detail.
Moreover, details regarding the benefits in question -- all of which
Grace, Jr. had been receiving while he was still Chief Executive Officer --
were not disclosed in previous filings with the Commission made prior to
his retirement.<(23)> I would venture to say that many securities
lawyers would not know that the Company s summary disclosure of these very
same benefits in a later filing would somehow now be inadequate because of
Grace, Jr. s retirement and change in status from executive officer and
director to non-employee director/consultant. In fact, I would suspect
that most securities lawyers would believe that less, not more, disclosure
would be required upon such a change. It is simply not the law to require
non-securities law experts to guess at the legal significance from a
federal securities law disclosure standpoint of such a change in status
and, therefore, be required to question the articulated judgment of their
disclosure counsel and the resultant level of disclosure.
With regard to the pending acquisition, the facts in the record are a
bit murkier. It is not clear whether disclosure counsel was aware of the
possible transaction. It is clear, however, that one or more lawyers in
<(21)> In fact, approximately 75% of the cost of the
other benefits supplied to Grace, Jr. in 1993 was
attributable to the use of corporate aircraft. The fact that
Grace, Jr. was receiving this benefit (although
not the quantification of its value) was specifically
referenced in the retirement agreement.
<(22)> Again, if disclosure counsel was unsure of the
specific details that might be relevant from a line-
item disclosure perspective, then it was the responsibility
of disclosure counsel to ask questions and obtain
these details.
<(23)> The Report s finding regarding the inadequacy of
the disclosure of these benefits is limited to the
1992 Annual Report on Form 10-K and the 1993 proxy statement.
The Report, however, does not address whether
the Company was required to make these disclosures in
any earlier or later filings.
======END OF PAGE 13======.
OLC did know about the possible transaction because lawyers in that office
drafted the non-binding letter of intent relating to it -- a transaction
that many at the Company may have thought had little possibility whatsoever
of consummation and that, in fact, never proceeded past the non-binding
letter of intent stage. Obviously, if disclosure counsel had knowledge of
the potential transaction, he made a legal determination as to whether the
facts of this situation rose to the level of a currently proposed
transaction -- a matter on which I believe lawyers might reasonably differ.
But, no matter what, it is lawyers that make these decisions. CEOs and
outside directors do not. Assuming that disclosure counsel was ignorant of
the transaction, what results is a breakdown in the procedures within OLC
itself, coupled with Grace, Jr. s failure to note the transaction in his
directors and officers questionnaire, that led to the lack of disclosure
(assuming disclosure was necessary). Bolduc or Erhart had no obligation to
second guess their counsel on this matter and raise their hand to ask an
affirmative question.
The Report seems to suggest that had they done so, the disclosures
might have been accurate (as we define accurate which, as mentioned, is not
open and shut on these facts). But that is irrelevant. Here, there did
not appear to be any reason for these senior managers to question their
disclosure counsel and OLC s procedures in the first instance. Moreover,
no case can be made that there is any disclosure so obviously required that
non-securities lawyers should know that it would be needed regardless of
whether counsel believes it to be or not.
If the facts were different, it might be possible to conclude that
these three individuals knew or had reason to know that the process had not
worked appropriately, and there then might be reason to impose upon them a
duty of inquiry that might rise to the level of querying and second-
guessing counsel s judgments and disclosures. Examples might include
knowing that Grace, Jr. had intentionally or otherwise not completed his
questionnaire properly, or the presence of past mistakes or omissions in
the Company s disclosure documents that would have alerted them to the fact
that their disclosure process was failing. But those are not the facts of
this record or as stated in the Report.
The Commission is understandably wary about pursuing lawyers for their
legal judgments. I share that wariness and believe that when professionals
-- whether lawyers, accountants or others -- are acting in their capacity
as such they must be given the opportunity to exercise their professional
judgment without fear that a mistake, no matter how innocent -- or
difference of judgment with the Commission -- will result in their being
viewed as having violated the federal securities laws.<(24)> We need
to recognize that in those circumstances where such judgments are made,
there simply may be no person that will be individually liable. Holding the
<(24)> See the dissent of Commissioner Johnson in In the Matter of
David J. Checkosky and Norman A. Aldrich,
Admin. Proc. File No. 3-6776, Securities Exchange
Act Release No. 38183 (January 21, 1997), and the dissent
of Commissioner Wallman in In the Matter of Robert
D. Potts, Admin. Proc. File No. 3-7998, Securities
Exchange Act Release No. 39126 (September 24, 1997).
======END OF PAGE 14======.
client liable for not questioning the legal judgment of counsel is not the
answer.
If the Commission believes it has a case against these three
individuals, then it should have brought it. The record, however, did not
support any such case. There is a well-known maxim bad facts make bad
law. Here, we have bad circumstances. The Report is only a Section 21(a)
report -- negotiated by the parties in lieu of any further or other action
of the Commission. It puts this matter to rest for these individuals.
There is no appeal and no court ruling on the law. My hope is that the
Report will be limited to the very specific facts of this very specific
case, and go no further.
I respectfully dissent.
======END OF PAGE 15======.
Modified: Aug. 31, 2023