Rule 4300*: NASDAQ, in addition to applying the enumerated criteria set forth in the Rule 4300 and 4400 Series, will exercise broad discretionary authority over the ... continued inclusion of securities in NASDAQ in order to maintain the
quality of and public confidence in its market. Under such broad discretion ... NASDAQ may ... apply additional or more stringent criteria for the ... continued inclusion of particular securities or suspend or terminate the inclusion of particular securities
based on any event, condition, or circumstance which exists or occurs that makes ... continued inclusion of the securities in NASDAQ inadvisable or unwarranted in the opinion of NASDAQ, even though the securities meet all enumerated criteria for ... continued
inclusion in NASDAQ.
Rule 4330(a)(3): NASDAQ may, in accordance with Rule 4800 Series ... apply additional or more stringent criteria for the ... continued inclusion of particular securities or suspend or terminate the inclusion of an otherwise qualified security
if ... NASDAQ deems it necessary to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, or to protect investors and the public interest.
Issue: In 2003, after the company was advised its Chief Executive Officer ("CEO") and Chairman of the Board was the target of a grand jury investigation, the Board of Directors ("Board") renegotiated certain provisions of his employment
agreement.
In 2004, the company's CEO and Chairman, and 55% shareholder, pled guilty to two felony counts of: (i) paying an illegal gratuity to an investment advisor and (ii) filing a false 1998 personal tax return, which resulted in him serving 18 months in federal
prison, paying $2,000,000 in restitution and a $25,000 fine. Thereafter, the company entered into an agreement with its former CEO and Chairman, where the company would: (i) continue to pay his regular annual salary of $350,000 and bonus during his incarceration
and (ii) pay him a "leave of absence" payment in the amount of $2,000,000 in consideration of his "good will, cooperation, and continuing assistance, and in recognition of his past service to the company, to help avoid litigation and for the other reasons."
The company also agreed that he would remain Co-Chairman as well as Co-CEO of the company.
Determination: The company was properly delisted in order to preserve and strengthen the quality and integrity of and public confidence in The NASDAQ Stock Market and in order to protect prospective investors and the public interest. The
nature of the offenses, which were fraud based, together with the Board of Directors responses to the offenses, pose serious public interest threats.
Specifically, the Listing Council was concerned that the company's Chairman, CEO and 55% shareholder at the time of the events that formed the basis for the fraud convictions, continued to exert influence and control over the company's affairs in his capacity
as Chief Strategic Officer, Treasurer, Secretary, Director and as the company's majority shareholder, while incarcerated.
The Listing Council was also particularly concerned that, after the former Chairman and CEO was identified as the target of an investigation by the U.S Attorney's Office, the Board renegotiated certain provisions of his employment agreement and agreed
to exclude, from the definition of a "for cause" termination, any termination based on the former CEO and Chairman's conviction of a felony unrelated to the company.
The Listing Council did not agree with the company that "in order to criticize the Board for agreeing to the provision, the staff must necessarily have concluded that the Board should have dismissed the former Chairman and CEO from his positions because
of his plea agreement...". In the alternative, the Board could have decided not to take the pro-active step that it took, i.e., it could have left the employment agreement as it stood prior to the renegotiation.
The Listing Council found it unconscionable that the Board agreed to pay the former Chairman and CEO $2,000,000 in addition to his regular salary and bonus. The Listing Council believed the payment was a transparent attempt to pay his court-ordered restitution
related to his guilty pleas. This action was further evidence of his influence over the company, which is at odds with shareholders' interests and good corporate governance.
The Listing Council was also concerned, given the heightened scrutiny of all companies' corporate governance and the extensive efforts that have been made by Congress and NASDAQ, among others, that the company would have allowed the former Chairman and
CEO to sign the certifications required of him as Co-Chief Executive Officer under Sarbanes-Oxley, but for the notice from the Bureau of Prisons.
Based on these and other actions of the Board, the Listing Council had concerns whether the Board, which is comprised of the former Chairman and CEO's friends and family, had discharged its duty to the company's shareholders and was working on behalf of
the company's best interest, or on behalf of the former Chairman and CEO's interest. The Listing Council found that the former Chairman and CEO's regulatory history, along with his ability to exert influence over the operations of the company and apparent
influence over Board actions, provided grounds for denying the company's request for continued listing. Accordingly, the Listing Council found that the totality of the circumstances raised public interest concerns under Rules 4300 and 4330(a)(3) that made
it appropriate to apply additional and more stringent criteria in order to preserve and strengthen the quality of and public confidence in NASDAQ and served as a basis for affirming the delisting of the company's securities.
* Please note that Rules 4300 and 4330(a) were re-codified and changed in August 2005. NASDAQ also added interpretative material regarding the use of its discretionary authority. For the current version of the rule, see Marketplace Rule 4300 and IM-4300.