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August 21, 2006, Alert No. 1,435.
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SEC Commissioner Defends Section 404

8/15. Raul Campos, a member of the Securities and Exchange Commission (SEC), gave a speech in Boston, Massachusetts, titled "How to be an Effective Board Member". One of the topics that he addressed was the internal control burdens imposed by Section 404 of the Sarbanes Oxley Act.

Roel CamposCampos (at left) said that the "benefits of Section 404 have been enormous" and that the SEC is committed to a strong "tone at the top" culture. He also said that "the need for strong internal controls and a strong culture of compliance absolutely justify keeping Section 404 around".

Other Commissioners have discussed Section 404 regulation with less enthusiasm. See for example, story titled "Atkins Says SEC Seeks More Rational Approach to Section 404" in TLJ Daily E-Mail Alert No. 1,395, June 20, 2006.

The "Sarbanes-Oxley Act of 2002" was HR 3763 in the 107th Congress. It is now Public Law No. 107-204. Its main sponsors were Sen. Paul Sarbanes (D-MD) and Rep. Mike Oxley (R-OH).

Section 404 is titled "Management assessment of internal controls". It provides, in full, as follows:

    (a) RULES REQUIRED- The Commission shall prescribe rules requiring each annual report required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) to contain an internal control report, which shall--
       (1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and
       (2) contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.
    (b) INTERNAL CONTROL EVALUATION AND REPORTING- With respect to the internal control assessment required by subsection (a), each registered public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by the management of the issuer. An attestation made under this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board. Any such attestation shall not be the subject of a separate engagement.

Small public technologies companies have argued that Section 404, and the SEC's implementation of it, is imposing huge burdens on them, with little benefit to investors. These arguments are supported by the May 8, 2006, Government Accountability Office (GAO) report [93 pages in PDF] titled "Sarbanes-Oxley Act: Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies". See also, story titled "GAO Reports that Section 404 of Sarbanes Oxley Burdens Small Public Companies" in TLJ Daily E-Mail Alert No. 1,366, May 9, 2006.

In addition, legislators have begun to introduce bills on this subject. On May 17, 2006, Sen. Jim DeMint (R-SC) and other Senators introduced S 2824, the "Competitive and Open Markets that Protect and Enhance the Treatment of Entrepreneurs Act", or COMPETE Act, which would add a "Smaller Public Company Exemption" to Section 404 of the Sarbanes Oxley Act. See also, HR 5404, the companion bill in the House, introduced by Rep. Tom Feeney (R-FL) and others on May 17. However, most legislators are likely waiting until after Sen. Sarbanes and Rep. Oxley retire at the end of the current Congress before introducing their bills.

Campos stated that the SEC "has been immersed in trying to find a workable implementation plan for Section 404. For the past several months, we have been hearing everywhere -- the press, meetings, and in public forums -- about the extensive costs of Section 404. This has been an extraordinarily complex and difficult policy issue for the Commission since it is quite clear that both the costs and benefits of Section 404 have been enormous."

He continued that "after a series of meetings and a public roundtable on this thorny issue, we issued a ``roadmap´´ last May which outlined the steps that would be taken by the SEC and PCAOB to ease implementation burdens and reduce compliance costs. Much work has already been done -- we recently issued a concept release to solicit comment for forthcoming practical management guidance. And just a few days ago, we issued two releases that extended compliance dates for the auditor attestation portion of Section 404 compliance for foreign private issuers that are accelerated filers (but not large accelerated filers), and proposed to extend compliance dates for Section 404 compliance for all non-accelerated filers. We also proposed to give newly public companies a transition period to comply with the internal control requirements of Section 404." (Parentheses in original.)

Campos concluded that "What all of this means is that we at the SEC are committed to a strong ``tone at the top´´ culture throughout Corporate America. Notwithstanding the extensive costs of Section 404, we have made the policy determination that the need for strong internal controls and a strong culture of compliance absolutely justify keeping Section 404 around. As a result, you -- as directors -- should also commit yourself to encouraging and implementing a pro-active and responsible board culture. You are at the front-line -- therefore, we will look to you to set and implement the proper tone and compliance environment at your respective companies."

Dennis Carlton Named Head of Economic Analysis in Antitrust Division

8/18. Dennis Carlton was named Deputy Assistant Attorney General for Economic Analysis in the Department of Justice's (DOJ) Antitrust Division. He will start in October of 2006. See, DOJ release.

He is currently a professor of business economics at the University of Chicago's Graduate School of Business. He is also a member of the Antitrust Modernization Commission (AMC). And, he is the senior managing director Lexecon, an economic consulting firm. See, Lexecon bio.

He is a co-author, with Jeffrey Perloff, of Modern Industrial Organization [Amazon], an 800 page textbook last revised for the fourth edition in 2004.

He has also authored or co-authored numerous articles and papers on a wide range of antitrust and competition topics. The following is a listing of some of his works that are relevant to technology that are published in the Social Sciences Research Network (SSRN). Access to the text requires registration. Access to some also requires payment. See also, all SSRN listings for Carlton.

  • "Competition, Monopoly and Aftermarkets", 2006. See, SSRN abstract and download page.
  • "Theories of Tying and Implications for Antitrust", 2005. See, SSRN abstract and download page.
  • "Intellectual Property, Antitrust and Strategic Behavior", 2002. See, SSRN abstract and download page.
  • "A General Analysis of Exclusionary Conduct and Refusal to Deal -- Why Aspen and Kodak are Misguided", 2001. See, SSRN abstract and download page.
  • "Free Riding and Sales Strategies for the Internet", 2001. See, SSRN abstract and download page.
  • "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries", 1999. See, SSRN abstract and download page.
Michelle Connolly Named Chief Economist at FCC

8/21. Michelle Connolly was named Chief Economist at the Federal Communications Commission (FCC). See, FCC release [PDF]. She began work on August 21. She replaces Leslie Marx, who worked in this position for only one year.

Connolly is a thirty-something junior professor at Duke University whose curriculum vitae [PDF] lists no papers or other works related to telecommunications, the internet, networked industries, or competition analysis. Nothing in her curriculum vitae or web site indicates that she has any expertise regarding the business practices, technologies, or participants in the communications, internet or technology sectors.

FCC Chairman Kevin Martin stated in the FCC's release only that "I am pleased Michelle has agreed to serve in the critical role of Chief Economist. Her talent and expertise will be a great asset for the Commission and will strengthen our policy-making."

Connolly has written about international trade, including intellectual property rights (IPR) in the context of trade. See for example, paper [12 pages in PDF] titled "Implications of Intellectual Property Rights for Dynamic Gains from Trade", co-authored with Diego Valderrama, and published in the American Economic Review, May 2005.

However, her work regarding IPR focuses on technological innovation and patents. In contrast, the FCC deals with IPR mostly in the context of entertainment industry copyrights in songs, movies, and programming, as for example, in the FCC's ill fated broadcast flag proceeding.

A major responsibility of the Chief Economist is to assist in the review of mergers. The Chief Economist may also be asked to provide economic analysis of the network neutrality issue, and a la carte programming. Connolly's curriculum vitae reflects no experience in any of these areas.

The Chief Economist is a short term position traditionally held by an outsider. Some former Chief Economists, such as Gerald Falhauber, had considerable experience in communications economics, policy and business practices at the time of their appointment to the FCC.

Chairman Martin's selection of Connolly suggests that he intends to continue to relegate independent economic analysis to a minimal and ineffective role in the FCC's decisions and policy making.

The Chief Economist serves in the Office of Strategic Planning and Policy Analysis (OSP). The head of the OSP is Cathy Bohigian, an attorney who was previously a legal advisor to Martin. Both Martin and Bohigian previously worked for the law firm of Wiley Rein & Fielding.

More People and Appointments

8/18. Michael Mines and Chris Briese were named Deputy Assistant Directors in the Federal Bureau of Investigation's (FBI) Directorate of Intelligence. See, FBI release.

8/15. James (aka Chip) Burrus was named Assistant Director of the Federal Bureau of Investigation's (FBI) Criminal Investigative Division. See, FBI release. Burrus testified before the Senate Commerce Committee on January 19, 2006 regarding internet related crimes against children. See, Burris' prepared testimony [4 pages in PDF] and partial transcript.

More News

8/18. The U.S. Court of Appeals (1stCir) issued its opinion in T-Peg v. Vermont Timber Works, a case regarding copyright in architectural works. The Court of Appeals reversed the summary judgment of the District Court for the Defendant, and remanded for trial. This case is T-Peg, Inc. and Timberpeg East, Inc. v. Vermont Timber Works, Inc. and Douglas Friant, U.S. Court of Appeals for the 1st Circuit, App. Ct. No. 05-2866, an appeal from the U.S. District Court for the District of Massachusetts.

8/18. The U.S. Court of Appeals (8thCir) issued its opinion [8 pages in PDF] in Schwan's IP v. Kraft Pizza Company, a trademark case. The Court of Appeals affirmed the judgment of the District Court for the alleged infringer (Kraft) on the basis that the mark "brick oven" is generic. This case is Schwan's IP, LLC and Schwan's Consumer Brands North America, Inc. v. Kraft Pizza Company, U.S. Court of Appeals for the 8th Circuit, App. Ct. No. 05-3463, an appeal from the U.S. District Court for the District of Minnesota.

8/9. A grand jury of the U.S. District Court (SDCal) returned an indictment of Joshua Edward Eveloff and Michael Steven Twombly that charges fraud in sending e-mail, in violation of 18 U.S.C. §§ 1037 (a)(3) and (a)(4), and conspiracy, in violation of 18 U.S.C. § 371, in connection with their sending bulk commercial e-mail with falsified header information. That is, the is a case brought under the CAN-SPAM Act of 2003. The U.S. Attorneys Office stated in a release [PDF] the "the defendants then transmitted as many as 1,000,000 spam messages in a single day".

Georgelas Sentenced in Islamic Cyber Crime Case

8/15. The U.S. District Court (NDTex) sentenced John Georgelas to 34 months of imprisonment, and ordered him to pay $44,808.00 in restitution, following his plea of guilty to one count of knowingly and intentionally accessing a protected computer without authorization, and recklessly causing damage to that computer, in violation of 18 U.S.C. §§ 1030 (a)(5)(A)(ii) and (a)(5)(B)(i).

The U.S. Attorneys Office for the Northern District of Texas added in a release that Georgelas "has been in custody since his arrest on April 14, 2006 on related charges outlined in a sealed complaint". The USAO release does not identify what those other charges are.

TLJ spoke with a spokesman for the USAO who said that that complaint remains sealed, and the USAO will not disclose its contents.

The USAO release states that Georgelas was a Datacenter Operations Technician at Rackspace Managed Hosting at the Dallas/Fort Worth (DFW) Datacenter facility in Grapevine, Texas, near the airport. The charge to which he plead guilty is based upon his accessing, without authorization, Rackspace servers to obtain the password of a customer, American Israeli Public Affairs Committee (AIPAC).

The USAO release also states that "Georgelas's unauthorized access of Rackspace was motivated by his desire to deface the website of due to his fundamentalist Muslim beliefs. The government was able to recover chat logs in which Georgelas communicated with a Canadian woman concerning his desire to support Al Qaeda, and he provided technical support to a pro-jihad website,, which was used as a propaganda vehicle to promote Osama Bin Laden and Al Qaeda."

The Assistant U.S. Attorney assigned to this case is Linda Groves. Georgelas is represented by the Dallas County Public Defender.

The Rackspace web site states that it offers "Fanatical Support". In addition, Rackspace holds U.S. Trademark No. 78754570 for this term.

Washington Tech Calendar
New items are highlighted in red.
Monday, August 21

The House will next meet at 2:00 PM on Wednesday, September 6. See, Republican Whip Notice.

The Senate will next meet at 11:00 AM on Tuesday, September 5.

12:00 NOON - 1:00 PM. The U.S. Chamber of Commerce will host a lunch briefing for reporters to discuss its "Global Anti-Counterfeiting and Piracy Initiative". The speakers will be Caroline Joiner, Brad Huther, Michael Considine, and Jennifer Osika. For more information, or to register, e-mail press at uschamber dot com or call 202 463-5682. Location: U.S. Chamber, 1615 H St., NW.

Tuesday, August 22

8:30 AM - 4:30 PM. The U.S.-China Economic and Security Review Commission. will hold a hearing titled "China's Financial System and Monetary Policies: The Impact on U.S. Exchange Rates, Capital Markets, and Interest Rates''. See, notice in the Federal Register, August 15, 2006, Vol. 71, No. 157, at Pages 46978-46979. Location: Room 385, Russell Senate Office Building, Capitol Hill.

9:00 PM EDT and 7:00 PM MDT. Sumner Redstone (Viacom and CBS) will speak at the Progress and Freedom Foundation's (PFF) conference titled "Aspen Summit" in Aspen, Colorado. His speech will be webcast. See also, agenda for the three day conference in the Calendar of Events Outside of the Washington DC Area.

Deadline to submit comments to the U.S. Patent and Trademark Office (USPTO) regarding its "modified plan to remove the paper search collection of marks that include design elements from the USPTO's Trademark Search Facility and replace them with electronic documents. The USPTO has determined that the paper search collection is no longer necessary due to the availability and reliability of the USPTO's electronic search system." See, notice in the Federal Register, June 23, 2006, Vol. 71, No. 121, at Pages 36065-36068.

Wednesday, August 23

8:30 AM - 2:30 PM. The American Electronics Association (AeA) will host an event titled "AeA Annual Government - Industry Executive Interchange". See, notice. Prices to attend range from $195-$295. Location: The Spy Museum, 800 F St., NW.

9:30 AM - 4:30 PM. Day one of a two day meeting of the U.S.-China Economic and Security Review Commission to consider drafts of material for the 2006 Annual Report. The agenda includes discussion of export controls and China's WTO compliance. See, notice in the Federal Register, August 16, 2006, Vol. 71, No. 158, at Page 47328. Location: Conference Room 381, Hall of The States, 444 North Capitol St., NW.

12:00 NOON - 3:00 PM. The DC Bar Association will host a panel discussion titled "DR-CAFTA: The United States-Dominican Republic-Central America Free Trade Agreement A Roundtable with the Ambassadors". The speakers will include ambassadors to the U.S. from Dominican Republic, Guatemala, Honduras, Nicaragua, El Salvador, and Costa Rica. The price to attend ranges from $15-40. For more information, call 202-626-3488. See, notice. Location: Arnold & Porter, 555 12th St., NW.

1:30 - 3:30 PM. The Department of State will host a meeting to hear public views on issues related to the possible expansion of the mandate of the International Mobile Satellite Organization (IMSO) to include new oversight and regulatory responsibilities that may affect U.S. and non-U.S. mobile satellite services providers. See, notice in the Federal Register, August 10, 2006, Vol. 71, No. 154, at Pages 45897-45898. Location: Harry S. Truman building, 2201 C St., NW.

CANCELLED. Federal Communications Commission (FCC) Auction 67 is scheduled to begin. This is the 400 MHz Air-Ground Radiotelephone Service auction. See, FCC notice of cancellation [PDF] and notice of cancellation in the Federal Register, May 17, 2006, Vol. 71, No. 95, at Page 28695.

Thursday, August 24

9:30 AM - 4:30 PM. Day two of a two day meeting of the U.S.-China Economic and Security Review Commission to consider drafts of material for the 2006 Annual Report. The agenda includes discussion of export controls and China's WTO compliance. See, notice in the Federal Register, August 16, 2006, Vol. 71, No. 158, at Page 47328. Location: Conference Room 381, Hall of The States, 444 North Capitol St., NW.

Friday, August 25

Deadline to submit comments to the National Institute of Standards and Technology's (NIST) Computer Security Division regarding its draft [159 pages in PDF] of Special Publication 800-53, Revision 1 (Second Public Draft), titled "Recommended Security Controls for Federal Information Systems".

Monday, August 28

Deadline to submit comments to the Department of Homeland Security (DHS) regarding its proposed rule changes that would amend its United States Visitor and Immigrant Status Indicator Technology (US-VISIT) rules to extend US-VISIT requirements to all aliens with the exception of aliens who are specifically exempted and Canadian citizens applying for admission as B1/B2 visitors for business or pleasure. See, notice in the Federal Register, July 27, 2006, Vol. 71, No. 144, at Pages 42605-42611.

Deadline to submit nominations of individuals for appointment to the National Institute of Standards and Technology's (NIST) Visiting Committee on Advanced Technology (VCAT). See, notice in the Federal Register, August 11, 2006, Vol. 71, No. 155, at Pages 46199-46200.

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