From: Ben Pugh [bpugh@enterprisecounsel.com] Sent: Friday, June 13, 2003 3:48 PM To: 'rule-comments@sec.gov' Subject: Comment on S7-10-03 To Whom It May Concern: My name is Benjamin Pugh. I am an attorney who is currently handling a number of litigation matters concerning corporate governance, shareholder elections of directors, and the rights of minority directors. I write to give the Commission my perspective as a lawyer "on the street" as to how the SEC's current proxy solicitation rules unfairly game the system to the advantage of corrupt entrenched management at the expense of shareholders. That is to say, the Commission's current proxy solicitation rules do not adequately allow dissenting shareholders to prevent the next Enron/WorldCom by voting corrupt management out of office before entrenched management is able to rob the shareholders blind. Now, of course, not all entrenched management of publicly reporting corporations is corrupt. But under the current rules, shareholders must rely upon entrenched management to voluntarily give any dissenting voice a fair shake. Even for perfectly honest management, this is no guarantee. Here is the problem in a nutshell: a.. Entrenched management is allowed to spend, without limitation, the corporation's money - that is, other people's money - to defeat an adverse proxy contest. b.. Any dissenting shareholder(s) who wish to challenge current management and place rival Director candidates up for election must spend their own money. In other words, unless the corporation's management voluntarily includes dissenting shareholder proposals and Board candidates, and all of the dissenting shareholders' proxy solicitation materials, with the entrenched management's own proxy solicitation materials, the expense of fighting entrenched management alone may make it impossible for a group of minority shareholders to oust a corrupt entrenched management. This does not even take into account the expenses of challenging the announced results of an election in court (which, quite rightly, should be left to state law). Unless the Commission is prepared to substantially increase its enforcement actions, the best - and most American - way to rid a corporation of corrupt management before the next Enron/WorldCom is to give the shareholders the greatest ability to vote the bums out. (An ounce of prevention is worth a pound of cure). A simple and easy way to solve this problem is to promulgate new rules where, if an adverse shareholder or group of shareholders has the support of a sufficiently large number of the outstanding shares (the case the Commission cites would set that number at 3% of the outstanding shares), either the corporation pays for both sides' proxy solicitation materials or the corporation pays for neither. That is to say, there is no reason why, simply because entrenched management was elected the year prior, that they have any greater claim upon the corporate treasury than any other shareholder with regards to securing their (re)election. Imagine if the United States set up a system of publicly financing political campaigns where the incumbent - and only the incumbent - had unlimited use of the U.S. treasury to spend on his or her campaign. The very notion is preposterous. Yet this is exactly the system of corporate Director elections in the U.S. today under the SEC's current proxy solicitation rules. This fundamental fact must change if corporate Democracy has any chance of "nipping in the bud" the next Enron, WorldCom, etc. before it happens. Another related problem is the fact that, under the Commission's current proxy solicitation rules, entrenched management may solicit proxies under the guise that it is the corporation that urges their reelection. Imagine if, when President Bush runs for reelection in 2004, he is allowed not only to use the United States treasury, without limit, to fund his reelection campaign, but also is allowed to claim that the United States of America recommends his reelection. This is, quite simply, un-American. Yet, again, this is exactly the state of the Commission's current proxy solicitation rules. To sum up: a.. The Commission should promulgate new proxy solicitation rules where, when shareholder(s) representing a significant number of the corporation's shares (perhaps 3%) seek to challenge entrenched management via proxy solicitation contest to elect a rival slate of Directors and/or submit proposed by-law amendments, either the corporation should pay for all sides' campaigns or the corporation should pay for neither's. Right now, the rules give entrenched management unlimited access to, and the ability to spend at will, the corporation's money on what truly are personal concerns (i.e., getting reelected and keeping one's job). This should end. b.. The Commission should promulgate new proxy solicitation rules that prohibit any side in a contested election from claiming that it is the corporation on whose behalf the proxies are being solicited. The current ruled provide entrenched management an unfair advantage by giving them a pseudo "endorsement" essentially from themselves. Entrenched management may factually state that they are the incumbents and may truthfully state their achievements warranting their reelection, just like incumbents in the political sphere, but their reelection campaigns should not have a pseudo "official" stamp of approval. Thanks, Benjamin P. Pugh, Esq. Enterprise Counsel Group A Law Corporation Five Park Plaza, Suite 450 Irvine, California 92614-5976 (949) 833-8550 telephone (949) 833-8540 facsimile bpugh@enterprisecounsel.com **************Confidentiality Footer************** THIS MESSAGE IS INTENDED ONLY FOR THE USE OF THE INDIVIDUAL TO WHOM IT IS ADDRESSED, AND CONTAINS INFORMATION THAT IS PRIVILEGED, CONFIDENTIAL AND EXEMPT FROM DISCLOSURE UNDER APPLICABLE LAW. IF YOU ARE NOT THE INTENDED RECIPIENT, OR THE EMPLOYEE OR AGENT RESPONSIBLE FOR DELIVERING THIS MESSAGE TO THE INTENDED RECIPIENT, YOU ARE HEREBY NOTIFIED THAT ANY UNAUTHORIZED DISCLOSURE, DISSEMINATION, DISTRIBUTION OR COPYING OF THIS COMMUNICATION IS STRICTLY PROHIBITED. IF YOU HAVE RECEIVED THIS COMMUNICATION IN ERROR, PLEASE NOTIFY US IMMEDIATELY BY TELEPHONE AND RETURN THE ORIGINAL MESSAGE TO US AT THE ABOVE ADDRESS VIA E-MAIL TO bpugh@enterprisecounsel.com. THANK YOU!