Compliance August 11, 2005

Outsourced Employee Loses Benefits Ruling

August 11, 2005 (PLANSPONSOR.com) - A former Cendant Corp. employee who was outsourced to International Business Machines Corp. has run into a legal roadblock in his court fight over severance pay and other benefits when he changed employers.
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US District Judge Arthur Spatt of the US District Court for the Eastern District of New York ruled that plaintiff Barry Engler’s claims were pre-empted by the Employee Retirement Income and Security Act (ERISA), BNA reported.

Spatt granted requests from Cendant and IBM to throw out Engler’s suit alleging state law fraudulent inducement, negligent misrepresentation, and breach of contract claims.

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According to court background, Engler was a Cendant employee in December 2001 when he received a letter from IBM extending to him an offer of employment. The offer of employment was part of an outsourcing agreement between IBM and Cendant in which certain Cendant employees were offered employment with IBM, according to the court.

As part of the offer, Engler received a letter from Cendant advising him that if he accepted employment with IBM, the company would recognize his service with Cendant for all purposes, including eligibility and vesting in IBM’s pension plan.

After Engler began working for IBM, Cendant sent him a letter in February 2002 stating that if his employment should be terminated by IBM within two years he would receive severance pay from IBM based on his combined credited service.

In May 2004, Engler was told he was ineligible for the benefits that had been promised in the February 2002 letter because his employment termination occurred more than two years after his initial employment date with IBM, the court said.

Engler originally sued in a New York state court against Cendant for fraudulent inducement, negligent misrepresentation, and breach of contract. The court noted that although Engler listed no cause of action against IBM, he demanded $50,000 from IBM and $100,000 from Cendant. Cendant and IBM had the case transferred to federal court as preempted by ERISA and asked Spatt to dismiss the matter.

The case is Engler v. Cendant Corp., E.D.N.Y., No. 04-cv-05215 (ADS)(MLO), 8/6/05.

Administration August 10, 2005

FASB Alters Volatility Valuation Rules for Private Companies

October 20, 2004 (PLANSPONSOR.com) - The Financial Accounting Standards Board (FASB) has decided to offer private companies some flexibility in the way they value stock options.
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The easing of rules for valuing stock compensation awards for private companies is aimed partially at arriving at appropriate figures regarding ‘expected volatility’. Traditionally hard to measure for private companies, expected volatility is essential to calculating share value (see  Expensing Proposition ). As a stand in for fair valuation, FASB will now allow private companies to use an alternative method that calculates share volatility by applying historical volatility of an appropriate index as an input to the valuation model.

Companies would be allowed to use this caveat to the pending rules if a lack of predictability makes a reasonable estimate of fair value impossible. If a company meets this requirement, it will be allowed to us the calculated value model, which is expected to cut the cost and complexity of stock option valuations.  FASB members said that the move is expected to bring share valuations somewhere in between fair and minimum value. Volatility will most likely be undervalued, however.

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Current rules allow private companies to assume a volatility of zero in calculating share value.

The forthcoming rules are to be applied by private companies for all stock compensation awards granted, modified, or settled beginning after December 15 of next year.

The new rules will go into effect for public companies on June 15 following a wide scale and successful push to have the deadline moved back six months in order for companies to have more time in which to comply with the new rules (see  Pressure on FASB Produces Options Expensing Delay ). The push by FASB to create stricter stock options expensing rules follows on the heels of the tech boom and subsequent bust, as well as accounting scandals like Enron and WorldCom, that have rocked Wall Street since then.

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