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07/22/2010

However, in a post-financial crisis global business climate, "cost-consciousness is as high as ever," says Washington, DC-based corporate and securities lawyer Donald H. Miers. Complying with the SEC can require a small army of people. Sarbanes-Oxley came around at the right time for companies to delist." German firms cross-listed in the United States spent between €10 and €15 million annually on SEC compliance, a survey conducted by Stadtmann and his colleagues found. Most companies would not disclose the exact amount of money they spent on SEC compliance, but a Deutsche Telekom spokesperson told SPIEGEL ONLINE costs were in the "low double-digits" of millions of euros and another at Daimler said they did not exceed €10 million.

When Telekom and Daimler announced their departures from the NYSE in April and May respectively, the main reason the companies said publicly was to reduce the complexity of financial reporting and administrative costs.

On average, companies must add another five to 10 people to their payroll for SEC compliance alone, and a company may need a dozen workers for required executive compensation disclosures, says Miers.

In addition to the resources required for SEC disclosure, German firms still needed staff for compliance in Germany. "Many firms just want to get rid of dual internal reporting," says Stadtmann. Since 2005, all German public companies have been required to adhere to International Financial Reporting Standards (IFRS), a system of accounting rules followed by each public company in the European Union and much of Asia.

In the United States, the SEC has also proposed replacing current US accounting rules with IFRS within the next decade. The SEC says the likely switch allows greater comparability and transparency of company's balance sheets worldwide.

A Regulation 'Nightmare'

The double-digit costs of SEC complaince, however, are paltry compared the hundreds of millions of dollars in liability -- either through lawsuits or investigations and prosecutions -- to which a US listing can expose foreign firms. Shareholders can take companies to court far more easily under SEC regulations than those of Germany's stock market regulator. And the US Justice Department and the SEC have been more assertive in investigating publicly traded companies following a wave of investment fraud schemes like the one by former Nasdaq chief Bernard Madoff, who swindled prominent investors out of billions.

"That's the real issue here," says Miers, who worked for the SEC's division of corporation finance from 1994 to 1997. "What the SEC fully doesn't grasp to today is that dealing with the US regulation system is a nightmare," he says. "It's another reason to run to the exit door."

Sarbanes-Oxley reforms also require a company executive to approve on all financial reports. "The most important thing (about Sarbanes-Oxley) is that the CEO and CFO sign for the financial statements," says Stadtmann. "All it takes is one person in the company to make a mistake and (an executive) can go to jail." Executives who sign off on incorrect financial statements can face a sentence of up to 20 years.

Daimler has had its own recent run in with the US Justice Department and SEC. In April, the carmaker settled charges brought by the two government agencies for $185 million that it and its subsidiaries bribed foreign government officials with cash held in secret bank accounts. None of the alleged bribes happened within the United States, but Daimler's registration with the SEC made it prosecutable under US law. The whistleblower in the case, David Bazzetta, was a US-based auditor for what was then DaimlerChrysler. Daimler says that the settlement had no influence on its decision to delist from the NYSE.

Meanwhile, US and European authorities fined German electronics and engineering firm Siemens a record $1.6 billion two years ago to settle bribery allegations. The company says it has no intentions of delisting from the NYSE, but Stadtmann believes Siemens will pull out at the first opportunity.

Easier to Leave

In 2007, the SEC relaxed several key provisions in Sarbanes-Oxley in an effort to reduce costs for companies and to make it easier to delist from stock exchanges. The SEC billed the provision as "eliminating conditions that had been considered a barrier to entry" that would "encourage participation in the US markets and increase investor choice."

The overall effect has been the opposite for German companies. Since the more lenient regulations went into effect, 10 German companies listed on the NYSE have pulled out. DAX behemoths BASF, E.on and Bayer each announced that they were leaving the American capital market within three months of the new rules.

The SEC ruled that foreign companies could deregister if their daily trading volume on a US exchange was less than 5 percent of its total global trading. This was the so-called "drop in the bucket," according to officials at the NYSE, who declined to discuss the matter on record. The new rules allowed foreign companies to reconsider their listing and get out of New York.

Today, the trading volume at DAX companies like Siemens and SAP don't fall under the 5 percent threshold at the NYSE.

For their part, officials at Deutsche Telekom and Daimler say there are fewer reasons to miss a listing in New York these days. Advances in electronic and Internet trading allow foreign investors to buy and sell shares directly in Frankfurt instead of going through foreign listings in New York, London and Tokyo. Even for large investment firms, it no longer matters if a company is traded in Bombay, Belgrade or New York.

"For investors, there's no stake in the game where they're listed, here (in the United States) or not," says Miers.

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• Part 1: German Giants Flee Wall Street
• Part 2: 'Cost-Consciousness Is as High as Ever'