SECURITIES EXCHANGE ACT OF 1934 Release No. 39157/September 30, 1997 REPORT OF INVESTIGATION PURSUANT TO SECTION 21(a) OF THE SECURITIES EXCHANGE ACT OF 1934 CONCERNING THE CONDUCT OF CERTAIN FORMER OFFICERS AND DIRECTORS OF W. R. GRACE & CO. I. INTRODUCTION The staff of the Division of Enforcement has conducted an investigation into whether W. R. Grace & Co. ("WRG") violated certain provisions of the federal securities laws and whether certain former officers and directors of WRG contributed to any such violations. The Commission has found that WRG violated various statutes and regulations requiring disclosure of specified information in proxy statements and periodic reports and has issued an Administrative Order ordering WRG to cease and desist from committing future violations of those statutes and regulations.<(1)> The Commission has determined that WRG's violations resulted from the conduct of certain of WRG's former officers and directors. In particular, these individuals contributed to these violations by failing to take steps which they should have taken to ensure full and proper disclosure. The Commission is issuing this Report of Investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934 (the "Exchange Act") to address the conduct of these individuals.<(2)> WRG and three of these individuals have consented to the issuance of this report without admitting or denying any of the statements set forth herein.<(3)> In the Administrative Order against WRG, the Commission found that WRG, in its 1992 annual report on Form 10-K ("1992 Form 10-K") and its 1993 proxy statement, did not fully disclose the substantial retirement benefits it had agreed to provide J. Peter Grace, Jr., effective at his retirement as chief executive officer on December 31, 1992. The Commission further found that WRG, in its 1993 annual report on Form 10-K ("1993 Form 10-K") and its 1994 proxy statement, omitted to disclose a proposed related-party transaction pursuant to which a group headed by Grace, Jr.'s son, J. Peter <(1)> In the Matter of W. R. Grace & Co., Exchange Act Release No. 34-39156. WRG consented to the issuance of this Order without admitting or denying the findings therein. <(2)> Section 21(a) of the Exchange Act authorizes the Commission, in its discretion, to publish information "concerning any . . . violations" and to investigate "any facts, conditions, practices or matters which it may deem necessary or proper" in fulfilling its responsibilities under the Exchange Act. <(3)> A fourth individual, J. Peter Grace, Jr., died on April 19, 1995.. Grace III, sought to acquire Grace Hotel Services Corporation ("GHSC"), a wholly-owned subsidiary of WRG involved in hotel food service management. As a result, WRG violated Sections 13(a) and 14(a) of the Exchange Act and Rules 13a-1, 14a-3 and 14a-9 thereunder. The Commission is issuing this Report of Investigation to emphasize the affirmative responsibilities of corporate officers and directors to ensure that the shareholders whom they serve receive accurate and complete disclosure of information required by the proxy solicitation and periodic reporting provisions of the federal securities laws.<(4)> Officers and directors who review, approve, or sign their company's proxy statements or periodic reports must take steps to ensure the accuracy and completeness of the statements contained therein, especially as they concern those matters within their particular knowledge or expertise. To fulfill this responsibility, officers and directors must be vigilant in exercising their authority throughout the disclosure process. In this case, both Grace, Jr., then the chairman of WRG's board of directors, and J. P. Bolduc, then WRG's chief executive officer and a member of WRG's board of directors, knew of Grace, Jr.'s substantial retirement benefits and the proposed transaction with Grace III. Eben Pyne, a non-management member of the board, also was aware of Grace, Jr.'s benefits. Charles Erhart, another non-management member of the board, was aware of the proposed related-party transaction. All four of these officers and directors reviewed all or portions of the relevant documents, and all but Pyne signed the relevant reports. Although the record does not demonstrate that Bolduc, Pyne, and Erhart acted in bad faith, the Commission concludes that they did not fulfill their obligations under the federal securities laws. Bolduc, Pyne, and Erhart each assumed, without taking the steps necessary to confirm their assumptions, that WRG's procedures would produce drafts of disclosure documents describing all <(4)> The Commission previously has noted that corporate directors must act aggressively to fulfill their responsibilities to ensure that their company's public statements are candid and complete. See Report of Investigation in the Matter of the Cooper Companies, Inc. As It Relates to the Conduct of Cooper's Board of Directors, Exchange Act Release No. 35082 (December 12, 1994). See also Report of Investigation in the Matter of National Telephone Co., Inc., Exchange Act Release No. 14380 (Jan. 16, 1978); Report Regarding the Investigation of Gould, Inc., Exchange Act Release No. 13612 (June 9, 1977); and Report of Investigation in the Matter of Stirling Homex, Exchange Act Release No. 11516 (July 2, 1975). Each of these Reports focused on the failure of non-management directors to act effectively when confronted with evidence of management's involvement in possible securities fraud. The present matter, in contrast, deals with the obligations of officers and directors where a company's violations do not constitute fraud. . matters that required disclosure.<(5)> Each also assumed, without taking steps necessary to confirm their assumptions, that other corporate officers, including counsel, had conducted full and informed reviews of the drafts. Bolduc, Pyne, and Erhart each had a responsibility to go beyond the established procedures to inquire into the reasons for non-disclosure of information of which they were aware. II. BACKGROUND At the time of the events discussed in this Report, WRG was a New York corporation with its principal executive offices in Boca Raton, Florida. WRG's primary businesses were packaging, specialty chemicals and health care services. WRG's securities were registered with the Commission pursuant to Section 12(b) of the Exchange Act and its common stock was listed on the New York and Chicago Stock Exchanges. On December 31, 1992, 89,892,000 shares of WRG common stock were issued and outstanding, and WRG had 20,869 common shareholders of record.<(6)> GHSC was a wholly-owned subsidiary of WRG during the relevant period. GHSC was in the business of providing food and beverage service to hotels. J. Peter Grace, Jr. was the chief executive officer of WRG from 1945 until 1992, when he retired from that position. He was chairman of WRG's board of directors during substantial periods from 1945 until his death on April 19, 1995. J. P. Bolduc, age 56, was the president and chief executive officer of WRG from 1992 until his resignation in March 1995. During the relevant period, Bolduc was also a member of WRG's board of directors. Eben W. Pyne, age 78, was a director of WRG from 1960 until 1995. He also served as chairman of the Compensation, Employee Benefits and Stock Incentive Committee of WRG's board of directors during 1992. Pyne did not <(5)> Indeed, this matter demonstrates that corporate disclosure mechanisms cannot compensate for the failures of individuals. WRG's procedures failed because, among other reasons, Grace, Jr. did not disclose some of his retirement benefits and the proposed transaction with his son in questionnaires which WRG distributed to officers and directors to gather information for disclosure in WRG's proxy statements and periodic reports. <(6)> On September 30, 1996, WRG's packaging and specialty chemicals businesses were reorganized as a Delaware corporation as part of the spin-off and combination of its National Medical Care subsidiary with the dialysis business of Fresenius AG, a German health care corporation. ======END OF PAGE 3======. stand for re-election to WRG's Board of Directors in 1995.<(7)> Charles H. Erhart, Jr., age 72, spent his entire business career with WRG. From 1968 to 1990 he served at various times as WRG's chief financial officer, vice chairman, chairman of the executive committee and president. After his retirement as an officer of WRG in 1990, he served as a director of WRG. Erhart also did not stand for re-election to WRG's board of directors in 1995. J. Peter Grace III, age 54, is a son of J. Peter Grace, Jr. He was chairman of the board of directors of GHSC from its formation in July 1990 until he resigned in November 1994. III. GRACE, JR., BOLDUC, AND PYNE FAILED TO TAKE STEPS TO ENSURE THAT GRACE, JR.'S RETIREMENT BENEFITS WERE FULLY DISCLOSED. During the latter part of 1992, Grace, Jr.'s health was deteriorating. Pursuant to delegated authority from WRG's board of directors, WRG's Compensation, Employee Benefits and Stock Incentive Committee (the "Compensation Committee") entered into negotiations with Grace, Jr., which resulted in his retirement from WRG as its chief executive officer, effective on December 31, 1992. Pyne, then chairman of the Compensation Committee, met several times with Grace, Jr. during November and December 1992. The negotiations resulted in an agreement in principle with respect to Grace, Jr.'s proposed retirement benefits. Among the provisions of this agreement in principle was an understanding that Grace, Jr. would continue to receive in retirement various substantial perquisites which he had received while chief executive officer. On December 7, 1992, WRG's board of directors approved Grace, Jr.'s proposed retirement benefits. Subsequently, Grace, Jr. and Pyne, on behalf of WRG, executed a letter agreement dated December 21, 1992 (the "Retirement Agreement"), which reflected the terms of this agreement in principle.<(8)> The Retirement Agreement provided, among other things, that immediately following Grace, Jr.'s retirement: [A]ll other benefits and arrangements currently provided to you [Grace, Jr.] as chief executive officer (including, but not limited to, the use of office space and corporate aircraft) will continue to be provided to you. <(7)> Since 1995, WRG's Board of Directors has been reduced in size from twenty-four members to its current size of nine members. <(8)> Bolduc and Pyne each assert that they assumed that this letter agreement, because it was drafted by WRG's legal counsel, would receive full consideration in WRG's disclosure process. ======END OF PAGE 4======. Pursuant to this provision of the Retirement Agreement, Grace, Jr. received the following benefits, among others, from WRG in 1993: (a) continued use of a Company-owned and maintained apartment with a market value estimated by WRG to be in excess of $3 million, with services of a cook, who was a WRG employee; (b) use of a company limousine and driver on a 24 hour basis; (c) the services of full-time secretaries and administrative assistants; (d) the use of corporate aircraft for personal and business travel; (e) home nursing services; and (f) security services. While there was general knowledge within management that Grace, Jr.'s Retirement Agreement provided for the continuation of benefits that he had received before retirement, specific information about Grace, Jr.'s benefits was not generally available to WRG's management. Only non- management directors were involved in the negotiation or approval of Grace, Jr.'s retirement benefits. Members of WRG's then-current management, including Bolduc and WRG's secretary and chief disclosure counsel, were asked to leave board and/or Compensation Committee meetings at which Grace, Jr.'s retirement benefits were discussed. However, Grace, Jr. and Pyne met with Bolduc in December 1992 to discuss Grace, Jr.'s retirement benefits after the negotiations over these benefits were completed. At that time, Bolduc became aware of each of the "other benefits" that WRG was providing to Grace, Jr. The Company provided Grace, Jr. with directors' and officers' questionnaires ("D&O Questionnaires") in the course of preparing its 1992 Form 10-K and 1993 proxy statement and its 1993 Form 10-K and 1994 proxy statement.<(9)> These questionnaires contained questions asking whether Grace, Jr. received certain benefits from the Company during the preceding year, including, among other things, use of Company property, including apartments; housing and other living expenses (including domestic service) provided at his principal and/or vacation residence; and other perquisites. Grace, Jr. incorrectly responded "no" to these questions. The final version of WRG's 1993 proxy statement contained language discussing Grace, Jr.'s Retirement Agreement, including a statement that Grace, Jr. would receive "certain other benefits." WRG filed the Retirement Agreement as an exhibit to its 1992 Form 10-K, but did not further describe Grace, Jr.'s "other benefits," nor did WRG disclose the costs of providing them in any of its proxy statements or periodic reports <(9)> During the development of WRG's annual reports and proxy statement disclosure, the Company used information from annual questionnaires sent to (a) all WRG officers and directors and (b) the chief financial officers of WRG's reporting units. ======END OF PAGE 5======. filed with the Commission before 1995.<(10)> Because WRG's senior management was excluded from the negotiation and approval of Grace, Jr.'s retirement benefits, WRG's disclosure counsel made arrangements for Pyne to review the executive compensation section of WRG's draft 1993 proxy statement, and Pyne did so. Bolduc, in his capacity as WRG's CEO, reviewed drafts of WRG's 1993 proxy statement and signed WRG's 1992 Form 10-K, which incorporated the proxy statement's section on executive compensation by reference. Grace, Jr., in his capacity as chairman, also signed the 1992 Form 10-K. Although Grace, Jr., Bolduc, and Pyne knew about the "other benefits" WRG had agreed to provide Grace, Jr. upon his retirement, they did not question the absence of information about these "other benefits" in WRG's disclosure of Grace, Jr.'s retirement benefits. Even if Bolduc and Pyne, as each asserted, assumed that WRG's legal counsel (whose office had participated in drafting the Retirement Agreement) had considered the adequacy of the disclosure concerning Grace, Jr.'s benefits, they should not have relied upon that assumption. They should have raised the issue of disclosure of Grace, Jr.'s "other benefits," for example, by discussing the issue specifically with disclosure counsel, telling counsel exactly what they knew about the benefits, and asking specifically whether the benefits should be disclosed.<(11)> As a result, WRG's 1992 Form 10-K and 1993 proxy statement failed to disclose specific information about the "other benefits." IV. GRACE, JR., BOLDUC AND ERHART FAILED TO TAKE STEPS TO ENSURE THAT THE PROPOSED GHSC TRANSACTION WAS DISCLOSED. In February 1993, WRG decided to dispose of GHSC because GHSC's restaurant operations were not one of WRG's "core" businesses and GHSC had failed to meet certain financial targets. This decision was part of a general program to concentrate WRG's assets in certain core industries and to divest certain non-core businesses. During February or early March 1993, Grace III, who was then the chairman of GHSC, proposed to WRG that he acquire GHSC from the Company. Negotiations between Grace III and WRG took place over the next few <(10)> After information concerning Grace, Jr.'s "other benefits" became public, WRG disclosed in its 1995 proxy statement that the benefits provided to Grace, Jr. pursuant to the "other benefits" provision cost the Company $3,601,500 in fiscal year 1993, of which approximately $2,700,000 was attributable to Grace, Jr.'s having access to corporate aircraft. <(11)> This might have established that counsel was not in fact fully informed about these benefits or that Grace, Jr. had incorrectly filled out his D&O questionnaires regarding these benefits. ======END OF PAGE 6======. months. On November 5, 1993, Grace III and WRG executed an agreement in principle expiring on April 15, 1994, which set forth the terms for the acquisition of GHSC by a new company to be formed by Grace III and others, later known as HSC Holding Co., Inc. ("HSC"). Grace III and his other investors agreed that they would execute a note for $1.3 million in exchange for ownership of GHSC. In addition, Grace III and HSC agreed that they would raise $2.5 million in a private placement of equity securities to a group of investors to fund the ongoing operations of the new company. During the negotiations, Bolduc was kept apprised of the status of both the negotiations and the terms of the agreement in principle. In early 1994, Grace III had a conversation with Erhart concerning HSC's private placement. Furthermore, in early 1994, Grace III sent both Grace, Jr. and Erhart a draft copy of a private placement memorandum, which discussed the agreement in principle and to which a copy of the agreement was attached. After the expiration of the agreement in principle, WRG informed Grace III that it would remain receptive to consummating the sale were he able to obtain financing. The transaction was abandoned by WRG in late 1994 because, among other things, Grace III and HSC were unable to obtain the necessary equity financing from the private placement.<(12)> As in past years, the D&O Questionnaires circulated to Grace, Jr. and the Company's other directors and officers for purposes of preparing the Company's 1993 Form 10-K and 1994 proxy statement contained a question concerning any transactions or proposed transactions since January 1, 1992, "to which the Company . . . was or is to be a party and . . . which you and/or any of your associates have direct or indirect interest."<(13)> The term "associates" was defined to include family members. Grace, Jr. knew about the November agreement in principle setting forth the terms and conditions of the proposed related-party transaction as well as Grace III's efforts to raise the required equity investment. Nevertheless, his response to this question on the D&O Questionnaire for the Company's 1993 Form 10-K and 1994 proxy statement was "None." During early 1994, Erhart and Bolduc reviewed drafts of WRG's 1993 Form 10-K and 1994 proxy statement, which omitted any discussion of the <(12)> During late 1994, WRG alleged that Grace III and HSC had misappropriated approximately $1.3 million belonging to GHSC to fund the operations of HSC. In 1995, WRG increased its claim by approximately $133,000. Pursuant to a negotiated settlement and arbitration award, Grace III and HSC repaid substantially all of the money claimed by WRG. <(13)> A questionnaire sent from WRG to GHSC in early 1994 requested substantially the same information concerning related-party transactions or proposed related-party transactions involving GHSC. In response to this request, an officer of GHSC incorrectly stated "Nothing to report". ======END OF PAGE 7======. proposed related-party transaction. Furthermore, Grace, Jr., in his capacity as chairman, Erhart, in his capacity as a director, and Bolduc, in his capacity as CEO, signed WRG's 1993 Form 10-K, which incorporated by reference the 1994 proxy's disclosure of related-party transactions. Although Grace, Jr., Bolduc, and Erhart knew about the proposed related- party transaction, they did not question the absence of disclosure concerning it. Even if Bolduc and Erhart, as each asserted, assumed that WRG counsel had considered whether the proposed transaction had to be disclosed,<(14)> they should not have relied on that assumption. They should have raised the issue of disclosure of this proposed transaction specifically with disclosure counsel.<(15)> As a result, WRG's 1993 Form 10-K (filed on March 28, 1994) and 1994 proxy statement (filed on April 11, 1994) failed to disclose any information about the proposed GHSC transaction. V. CONCLUSION Serving as an officer or director of a public company is a privilege which carries with it substantial obligations. If an officer or director knows or should know that his or her company's statements concerning particular issues are inadequate or incomplete, he or she has an obligation to correct that failure. An officer or director may rely upon the company's procedures for determining what disclosure is required only if he or she has a reasonable basis for believing that those procedures have resulted in full consideration of those issues.<(16)> Grace, Jr., Bolduc, Pyne, and Erhart did not fulfill their obligations under the federal securities laws. Grace, Jr., Bolduc, and Pyne knew or should have known that Grace, Jr.'s retirement benefits were not fully disclosed in drafts of WRG's 1993 proxy statement and 1992 Form 10-K. Grace, Jr., Bolduc, and Erhart knew or should have known that the proposed GHSC transaction was not disclosed in drafts of WRG's 1994 proxy statement and 1993 Form 10-K. As noted, Grace, Jr. failed to identify information relating to both of these issues in his D&O questionnaires. Grace, Jr., Bolduc, Pyne, and Erhart, given their positions as directors or senior officers and their particular knowledge of these transactions, should have inquired as to whether the securities laws required disclosure of this <(14)> WRG's Office of Legal Counsel participated in drafting the letter of intent between Grace III and GHSC. <(15)> Such action might have revealed that Grace, Jr. had incorrectly filled out his D&O questionnaire concerning the proposed transaction. <(16)> Procedures or mechanisms established to identify and address disclosure issues are effective only if individuals in positions to affect the disclosure process are vigilant in exercising their responsibilities. ======END OF PAGE 8======. information. This inquiry could have included seeking the specific and fully informed advice of counsel. If they were not reasonably satisfied as to the answers they received, they should have insisted that the documents be corrected before they were filed with the Commission.<(17)> WRG's violations resulted, in part, from its corporate culture, which reflected Grace, Jr.'s substantial influence over the Company.<(18)> Given this circumstance, Bolduc, Pyne, and Erhart should have been more attentive to issues concerning disclosure of information relating to Grace, Jr. or the Grace family. Bolduc, Pyne, and Erhart did not adequately follow through on fostering accurate and complete disclosure, which should have been their touchstone as members of WRG's board of directors or as officers of WRG. Since Grace, Jr.'s death, WRG has substantially revised the composition of its board of directors. Because of the unique circumstances presented here (including the death of Grace, Jr.), the Commission has determined not to issue cease-and-desist orders or take other action against Bolduc, Pyne, and Erhart in this matter. However, the Commission remains resolved to take enforcement action, where appropriate, against individual directors and officers who have violated or caused violations of the federal securities laws. <(17)> Bolduc, Pyne, and Erhart would each bear this responsibility even if, as each asserted, each assumed that WRG's internal mechanisms for preparing the relevant disclosure documents, including review of counsel, would address these issues. <(18)> There is some evidence that Bolduc recognized that Grace, Jr. exercised a degree of influence over WRG which was inappropriate for a public corporation and attempted to limit that influence. ======END OF PAGE 9======. September 30, 1997 DISSENT OF COMMISSIONER STEVEN M.H. WALLMAN In the Matter of W.R. Grace & Co. The Section 21(a) report In the Matter of W.R. Grace & Co.(the Report ) articulates a certain legal standard,<(19)> and then applies that standard to these facts. I take issue with that standard <(19)> As stated in the Report: The Commission is issuing this Report of Investigation to emphasize the affirmative responsibilities of corporate officers and directors to ensure that the shareholders whom they serve receive accurate and complete disclosure of information required by the proxy solicitation and periodic reporting provisions of the federal securities laws. Officers and directors who review, approve, or sign their company s proxy statements or periodic reports must take steps to ensure the accuracy and completeness of the statements contained therein, especially as they concern those matters within their particular knowledge or expertise. To fulfill this responsibility, officers and directors must be vigilant in exercising their authority throughout the disclosure process. ======END OF PAGE 10======. specifically to the extent it suggests that officers and directors must ensure the accuracy and completeness of company disclosures. Moreover, I do not agree that, when the appropriate legal standard is applied to the particular facts of this case as described in the Report itself, there has been a violation of law on the part of the three individuals cited. Certain of the disclosures of W.R. Grace & Co. (the Company ) relating to perquisites and related party transactions were not in compliance with applicable requirements. The Company has consented to the issuance of a cease and desist order with respect to these matters. As for individual liability, the record suggests that were J. Peter Grace, Jr. ( Grace, Jr. ) still alive, further examination as to whether he was a cause of the Company s improper disclosures would be in order. But in attempting to find other individuals who were responsible for the Company s conduct, I disagree with the Commission s conclusion that, on this record, J.P. Bolduc ( Bolduc ), Eben Pyne ( Pyne ) and Charles Erhart ( Erhart ) failed to fulfill their obligations under the federal securities laws.<(20)> To conclude otherwise is to impose strict liability for such a disclosure failure -- which simply is not the law. In this case, as stated in the Report, Grace, Jr. exerted an unusual amount of control over the Company. But the Company also had policies and procedures in place designed to satisfy the Company s disclosure obligations. The Company prepared and distributed appropriate director and officer questionnaires requesting information concerning, specifically, the receipt of perquisites and other benefits, and actual and proposed related party transactions. The Company also surveyed the chief financial officers of the Company s operating units for the same information. Draft documents were circulated among senior management (including Bolduc) and members of the board for their review and comment. A substantial number of people were involved in the creation or review of the relevant disclosure documents. From the record, there do not appear to have been any red flags or warnings to indicate that this system -- which included the employment of respected and competent securities counsel -- was breaking down, or was inadequate to produce documents that would comply with the federal securities laws. Yet, even though appropriate procedures were in place, and followed, insufficient disclosures were made. The Report states that the violations resulted from the conduct of Bolduc, Pyne and Erhart. In particular, according to the Report, these three individuals contributed to these violations by failing to take steps which they should have taken to ensure full and proper disclosure. The Report describes the specific knowledge that these three individuals <(20)> I understand that Grace, Jr. received compensation and perquisites that many believe were inappropriate, and that many believe the board or others in management should have taken action to reduce those benefits. But we at the Commission do not administer the corporate law, which is the proper venue for those complaints. ======END OF PAGE 11======. possessed of the relevant facts, their assumption that the system for the creation of disclosure documents was working appropriately, and their failure to reach behind and beyond the established procedures to inquire into the reasons for non-disclosure of information of which they were aware. Whether disclosure of certain matters is required under the federal securities laws is a legal (or mixed legal and factual) determination that ultimately has to be made by counsel after being informed of the relevant facts. Bolduc, Pyne and Erhart were aware of the documents relevant to the two questioned disclosures at issue in this case: the non-binding letter of intent with Grace, Jr. s son (of which Bolduc and Erhart were aware) and the retirement agreement with Grace, Jr. (of which Bolduc and Pyne were aware). The existence of these documents also was known to various attorneys in the Office of Legal Counsel ( OLC ) -- the office whose job it was to prepare disclosure in accordance with legal requirements, and the same office that drafted these documents. Bolduc, Pyne and Erhart were each aware that OLC was preparing disclosure based on these agreements. And Bolduc, Pyne and Erhart do not appear to have had any reason whatsoever to believe that the appropriate legal distinctions were not being made by OLC attorneys. The two questioned disclosures in this case both turn on fine line legal interpretations. Bolduc, Pyne and Erhart were not lawyers; they were not versed in SEC line item disclosure requirements; they were not possibly capable of making the fine judgment calls on whether disclosure of the items at issue here was sufficient or warranted. These decisions were the domain of counsel. Bolduc, Pyne and Erhart were not in a position to second-guess this type of disclosure and had every right to rely on a system designed to produce appropriate disclosure. If there were any attorneys in OLC who were unsure, or unaware, of the significance, or specifics, of the terms of either the retirement agreement or the non- binding letter of intent, and clarification was needed to make a determination of what the law required in terms of disclosure, then it was the responsibility of those attorneys to ask the appropriate questions. The issue then is simple: did legal counsel have the necessary facts to do the job that was required -- and if not, did these three individuals know (or, perhaps, should these three individuals have known) that counsel did not have the necessary facts. It is clear that disclosure counsel in particular was well aware of the facts regarding Grace, Jr. s retirement package since he was supplied with an actual copy of the retirement agreement -- an agreement filed publicly as an exhibit to the Company s Form 10-K. The agreement specifically provided that: All other benefits and arrangements currently provided [Grace, Jr.] as chief executive officer (including, but not limited to, the use of office space and corporate aircraft) will continue to be provided to [him]. ======END OF PAGE 12======. There was no change in the benefits being granted Grace, Jr. from previous years -- what he received as CEO he was to continue to receive in retirement.<(21)> Disclosure counsel, knowing these facts, then apparently made the determination that the description of these continued benefits as certain other benefits was adequate disclosure under Item 402(h) of Regulation S-K, and presented drafts with that disclosure to Bolduc and Pyne. Bolduc and Pyne knew that disclosure counsel had reviewed this certain other benefits language and the retirement agreement and appeared to be in possession of all relevant facts, including that Grace, Jr. was now retired. Bolduc and Pyne relied on disclosure counsel to make the legal determination as to what the law required regarding disclosure of the retirement agreement, including the level of detail regarding disclosure of any specific terms or conditions.<(22)> Given the plain language of both the disclosure and the relevant portion of the retirement agreement, I fail to see where the red flag exists that would require non-lawyers to question the explicit determinations of their disclosure counsel as to the level of disclosure detail. Moreover, details regarding the benefits in question -- all of which Grace, Jr. had been receiving while he was still Chief Executive Officer -- were not disclosed in previous filings with the Commission made prior to his retirement.<(23)> I would venture to say that many securities lawyers would not know that the Company s summary disclosure of these very same benefits in a later filing would somehow now be inadequate because of Grace, Jr. s retirement and change in status from executive officer and director to non-employee director/consultant. In fact, I would suspect that most securities lawyers would believe that less, not more, disclosure would be required upon such a change. It is simply not the law to require non-securities law experts to guess at the legal significance from a federal securities law disclosure standpoint of such a change in status and, therefore, be required to question the articulated judgment of their disclosure counsel and the resultant level of disclosure. With regard to the pending acquisition, the facts in the record are a bit murkier. It is not clear whether disclosure counsel was aware of the possible transaction. It is clear, however, that one or more lawyers in <(21)> In fact, approximately 75% of the cost of the other benefits supplied to Grace, Jr. in 1993 was attributable to the use of corporate aircraft. The fact that Grace, Jr. was receiving this benefit (although not the quantification of its value) was specifically referenced in the retirement agreement. <(22)> Again, if disclosure counsel was unsure of the specific details that might be relevant from a line- item disclosure perspective, then it was the responsibility of disclosure counsel to ask questions and obtain these details. <(23)> The Report s finding regarding the inadequacy of the disclosure of these benefits is limited to the 1992 Annual Report on Form 10-K and the 1993 proxy statement. The Report, however, does not address whether the Company was required to make these disclosures in any earlier or later filings. ======END OF PAGE 13======. OLC did know about the possible transaction because lawyers in that office drafted the non-binding letter of intent relating to it -- a transaction that many at the Company may have thought had little possibility whatsoever of consummation and that, in fact, never proceeded past the non-binding letter of intent stage. Obviously, if disclosure counsel had knowledge of the potential transaction, he made a legal determination as to whether the facts of this situation rose to the level of a currently proposed transaction -- a matter on which I believe lawyers might reasonably differ. But, no matter what, it is lawyers that make these decisions. CEOs and outside directors do not. Assuming that disclosure counsel was ignorant of the transaction, what results is a breakdown in the procedures within OLC itself, coupled with Grace, Jr. s failure to note the transaction in his directors and officers questionnaire, that led to the lack of disclosure (assuming disclosure was necessary). Bolduc or Erhart had no obligation to second guess their counsel on this matter and raise their hand to ask an affirmative question. The Report seems to suggest that had they done so, the disclosures might have been accurate (as we define accurate which, as mentioned, is not open and shut on these facts). But that is irrelevant. Here, there did not appear to be any reason for these senior managers to question their disclosure counsel and OLC s procedures in the first instance. Moreover, no case can be made that there is any disclosure so obviously required that non-securities lawyers should know that it would be needed regardless of whether counsel believes it to be or not. If the facts were different, it might be possible to conclude that these three individuals knew or had reason to know that the process had not worked appropriately, and there then might be reason to impose upon them a duty of inquiry that might rise to the level of querying and second- guessing counsel s judgments and disclosures. Examples might include knowing that Grace, Jr. had intentionally or otherwise not completed his questionnaire properly, or the presence of past mistakes or omissions in the Company s disclosure documents that would have alerted them to the fact that their disclosure process was failing. But those are not the facts of this record or as stated in the Report. The Commission is understandably wary about pursuing lawyers for their legal judgments. I share that wariness and believe that when professionals -- whether lawyers, accountants or others -- are acting in their capacity as such they must be given the opportunity to exercise their professional judgment without fear that a mistake, no matter how innocent -- or difference of judgment with the Commission -- will result in their being viewed as having violated the federal securities laws.<(24)> We need to recognize that in those circumstances where such judgments are made, there simply may be no person that will be individually liable. Holding the <(24)> See the dissent of Commissioner Johnson in In the Matter of David J. Checkosky and Norman A. Aldrich, Admin. Proc. File No. 3-6776, Securities Exchange Act Release No. 38183 (January 21, 1997), and the dissent of Commissioner Wallman in In the Matter of Robert D. Potts, Admin. Proc. File No. 3-7998, Securities Exchange Act Release No. 39126 (September 24, 1997). ======END OF PAGE 14======. client liable for not questioning the legal judgment of counsel is not the answer. If the Commission believes it has a case against these three individuals, then it should have brought it. The record, however, did not support any such case. There is a well-known maxim bad facts make bad law. Here, we have bad circumstances. The Report is only a Section 21(a) report -- negotiated by the parties in lieu of any further or other action of the Commission. It puts this matter to rest for these individuals. There is no appeal and no court ruling on the law. My hope is that the Report will be limited to the very specific facts of this very specific case, and go no further. I respectfully dissent. ======END OF PAGE 15======.