<click> In the Report, the Commission articulated a framework for evaluating a public company’s cooperation in determining whether and how to charge violations of the federal securities laws. <click> The Commission identified when it would give credit for extraordinary cooperation <click> But its important to make clear that the report is not an immunity program like those in the Defense Contracting and Antitrust area, e.g. There is conduct that is so egregious that no amount of cooperation will earn a pass <click> The report is designed to explain and expand the spectrum of outcomes from an investigation and enforcement action <click> Help investors and the public generally understand why cases are charged and remedies are sought. <click> At the same time, it allows the SE to provide credit for real cooperation and to impose tougher sanctions in the worst cases <click> Report makes clear that the paramount issue in every enforcement judgment is what best protects investors. <click> Motivated by a belief that when businesses seek out, self-report, and rectify illegal conduct, and cooperate with Commission staff large expenditures of government and shareholder resources can be avoided. <click> Report strongly emphasizes the importance of putting compliance procedures into place before misconduct occurs. <click>
<click> The Commission outlined four broad measures it would look at in measuring a company’s cooperation. <click> Self-policing prior to the discovery of the misconduct, including establishing effective compliance procedures and an appropriate tone at the top; <click> Self-reporting of misconduct when it is discovered, including conduct a thorough internal investigation of the nature, extent, origins and consequences of the misconduct, and promptly, completely, and effectively disclosing the misconduct to the public, to regulators, and to self-regulators; <click> Remediation , including dismissing or appropriately disciplining wrongdoers, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, and appropriately compensating those adversely affected; and <click> Cooperation with law enforcement authorities, including providing the Commission staff with all information relevant to the underlying violations and the company’s remedial efforts. The non-exclusive list of criteria is set forth in greater detail in the Report.
And just as there is credit for cooperation, there also consequences for non-cooperation: <click> We are certainly less tolerant of delaying tactics by those we investigate. We insist on, and enforce, tighter deadlines for production of documents and appearances for testimony. When these deadlines are unreasonably disregarded, we will seek to enforce our subpoenas in federal court. Already this fiscal year, the Commission has brought 14 18 actions to enforce subpoenas for documents or testimony. <click> This can result in unfortunate adverse publicity– some of you may recall Andrew Fastow, former CFO for Enron who refused to appear for testimony, and then had to schedule a press conference at which is lawyer wouldn’t let him speak. <click> We’ll also insist on tougher sanctions to resolve enforcement matters Couple of cases I’ll talk about <click> AA $7 million <click> Xerox $10 million/ press release <click> Last year the SEC obtained a jury verdict that David Lipson, CEO and Chairman of Supercuts, Inc., committed fraud when he sold 365,000 shares of Supercuts stock on the basis of material nonpublic information Court ordered relief: Permanent antifraud injunction Disgorgement of losses avoided: $621,875 Prejudgment interest on disgorgement: $348,097 Civil penalty of three times the amount of losses avoided: $1,865,625 Unusually high penalty warranted because of need to deter Lipson, who otherwise would be likely, in the Court’s opinion, to commit future violations. <click>
Before I turn to a discussion of some of the cases that we filed, I want to touch briefly on the Sarbanes Oxley Act and its ramifications for public companies and for the Division of Enforcement. The Act will effect significantly the work of the SEC You could have an entire conference on the Act, which was signed into law by President Bush on July 30, 2002, less than a month after his speech in NY. <Click>Perhaps of most significance, the Act changes dramatically the regulation of accounting in the United States It establishes the Public Company Accounting Oversight Board to enforce professional standards, ethics, and competence for the accounting profession; It also has provisions that strengthen the independence of firms that audit public companies; <Click> The Act includes measures that increases corporate responsibility and the usefulness of corporate financial disclosure; Among other things, the Act amends the securities laws to require reporting on a rapid and current basis information required by the SEC. Picking up on recent action by the SEC, the Act requires that the CEO and CFO to certify compliance with the reporting requirements of the Exchange Act. Pro Formas must be reconciled to GAAP. In the Corporate Governance Area many of the listing requirements of the NYSE and Nasdaq are codified and would apply to all public companies. The Act provides protections to internal whistleblowers. <Click> The Act provides for new and increased penalties for corporate wrongdoing; For example, if a company must must restate because of misconduct, the Act specifically provides that the CEO and CFO must reimburse the issuer for any bonus or equity based compensation. The Act creates a new federal crime for failing to retain audit and review workpapers. Another new crime is defrauding shareholders, and carries a maximum sentence of 25 years. <Click> The Act contains provisions designed to Protects the objectivity and independence of securities analysts; and requires new rulemaking in the area.p <Click> Finally, the Act significantly increases the SEC budget, and provides for a larger staff—needed because un addition to increased responsibilities 9 separate studies and over 30 rulemakings. <click>
Complaint alleges that WorldCom capitalized rather than expensed approximately $3.8 billion of its costs, in violation of GAAP.
Within 48 hours, Commission obtained a court order preventing destruction of documents, prohibiting extraordinary payments to current and former officers, directors and other employees, and appointing a corporate monitor.
Subsequently filed cases against Controller David Myers and Director of General Accounting Buford “Buddy” Yates. Investigation continues.
Commission sued Xerox on April 11, alleging undisclosed accounting actions that accelerated revenue recognition of equipment by over $3 billion and increased pre-tax earnings by $1.5 billion over a four-year period. Over 30% of pre-tax earnings resulted from undisclosed accounting actions.
Among other things, shifted leasing revenue from service/financing to hardware so could accelerate revenue recognition.
Commission filed charges against Adelphia, its founder (John J. Rigas), his three sons, and two other senior executives, alleging one of the most extensive financial frauds ever to take place at a public company.
Property unlawfully taken from Adelphia through undisclosed related-party transactions
Officer and Director bars
Permanent anti-fraud injunctions
Civil penalties from each defendant, including Adelphia.
Penalty against company sought because Adelphia failed early on to cooperate with the Commission's investigation and actually allowed the fraud to continue until the Rigas family lost control over the company's conduct.
Commission charged former CEO, CFO, and Vice Chairman with fraud in connection with wide-ranging accounting fraud scheme that enabled the company to overstate its income in every quarter from May 1997 to May 1999.
Non-fraud cease-and-desist settlement for company (based on cooperation with Commission, including declining to assert attorney-client privilege in giving access to internal investigation conducted by company counsel).
Commission found that Edison, despite technical compliance with GAAP, inaccurately described aspects of its business in its SEC filings, in violation of the securities laws.
Specifically, Edison failed to disclose that a substantial portion of its reported revenues consist of payments that never reach Edison. Funds are instead expended by school districts to cover costs of operating schools managed by Edison.