SEC insiders say settlements in major fraud cases are stacking up while the five-member commission tries to find the answer. New SEC Chairman Christopher Cox wants the agency to agree on standards that would trigger fines against companies -- and to communicate those guidelines publicly. Hammering out the rules hasn't been easy: The commissioners, joined by staffers from the SEC's Enforcement Div. and Office of the General Counsel, have met behind closed doors four times this fall for two hours at a stretch. In a Nov. 29 interview with BusinessWeek, Cox said he hoped the SEC would be ready to issue guidance on corporate fines by yearend.
The new standards won't dictate the size of fines. But investor advocates see a strong chance that a GOP-dominated commission will use the rules to lower business' risk of megafines.
CLEAR SIGNALS. The effort is a deft political move by Cox. The chairman's two fellow Republicans rebelled in the SEC's private sessions against some of the the sky-high fines handed down under William H. Donaldson during the post-Enron cleanup. Cox figures that spelling out the rules will bring those mavericks on board and send unambiguous signals to Corporate America. "There needs to be a very clear understanding of what the law requires of us and, among Americans, what the law requires of them," says Cox.
Under Donaldson, the SEC extracted stiff penalties from corporations accused of financial fraud. WorldCom, now MCI (MCIP
), paid a $750 million fine for cooking its books. Time Warner (TWX
) forked over $300 million for inflating advertising revenue at America Online, while Qwest Communications (Q
) was slapped with $250 million in penalties for accounting fraud.
Until the 2002 Sarbanes-Oxley corporate reform law, the SEC had been reluctant to hit companies with big penalties. The funds flowed into Treasury's coffers, and conservatives argued that fines only hurt shareholders whose stocks had already been hammered by their company's misdeeds. Sarbanes-Oxley let the SEC use penalties to repay harmed shareholders, and the agency began to jack up fines. But since Cox was sworn in on Aug. 3, the SEC hasn't imposed civil penalties of more than $10 million against any business defendant -- leaving corporate lawyers in Washington puzzled about the chief's enforcement priorities.
THE HARD PART. Commissioners Paul S. Atkins and Cynthia A. Glassman, both Republicans, have argued that fat fines on companies that cook the books are counterproductive, even when the funds are earmarked for shareholders. They want the SEC to focus on penalizing executives who engineer corporate frauds. Commissioner Roel C. Campos, a Democrat, has countered that stiff fines can be an effective deterrent to wrongdoing. The two newest commissioners -- Republican Cox and Democrat Annette L. Nazareth -- haven't tipped their hands.
Already, a legal review by the commissioners has concluded that Congress intended for the agency to deter corporate fraud by fining companies. The hard part will be deciding what guideposts the SEC should use in imposing the penalties. "There's got to be a series of objective measures so there can be continuity from case to case," says Cox.
Easier said than done, warn some legal scholars. A good place to start, says Donald C. Langevoort, a law professor at Georgetown University, is to look at whether a company benefited from its wrongdoing. Enron boosted its stock by hiding its rapidly growing debt, and thus profited from its wave of takeovers. Commissioners will debate vigorously, Langevoort says, how much credit a company should get for dumping its CEO, waiving attorney-client confidentiality, or taking other steps to cooperate with the SEC. "You're not going to come up with a computer program that spits out an answer for every case," Langevoort warns.
But corporate lawyers, who pine for consistency, will be glad for any signposts that Cox & Co. put up. "There needs to be an understanding that certain behaviors will get certain punishments and that you can't cut special deals," says Diane E. Ambler, a partner at law firm Kirkpatrick & Lockhart Nicholson Graham in Washington. But striking the right balance -- and making sure that loose standards don't encourage companies to cut corners -- could tie the SEC up for weeks to come.
Borrus is a correspondent in BusinessWeek's Washington bureau