Disclaimer
The SEC as a matter of policy disclaims responsibility for any private publication or statement by any of its employees. The views expressed in this presentation are those of Joan E. McKown and are not necessarily shared by the Commission or its staff.
Today’s Topics
• Overview of Commission Actions –FY 2004
• New Initiatives
• Criminal Cases
Annual Caseload by Fiscal Year
0
100
200
300
400
500
600
700
19951996
19971998
19992000
20012002
20032004
Fiscal Year
FY 2004 Statistics 639 Total Cases Largest categories
Financial fraud and issuer reporting ( 28%) Broker-Dealer (22%) Offering fraud (15%) Investment Adviser/IC/Transfer Agents (15%) Insider Trading (7%) Market Manipulation (6%)
Fair Funds – over $4 billion
Financial Reporting and Issuer Disclosure Actions
FY 2004---- 179 casesFY 2003-----199 casesFY 2002-----163 casesFY 2001-----112 casesFY 2000-----103 casesFY 1999-------94 cases
Significant Cases
Qwest - $250 million penalty Computer Associates - $225 million in
restitution to shareholders and settlement with criminal authorities
Royal Dutch Shell- $120 million penalty Bristol-Myers Squibb - $100 million penalty Symbol- $37 million penalty
Disclosure to Shareholders
Executive Compensation and Self-Dealing Cases
GE- executive compensation not disclosed Disney- failed to disclose employment and
compensation of director’s family and payment to corporation owned by director
TV Azteca- failed to disclose 3rd party transactions benefited COB
Disclosure to Shareholders (cont)
Numbers Right but Disclosure Incomplete
Warnaco- Numbers OK in restatement, but failed to disclose real reason for restatement
Hollinger- Numbers OK in 10-K but failed to disclose unauthorized transfer of assets to insiders
Third Party Responsibility Royal Ahold- employees and agents of vendors
held liable for aiding and abetting massive fraud by signing and returning materially false audit confirmations sent to them by the auditors of U.S. Foodservice (sub of Royal Ahold)
AIG- sold an earnings management product and held liable for misstatements in customer’s financial disclosures (PNC)
NEW INITIATIVES
Tone at the Top
Gatekeepers
Corporate Governance
Cooperation
Tone at the Top
Violations of securities laws are frequently the product of :
Individual failings and Deficient corporate culture
Creating Good Tone at the Top
Make ethics part of company DNA- day to day lives of employees
Senior management’s conduct should reflect company’s ethical standards– no double talk
Don’t tolerate compliance risks for short term profitability
Employees should be able to safely voice ethical concerns
Be ready to handle problems openly and honestly Punish those who violate ethical standards- let other
employees know why they were punished Make sure Board is involved
Personal Responsibility
Recent Actions against Corporate Officers and Directors
Enron – Kenneth Lay, Jeff Skilling and Andy Fastow WorldCom – Bernard Ebbers and Scott Sullivan HealthSouth- Richard Scrushy Tyco – Dennis Kozlowski Hollinger- Conrad Black and David Radler Adelphia – the Rigas family Schering-Plough – Richard Kogan Gemstar/TV Guide – Henry Yuen and Elsie Leung Computer Associates – Sanjay Kumar Warnaco- Linda Wachner Symbol Technologies – Tomo Razmilovic Vivendi- Jean-Marie Messier Xerox – Paul Allaire, Richard Thoman, Barry Romeril
Focus on Gatekeepers
First Line of Defense• Auditors
• Lawyers
• Board of Directors
Auditors Grant Thornton- $1.5 million penalty for
misconduct in connection with audit of MCA Financial Corp.
PricewaterhouseCoopers- $2.4 million penalty for aiding and abetting the reporting violations of Warnaco
Ernst & Young- $2.1 million in disgorgement and PI in connection with audit of PeopleSoft
Attorneys
Recently, the Commission has increased is scrutiny of the role of lawyers in corporate frauds
In past 2 years, Commission has named lawyers as respondents or defendants in more than 30 of our enforcement actions
David Drummond - Google
Settled C&D Drummond charged with causing Google’s Section 5 violation Google issued over $80 million worth of stock options to
employees during a 12 month period Securities laws require companies issuing over $5 million in
options during 12 month period to provide detailed financial information to recipients or to register options and make disclosures to public
Drummond advised Google’s Board that it could continue to issue options due to an exemption to the law, but failed to inform the Board that the registration and disclosure obligations had been triggered or that there were risks in relying on the exemption
“Attorneys who undertake action on behalf of their company are no less accountable than any other corporate officer.”
Board of Directors
Look hard at the responsibility of the company’s independent directors
Continue to focus closely in our investigations on whether outside directors have lived up to their role as guardians of the shareholders they serve
Corporate Governance
Post investigation, Commission takes a look at the shape of company
Lingering issues are handled by settlements that include corporate governance enhancements
Corporate Governance Enhancements
Qwest - Financial fraud$250 million penalty Chief Compliance Officer who reports directly
to new compliance committee of Board of Directors
CCO shall respond to employee’s concerns regarding matters of ethics or questionable business practices
Corporate Governance Enhancements (cont.)
CharterSpecific undertakings regarding the reporting
of subscriber numbers to deal with the fraud of the case
Establish web site and Toll Free number managed by independent 3rd party for employees to contact
Cooperation
What Does Cooperation Mean?
21(a) Report: Self-policing Self-reporting Remediation Cooperation
Effort to influence conduct
Rewarding Good Behavior
At the same time the Commission is seeking penalties to effect changes in corporate culture – they are also seeking to reward companies that can demonstrate that they had or have made significant efforts to achieve a culture of compliance
Recently the Commission brought 11 cases in which we publicly recognized cooperation and remedial acts
No penalties were sought in these cases
No Penalty Cases Conseco Corrpro Charter VantageMed Corp. Senetek Gateway
Royal Ahold Performance Food
Groups Gold Banc BJ Services Hanover Compressor
ElectroScientic
• No case against ESI because of its “swift, extensive, and extraordinary cooperation in the Commission’s investigation.”
• Self –reported
• Conducted a through and independent internal investigation
• Shared results of investigation – including not asserting any applicable privileges and protections with respect to written materials
• Terminated responsible wrongdoers
• Facilitated Commission staff’s investigation overseas
• Implementing remedial actions designed to prevent recurrence of fraudulent activity
Goals of New Initiatives
Anticipate risk Create greater deterrence Change corporate culture and
tone at the top
Coordination with Criminal Authorities
In FY 2004, Commission coordinated with41 U.S. Attorney’s Offices and 8 state
prosecutorson 159 indictments or informations for 302
individualsverses 64 indictments or informations in
1999
Corporate Fraud Task Force