The Securities and Exchange Commission

[thepennyking]

SEC gets tough on companies hindering investigations

By Kathleen Day / The Washington Post


WASHINGTON--The Securities and Exchange Commission is sending a pointed message to corporate America: Cooperate during federal investigations ... or else.

Starting with a warning in the fall of 2001 and bolstered more recently by a series of civil cases and millions of dollars in penalties, the SEC has signaled a tougher policy. The agency is not only enforcing the nation's securities laws, but also vigorously reacting to how well companies and individuals help or hinder federal probes, according to lawyers who follow its enforcement actions.

``If the legal and corporate community hasn't gotten the message, they are deaf,'' said David Gourevitch, a securities fraud lawyer, former SEC enforcement attorney and former New York state securities prosecutor. ``There's tremendous pressure on corporations and individuals to cooperate in investigations. The SEC is out there pounding that message whenever they can.''

The strategy is part of a series of new tactics the agency has implemented. With business scandals producing daily headlines about corporate misconduct that has cost the investing public billions of dollars, the SEC has sometimes appeared to be playing catch-up to the more aggressive efforts of others, especially New York Attorney General Eliot Spitzer. But now it is moving on many fronts, including nailing companies that try to derail investigations, according to lawyers in and outside the agency.

The Justice Department's criminal obstruction-of-justice case against Arthur Andersen LLP two years ago--which put the accounting firm out of business--and its more recent case against Martha Stewart have been well publicized. In both cases the Justice Department lawyers won on allegations of a coverup during a federal probe of alleged securities law violations, not on charges involving the alleged violations themselves.

The SEC's change in policy has made fewer headlines than those Justice Department cases, but it has been heard loud and clear in the corporate legal community. ``There's no doubt the SEC staff have substantially increased the penalties for those companies that they believe haven't cooperated,'' said William R. Baker III, former associate director of enforcement at the SEC and now a partner at Latham & Watkins LLP.

The most recent example was the announcement this week by Lucent Technologies Inc., which said it agreed in principle, without admitting or denying guilt, to pay a $25 million penalty to the SEC as an addition to a previous settlement of investigation into the company's accounting practices. The SEC's staff didn't impose a fine in connection with the alleged violations, accepting instead a promise from the company to stop the practices in question. Rather, the entire $25 million penalty was imposed because of what the SEC staff ``considered Lucent's lack of cooperation during the investigation and certain actions taken by the company subsequent to the agreement in principle,'' according to a Lucent press release.

Last week the SEC fined Bank of America Corp. $10 million for withholding and destroying documents requested in connection with an ongoing investigation into whether the company's brokerage unit engaged in illegal trading based on inside information about its upcoming analysts' reports.

A number of companies in the past two years, including Xerox Corp. and American International Group Inc., also have been hit, as part of broader settlements of alleged securities violations, with large penalties that the SEC made clear could have been avoided if the firms had been helpful.

Several investment banks, including Deutsche Bank, Goldman Sachs, Morgan Stanley and a unit of Citigroup Inc., were fined $8.25 million for failing to properly maintain documents such as e-mails that the SEC requires them to keep so federal regulators can properly oversee the companies.

``Any effort to impede an SEC investigation may itself become the subject of an enforcement proceeding,'' Stephen Cutler, head of the SEC's enforcement division, said in an interview.

In addition to penalizing companies that refuse to cooperate, the SEC has implemented a strategy called ``sweeps'' to try to detect problems before they become pervasive in an industry. For example, according to sources familiar with the probes, the SEC launched a review of oil companies' financial statements in recent months, following revelations by Royal Dutch/Shell Group that the multinational oil company overstated its oil and gas reserves. Similarly, the SEC has launched a review of the grocery industry following accounting errors at Royal Ahold NV, the owner of Giant Food.

The SEC won't confirm or deny such investigations, but sources say that the willingness of companies to be forthcoming is essential for such large-scale reviews to be efficient and effective in rooting out fraud.

The emphasis on cooperation was formally unveiled in the fall of 2001, when the SEC, under then-Chairman Harvey Pitt, issued a report saying the agency, when deciding what charges to bring and penalties to impose, would weigh factors such as how responsive a company was during a probe. The issue was so important, SEC sources say, that Pitt wrote much of the report himself, rather than directing agency attorneys to draft it.

The Seaboard decision--which got its name from the company involved in the decision--has become a hallmark of agency policy that securities lawyers describe as a carrot-and-stick approach. It emphasizes that companies can reduce charges against them, and possibly even avoid being charged with securities fraud altogether, if they help SEC staff identify individuals who are at fault.

Some attorneys say the agency needs to make sure that the rights of those under investigation are not compromised by the approach.

``In the carrot-and-stick approach, the question for lawyers is: Is there any room for advocacy on behalf of the client or will the SEC characterize that as obstruction?'' Baker said.

Cutler, in response to such questions, says that the SEC welcomes ``zealous advocacy'' because ``it helps us frame better cases and it makes sure we get to a more just result.'' He said that obstruction--behavior that interferes with justice because it interferes with getting at the truth--is clearly different.