SEC Lets Top Execs In Fraud Settlement Go Free
Neil Weinberg, 11.03.09, 2:13 PM ET
Evidence of how easy it remains for corporate bosses to walk away from the scene of financial scandals and go on with their lives arrived in a recent e-mail pitch from a publicist for an outfit called Daylight Forensic & Advisory.
The New York City firm is one of dozens aiming to cash in on the white-collar crime wave by claiming it can battle financial wrongdoing. For its part, Daylight sees itself as expert in "the Madoff investigations, Wall Street collapse and the calls for financial reforms." (See: "Giuliani Seeks To Cash In On Wealthy Investor Fears.")
Expert? Well, at least one Daylight exec does have experience in corporate shenanigans. As Forbes pointed out two years ago, Dennis Sheehan, the guy Daylight co-founders Ellen Zimiles and Joseph A. Spinelli have hired as their chief financial officer, formerly oversaw a financial scandal at Bisys Group. On Sheehan's watch, first as president and chief operating officer and then as chief executive, Bisys officers and executives "knowingly or recklessly" overstated pretax income by $180 million between 2001 and 2003, according to the Securities & Exchange Commission. (See: "Those Who Can't Do, Teach.")
Paying the SEC to go away cost Bisys' shareholders $25 million. Bisys shelled out another $65.5 million to settle a class action against the company, Sheehan and others. Following standard practice, the company neither admitted nor denied wrongdoing in either case. Its stock proceeded to tank and Bisys was sold to Citigroup in 2007. Sheehan walked away with $5.8 million in total pay over the three years when the accounting fraud occurred. Andrew C. Corbin, Bisys' chief financial officer at the time, left with an estimated $1.8 million in pay over the three years.
For a time after leaving Bisys, Sheehan taught accounting, finance and economics at Adelphi University in addition to working at Daylight. Corbin left to become chief financial officer at HLTH, which owns WebMD. He eventually ended up as the chief executive of Sage Software, yet another public company, until his abrupt departure two years ago.
Contacted recently via e-mail about Sheehan's background, Daylight co-founders Zimiles and Spinelli, and Andrea Bonime-Blanc, its general counsel and chief compliance officer, did not respond. Sheehan referred a phone call to Daylight's PR firm, which did not provide a statement for publication.
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Daylight's Web site doesn't shed much light on Sheehan's background either. It describes his Bisys experience as a time when he "served as the president and chief executive officer of a leading provider of financial services outsourcing solutions."
When Forbes first looked into the Bisys case, it was with the notion that only people--not corporations--are capable of "knowingly and recklessly" perpetrating fraud. Pressed on the matter in 2007, the SEC insisted that the $25 million it extracted from Bisys' shareholders was not the end of the story and that its investigation continued.
Contacted last week, Leslie Kazon, assistant director of the SEC's New York Regional Office, conceded that the agency never did take further action in the Bisys matter. The SEC contacted Forbes after this story was originally published to state that last year it did, in fact, take injunctive action against two lower-level employees for violating antifraud and internal control provisions of the Exchange Act of 1934. Those employees allegedly were involved in “encouraging and directing personnel in the Insurance Services’ finance department to meet earnings targets by applying a variety of fraudulent or otherwise improper accounting practices,” the SEC said at the time. The lower-level employees agreed to the SEC’s findings and penalties without admitting or denying wrongdoing.
The Bisys case resounds on a couple of levels, given the recent wave of corporate fraud involving the likes of hedge funds at Bear Stearns, now part of JPMorgan Chase, and Galleon Group's alleged insider trading ties to Advanced Micro Devices and IBM. First, is the SEC's response--punish shareholders and let off the real miscreants scott-free. This closely parallels its ongoing case against Bank of America. Following its well-worn pattern, the SEC in that case got the bank to agree to pay $33 million for allegedly misleading its shareholders about billions of dollars in bonuses that were being paid to Merrill Lynch.
All the SEC needed to claim another victory against corporate crime was a rubber stamp from a federal judge. That's when Jed S. Rakoff, U.S. District Judge for the Southern District of New York, threw a monkey wrench into the works.
The Bank of America settlement, Rakoff wrote, "suggests a rather cynical relationship between the parties: The SEC gets to claim that it is exposing wrongdoing … management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all of this is done at the expense, not only of the shareholders, but also of the truth."
The other parallel in the Bisys case is to Bernard Madoff. Transcripts of jailhouse interviews with the Ponzi scamster released in recent days quote him as saying that if the SEC had applied even the most basic anti-fraud tools, it would have discovered his crimes years earlier.
With Bisys, the SEC is guilty of an even more egregious dereliction of duty. In this case its own findings declared that the real cause of the Bisys fraud was the pressure put on lower-level employees by ”senior management’s focus on meeting aggressive, short-term earnings projections.” The misdeeds, according to the SEC, “were the product of a corporate focus on meeting aggressive, short-term earnings targets and a lax internal control environment.”
That said, the SEC has not gone after a single top-level executive. Instead, it has permitted the chief executive to go off and work as a fraud-fighter while the chief financial officer responsible took up the same position at other public companies. What we have as a result is another case of the SEC punishing the innocent and declaring victory.
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