New SEC Guidelines Shield Shareholders
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New SEC Guidelines Shield Shareholders
Sat Jan 28, 12:55 PM ET
NEW YORK - How can the Securities and Exchange Commission punish corporate crime without punishing shareholders? The scandals of the bubble years ended with record corporate penalties and restitution payments. WorldCom Inc. alone was ordered to repay $750 million. Under laws passed after the scandals, the fines were returned to the shareholders whose investments evaporated when the companies crashed and their stock prices plunged.
But even hundreds of millions of dollars in fines at the corporate level did little to compensate shareholders.
So the SEC says it may turn to the individuals convicted of corporate wrongdoing for further restitution for investors.
At the beginning of January, the SEC issued a statement on financial penalties for corporations, saying it will look at "whether the issuer's violation has provided an improper benefit to shareholders, or conversely whether the violation has resulted in harm to shareholders.
"Where shareholders have been victimized by the violative conduct, or by the resulting negative effect on the entity following its discovery, the commission is expected to seek penalties from culpable individual offenders acting for the corporation," the statement said.
The guidelines are meant to bring "clarity, consistency and predictability" to the SEC's enforcement efforts, agency Chairman Christopher Cox said at a news conference.
As SEC Commissioner Paul S. Atkins said in a Jan. 19 speech before the Securities Regulation Institute in San Diego, "In financial fraud cases, shareholders, who are the ultimate owners of the corporations on which we impose these penalties, may have already been punished through reputational and stock-price damage."
Atkins called the SEC's statement "a more rational and systematic approach to deciding whether to impose penalties on shareholders."
Not everyone is impressed.
"The statement is so general, it really doesn't tell you much," said Peter J. Henning, a former senior attorney for the division of enforcement at the SEC who is now a law professor at Wayne State University in Detroit. "It's kind of what everyone knew already: If you cooperate, it's going to help you. If senior management were involved, it's going to be a problem. How extensive the wrongdoing was and what timeframe it covered will be considered."
There's been a push-pull within the SEC on penalties, with the commission's Democratic members in favor of penalties and its Republican members opposed.
For investors, there is no punishment for corporate crooks that will make them whole.
Take the case of John Rigas, the founder of Adelphia Communications Corp., which imploded after Rigas and his sons diverted $1.9 billion from the company for personal use. John Rigas and son Timothy were sentenced to jail terms last year. Both are appealing, but even if they do their time, shareholders in Adelphia, a cable company that went bankrupt, will still have dramatically shrunken portfolios.
The SEC imposed fines and restitutions totaling $715 million from Adelphia, but it didn't come close to pulling investors out of the red. The company's peak market cap, before the scandals and subsequent bankruptcy, was $8.4 billion.
What's the best way to punish corporate crimes?
"I wish I knew," Henning said. "To this point, no one has come up with one. ... It's so much easier if someone steals your purse."
