Is The SEC Tough Enough?
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NEW YORK — The government appears to be getting tough on corporate shenanigans, securing $83 million in fines last week from Bank of America and General Electric for misleading investors.
Problem is, it's like a traffic cop ticketing a speeding car instead of its driver.
No one at Bank of America or GE has been ordered to pay for their misdeeds. If the Securities and Exchange Commission is serious about cracking down on illegal behavior, the people – not just companies – must be held accountable.
"If the SEC really wants to regain its title of top cop, then it will have to prosecute individuals involved," said Thomas Gorman, who chairs the securities litigation practice at the law firm Porter Wright Morris & Arthur and is author of the blog, SECactions.com. "Big fines (at companies) won't stop bad behavior."
To be sure, any action – even if it targets companies instead of people – is a step forward for the SEC. Over the last year, it has been rightfully criticized for failing to spot major frauds, including Bernie Madoff's Ponzi scheme, and warnings signs leading up to the financial crisis.
Since Chairman Mary Schapiro took over in late January, the agency has been on a tear. Since then, its enforcement division has opened about 525 investigations, up from 475 during the same period in 2008.
During a June congressional appearance, Schapiro said that the "SEC needs to send a clear message that corporate wrongdoing will not be tolerated, and penalties for securities violations will be stiff."
But to keep her word, the SEC must not only extract settlements out of companies but also individuals responsible for corporate misdeeds. That's fairest to shareholders, who get stuck with the bill for corporate fines even though they've often been hurt the most by corporate misconduct.
"Entities don't do bad stuff. People do bad stuff," said Lynn Turner, former chief accountant for the SEC in the late 1990s who is now a senior adviser to LECG, a legal, economic and forensic accounting firm. "To stop that, people need to know the SEC is going to come down on them like a ton of bricks."
In recent months, the SEC has been more aggressive at targeting individuals. The biggest cases have included the charges regulators filed against former executives of mortgage lender Countrywide Financial, including former CEO Angelo Mozilo, for allegedly failing to disclose the risks of its business practices to investors. Also sued was a former executive of Beazer Homes for allegedly committing fraud and misleading company auditors.
But the cases against Bank of America and GE haven't gotten that far, and they should. The settlements are laudable, but the SEC could make a bold statement by pursuing the individuals involved. That could include anyone from the executive suite to auditors, lawyers and more.
In the case of Bank of America, the Charlotte, N.C.-based company agreed Monday to pay $33 million to settle federal charges that it misled investors about Merrill Lynch's plans to pay $5.8 billion bonuses to its executives. The SEC claims that Bank of America, as it sought approval to buy Merrill, told investors that Merrill would not pay the year-end bonuses without Bank of America's consent. Bank of America made that "materially false and misleading" claim in a mailing to 283,000 shareholders of both companies, the SEC said.
The bank settled the charges without admitting or denying the allegations.
Merrill ended up paying $3.6 billion in bonuses in 2008, even though it lost $27.6 billion that year, a record for the firm. The bonuses amount to nearly 12 percent of the $50 billion that Bank of America paid for Merrill.
On Tuesday, General Electric agreed to pay $50 million to settle federal charges that it committed accounting fraud for two years earlier this decade.
The SEC said that GE violated U.S. securities laws four times between 2002 and 2003 when accounting for items like commercial paper funding and the sale of train locomotives and aircraft engine spare parts. The SEC said the accounting maneuvering helped GE maintain a string of earnings that beat Wall Street expectations.
"GE bent the accounting rules beyond the breaking point," said Robert Khuzami, head of the SEC's enforcement division, in a statement when the settlement was announced.
GE, which is based in Fairfield, Conn., doesn't admit or deny the allegations, but said in a statement that it corrected its financial statements for SEC filings made between 2005 and 2008. GE said two of the violations outlined by the SEC were intentional, but that the other two were negligent errors by company officials, some of whom have been disciplined or fired.
In this case, the SEC left the door open for future actions by saying the charges "conclude the SEC's investigation with respect to the company." GE declined to comment on individuals.
As for Bank of America, the SEC said the investigation was ongoing. Bank of America spokesman Scott Silvestri said the company continues "to cooperate with authorities on all of these investigations."
But New York federal judge Jed Rakoff has ordered a hearing on the bank's proposed settlement. In a statement late Wednesday, Rakoff said the settlement "would leave uncertain the truth of the very serious allegations made in the complaint."
What happens next in both these cases should be closely watched. The outcome will say a lot about whether SEC today is really as empowered as the investing public hopes it will be.
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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org.
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RACHEL BECK 08/ 7/09 04:25 PM ET Associated Press