SEC enforcement actions are down and reasons vary

Some suggest crackdown on crime is having effect

August 03, 2004|By Jonathan Peterson | Jonathan Peterson,LOS ANGELES TIMES

WASHINGTON - For the first time since corporate fraud emerged as a national issue, enforcement actions by the Securities and Exchange Commission are slipping - down 14.7 percent in the current fiscal year.

Regulators aren't sure what's driving the trend, but it has triggered speculation that the crackdown on corporate crime may be having an effect on executive behavior. SEC Chairman William H. Donaldson called the decline "encouraging."

Donaldson was quick to add that it was too early for the SEC to declare victory in the war on corporate corruption. "One swallow a summer does not make," he said in a recent interview.

Securities lawyers and others involved with the SEC say that the spectacle of executives being handcuffed and hauled off to jail may have sobered many would-be cookers of the books. Regulators say there is no way to prove that.

"It's difficult to measure your deterrent effect," said Linda C. Thomsen, deputy enforcement director at the SEC.

In the nine months ending June 30, the SEC imposed 378 enforcement actions against companies and individuals. These included fines, forfeitures of profits, suspensions of corporate directors, asset freezes and other punishments.

In the same period last year, the SEC undertook 443 enforcement actions.

At the current pace, the SEC will log 504 actions for the 2004 fiscal year, which ends Sept. 30. That would compare with 679 enforcement actions in fiscal 2003 and 598 in fiscal 2002, when the surge in penalties began.

Enforcement actions were 484 in 2001. The next year, a series of scandals at Enron Corp., WorldCom Inc. and other companies made corporate wrongdoing a broad public concern.

Some experts speculate that the pace of SEC sanctions reveals more about changing enforcement strategies and a load of complex cases than it does about corporate ethics.

Under Donaldson, SEC investigators have invested more time than in the past to explore potential problems in entire industries, a tactic that has possibly contributed to the dip in the overall number of enforcement actions.

The approach represents an effort to answer critics who say the agency has deployed its limited, if growing, resources in a scattershot manner and failed to spot emerging problems.

The SEC's image took a beating last year after revelations of widespread trading abuses in the mutual-fund industry. The scandal was exposed not by the SEC but by New York Attorney General Eliot Spitzer.

Donaldson has made it a pet goal to improve the SEC's ability to anticipate problems by conducting methodical sweeps of industries suspected of misbehavior.

In recent months, investigators have examined the use of stock options by high-tech companies, bookkeeping practices in the video-game industry, statements of oil and gas reserves by energy companies and possible manipulation of subscriber numbers by cable companies, according to SEC officials.

(After the late start against mutual funds, SEC enforcers came in aggressively, imposing 31 actions in the past nine months against errant fund companies, including fines, lawsuits and forfeitures of profits.

The SEC also has leaned hard on companies to cooperate with its investigations - fining Lucent $25 million and Bank of America $10 million for failing to do just that.

And it sent a stinging message to major accounting firms when it hit Ernst & Young with a six-month ban on performing audits for new, publicly traded companies. The SEC had found that Ernst & Young had flouted the rules of auditor independence when it formed a joint business with client PeopleSoft Inc.

SEC enforcement numbers have been rising in select areas, such as freezing assets it considers at risk for investors and suspending trades in stock where it is concerned about fraud.

"Any lawyer who practices in this area will tell you that the [SEC's] Division of Enforcement has never been busier," said William R. Baker III, a securities attorney with Latham & Watkins LLP in Washington and a former associate director of the division.

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