Calling Off the Dogs

Recent signals from the SEC raise the question: Is Harvey Pitt taking a softer line on financial fraud?

As accounting frauds go, the problems at Seaboard Corp.’s Chestnut Hill Farms division amounted to garden-variety book-cooking.

Division controller Gisela de Leon-Meredith had been caught overstating deferred-farming-cost assets and understating farming expenses, inflating revenues by a total of $7 million between 1995 and the first quarter of 2000. When confronted by the internal audit staff, Meredith fessed up, and parent Seaboard, a Shawnee Mission, Kansas-based agribusiness, announced that it would restate its earnings last August. Even investors, who held Seaboard’s stock price steady, were apparently nonchalant about the fraud.

The case became extraordinary, however, when the Securities and Exchange Commission thrust it into the spotlight this past October — not as a warning to other companies, but as an example of good behavior on the part of Seaboard, which willingly handed over all of the evidence it had gathered from its internal investigation.

“When businesses seek out, self-report, and rectify illegal conduct, and otherwise cooperate with commission staff, large expenditures of government and shareholder resources can be avoided,” read the SEC’s official statement, or so-called 21(a) report, signed by recently installed chairman Harvey Pitt and commissioners Laura Unger and Isaac Hunt. In Seaboard’s case, that meant a cease-and-desist order for its Chestnut Hill Farms division was the end of the matter. No charges or penalties were levied against the company or its senior management; Meredith walked away without even a fine. Extrapolating from the case, the report set forth “some of the criteria [the SEC] will consider in determining whether, and how much, to credit self-policing, self-reporting, remediation and cooperation” in reducing the severity of enforcement actions.

What’s this? Is Harvey Pitt calling off the guard dogs that his predecessor, Arthur Levitt, so carefully bred? Just last December, the associate director of the SEC’s enforcement division, Paul Berger, was warning financial executives to “fasten their seat belts” as the agency ramped up its new Financial Fraud Task Force, a 14-member team charged with special accounting investigations. And while Berger outlined the very same tenets for cooperation that appear in the 21(a) report on Seaboard, the tone was more threatening than promising. Subpoenas for documents and testimony would be sent out faster than ever, with response dates that “are reasonable but less generous than you would like,” he noted.

By contrast, the October report signals a friendlier direction for the agency. Moreover, it was issued one day after Pitt’s genial speech to the American Institute of Certified Public Accountants, in which he invited companies to help “raise and resolve difficult issues with us, without fear that we will play ‘gotcha’ with you when you do.” You can’t blame financial executives for breathing a sigh of relief.

“We’re encouraged by this,” says CFO Rick Dutkiewicz, who took the reins at wireless-equipment maker Vari-L Co. after the SEC levied accounting fraud charges against the company’s former CFO and controller. “I’m delighted,” says one securities attorney who requested anonymity. “Before, it was tempting to adopt the bunker mentality when the SEC started investigating, because everyone was coming after you with the suspicion that you were a wrongdoer, and they were damn well going to prove it. Now they’re saying, if you cooperate, you’re going to be served in the process.”

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