Certainly, vigilant companies are the main line of defense. If a job candidate has been barred, a background check usually finds enough other career anomalies to scuttle his or her chances. Although recruiters don’t routinely check the SEC site to see if a candidate has been barred, Walt Williams, a partner at executive-search firm Battalia Winston International, says, “We would usually trip over that information in other ways when we check references. If there were any previous problems at all, never mind a bar, they could be withdrawn from consideration.”
But while barred individuals are less likely to be hired directly into large public companies, they can sneak back into executive jobs relatively easily by rising through the ranks at smaller firms, which often don’t perform thorough background checks.
If companies don’t block barred individuals from officer and director posts, chances are slim that the SEC’s spot-checks will. These reviews fail to catch even the most blatant offenders.
Take the case of Marlen V. Johnson. In 1996, a securities-fraud settlement barred Johnson from serving as an officer and director after he was charged with masterminding a stock-manipulation scheme. In late 2002, the SEC filed a motion to find Johnson in contempt of court for serving as president, secretary, and director of publicly traded R&RX Group Inc. (and two previous incarnations of the firm). During his tenure as president of R&RX Group, Johnson filed at least three quarterly reports and one annual report with the SEC, signing each with his own name and listing his position as president of the company. It took the commission at least a year to realize what was happening.
When the SEC finally nailed Johnson, it wasn’t through a spot-check. It was because a “third party provided us with information,” says Jeffrey B. Norris, trial counsel in the SEC’s Fort Worth district office, who prosecuted Johnson’s contempt case. Johnson was also in comtempt for not paying penalties associated with the O/D violation, but the SEC laid that complaint to rest—without collecting the fines.
It’s hard to say how many similar cases exist. “We’ve made these bars more of a central point of our enforcement program,” says Norris. “But I have no idea how often they are being violated.”
The Hunt Is On
Most people who are given an O/D bar would never dare ignore it. But reliance on an honor system has its drawbacks; most notably, it depends on people who have already broken the law to keep their promise. And as the Johnson case shows, those willing to break the law are little deterred by the threat of a contempt charge.
“The system relies on people agreeing to [the bar] and risking severe sanctions if they violate it,” says Hibbard. Moreover, he says the rules assume that most companies would not risk their reputations by allowing a barred individual on their board or in the C-suite, even though they could, legally, hire them for other corporate positions. “It would be a rare public company that would use a back door to put a barred person back into a position of power,” he says.