In a report released publicly today, the Government Accountability Office said that policies put in place during the tenure of former Securities and Exchange Commission Chairman Christopher Cox were thought within the agency to have hampered investigations, discouraged staff from pursuing penalties against corporations, and created an adversarial relationship between the Division of Enforcement and the agency’s commissioners.
In at least one case, the GAO said, SEC attorneys claim the commission insisted on levying a lower penalty than one company had already agreed to pay.
The GAO’s review of the SEC began last August, when Cox was still chairman, and concluded in February, shortly after he left office. Many of the policies described in the resulting report were publicly disavowed and overturned earlier this year by current Chairman Mary Schapiro, who received a draft of the report months ago. “No one should be heard credibly to question whether enforcement is a priority at the SEC,” said a newly confirmed Schapiro in a February 6 speech.
In that speech, Schapiro announced that she was overturning a “penalty pilot” program requiring that staff in the Division of Enforcement seek approval from the commission before levying fines against public companies involved in securities fraud. The GAO report released publicly today says that policy, enacted in 2007, as well as an earlier 2006 policy, convinced managers and investigative attorneys in the Division of Enforcement that corporate penalties “were highly disfavored” by the commission, and frequently resulted in delays.
Penalties fell 84 percent during the fiscal years roughly coinciding with Cox’s tenure, from a peak of $1.59 billion in fiscal-year 2005 to $256 million in fiscal 2008. Disgorgements fell 68 percent, from a fiscal-year 2006 peak of $2.4 billion to $774.2 million in fiscal-year 2008.
Before Cox joined the SEC in 2005, the four SEC commissioners, two Democrats and two Republicans, reportedly often split over corporate penalties. Former Republican commissioner Paul Atkins, in particular, had long complained that financial penalties against corporations represented a form of double jeopardy for shareholders already wounded by financial fraud.
Under Cox, in 2006, the SEC announced settlements with two companies, McAfee and Applix, but levied a penalty — $50 million — only against McAfee. (The SEC did file civil fraud charges against former Applix executives, including former CFO Walter T. Hilger.) At the time, the SEC explained, penalties would be assessed when a securities law violation improperly benefits shareholders, but that when “shareholders are the principal victims of the violations,” the commission “will seek penalties from the individual offenders” acting on behalf of the company.
In a subsequent 2007 speech, Cox announced that SEC enforcement staff would need to obtain approval from the commission for a penalty range before beginning settlement discussions.
The GAO report notes that both policies appear “neutral, in that they neither encourage nor discourage corporate penalties.” But according to GAO interviews with SEC staff, the policies were perceived as sending a message that the commission did not approve of corporate penalties. They also reportedly resulted in significant delays, and changes in the size of settlements. “[S]everal Enforcement attorneys told us that even when they presented cases in which a corporation had agreed to pay a penalty, the Commission might lower or eliminate the amount,” the report said.