Disclaimer
The SEC as a matter of policy
disclaims responsibility for any private
publication or statement by any of its
employees. The views expressed in this
presentation are those of Joan E.
McKown and are not necessarily
shared by the Commission or its staff.
Today’s Topics
• Overview of Commission Actions
–FY 2004
• New Initiatives
• Criminal Cases
Annual Caseload by
Fiscal Year
700
600
500
400
300
200
100
0
19 19 19 19 19 20 20 20 20 20
95 96 97 98 99 00 01 02 03 04
Fiscal Year
FY 2004 Statistics
 639 Total Cases
 Largest categories
 Financial fraud and issuer reporting ( 28%)
 Broker-Dealer (22%)
 Offering fraud (15%)
 Investment Adviser/IC/Transfer Agents (15%)
 Insider Trading (7%)
 Market Manipulation (6%)
 Fair Funds – over $4 billion
Financial Reporting and Issuer
Disclosure Actions
FY 2004---- 179 cases
FY 2003-----199 cases
FY 2002-----163 cases
FY 2001-----112 cases
FY 2000-----103 cases
FY 1999-------94 cases
Significant Cases
 Qwest - $250 million penalty
 Computer Associates - $225 million in
restitution to shareholders and settlement with
criminal authorities
 Royal Dutch Shell- $120 million penalty
 Bristol-Myers Squibb - $100 million penalty
 Symbol- $37 million penalty
Disclosure to Shareholders
Executive Compensation and Self-Dealing Cases
 GE- executive compensation not disclosed
 Disney- failed to disclose employment and
compensation of director’s family and payment
to corporation owned by director
 TV Azteca- failed to disclose 3rd party
transactions benefited COB
Disclosure to Shareholders (cont)
Numbers Right but Disclosure Incomplete
 Warnaco- Numbers OK in restatement, but
failed to disclose real reason for restatement
 Hollinger- Numbers OK in 10-K but failed to
disclose unauthorized transfer of assets to
insiders
Third Party Responsibility
 Royal Ahold- employees and agents of vendors
held liable for aiding and abetting massive fraud by
signing and returning materially false audit
confirmations sent to them by the auditors of U.S.
Foodservice (sub of Royal Ahold)
 AIG- sold an earnings management product and
held liable for misstatements in customer’s
financial disclosures (PNC)
NEW INITIATIVES
 Tone at the Top
 Gatekeepers
 Corporate Governance
 Cooperation
Tone at the Top
Violations of securities laws are frequently the
product of :
 Individual failings and
 Deficient corporate culture
Creating Good Tone at the Top
 Make ethics part of company DNA- day to day lives of
employees
 Senior management’s conduct should reflect company’s
ethical standards– no double talk
 Don’t tolerate compliance risks for short term
profitability
 Employees should be able to safely voice ethical
concerns
 Be ready to handle problems openly and honestly
 Punish those who violate ethical standards- let other
employees know why they were punished
 Make sure Board is involved
Personal Responsibility
Recent Actions against Corporate
Officers and Directors
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Enron – Kenneth Lay, Jeff Skilling and Andy Fastow
WorldCom – Bernard Ebbers and Scott Sullivan
HealthSouth- Richard Scrushy
Tyco – Dennis Kozlowski
Hollinger- Conrad Black and David Radler
Adelphia – the Rigas family
Schering-Plough – Richard Kogan
Gemstar/TV Guide – Henry Yuen and Elsie Leung
Computer Associates – Sanjay Kumar
Warnaco- Linda Wachner
Symbol Technologies – Tomo Razmilovic
Vivendi- Jean-Marie Messier
Xerox – Paul Allaire, Richard Thoman, Barry Romeril
Focus on Gatekeepers
First Line of Defense
• Auditors
• Lawyers
• Board of Directors
Auditors
 Grant Thornton- $1.5 million penalty for
misconduct in connection with audit of MCA
Financial Corp.
 PricewaterhouseCoopers- $2.4 million penalty
for aiding and abetting the reporting violations
of Warnaco
 Ernst & Young- $2.1 million in disgorgement
and PI in connection with audit of PeopleSoft
Attorneys
 Recently, the Commission has increased
is scrutiny of the role of lawyers in
corporate frauds
 In past 2 years, Commission has named
lawyers as respondents or defendants in
more than 30 of our enforcement actions
David Drummond - Google
Settled C&D
 Drummond charged with causing Google’s Section 5 violation
 Google issued over $80 million worth of stock options to
employees during a 12 month period
 Securities laws require companies issuing over $5 million in
options during 12 month period to provide detailed financial
information to recipients or to register options and make disclosures
to public
 Drummond advised Google’s Board that it could continue to issue
options due to an exemption to the law, but failed to inform the
Board that the registration and disclosure obligations had been
triggered or that there were risks in relying on the exemption
 “Attorneys who undertake action on behalf of their company are no
less accountable than any other corporate officer.”
Board of Directors
 Look hard at the responsibility of the
company’s independent directors
 Continue to focus closely in our
investigations on whether outside directors
have lived up to their role as guardians of
the shareholders they serve
Corporate Governance
 Post investigation, Commission takes a
look at the shape of company
 Lingering issues are handled by
settlements that include corporate
governance enhancements
Corporate Governance Enhancements
 Qwest - Financial fraud
$250 million penalty
Chief Compliance Officer who reports directly
to new compliance committee of Board of
Directors
CCO shall respond to employee’s concerns
regarding matters of ethics or questionable
business practices
Corporate Governance Enhancements
(cont.)
 Charter
Specific undertakings regarding the reporting
of subscriber numbers to deal with the fraud
of the case
Establish web site and Toll Free number
managed by independent 3rd party for
employees to contact
Cooperation
What Does Cooperation Mean?
 21(a) Report:
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Self-policing
Self-reporting
Remediation
Cooperation
 Effort to influence conduct
Rewarding Good Behavior
 At the same time the Commission is seeking penalties to
effect changes in corporate culture – they are also seeking to
reward companies that can demonstrate that they had or have
made significant efforts to achieve a culture of compliance
 Recently the Commission brought 11 cases in which we
publicly recognized cooperation and remedial acts
 No penalties were sought in these cases
No Penalty Cases
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Conseco
Corrpro
Charter
VantageMed Corp.
Senetek
Gateway
 Royal Ahold
 Performance Food
Groups
 Gold Banc
 BJ Services
 Hanover Compressor
ElectroScientic
• No case against ESI because of its “swift, extensive, and
extraordinary cooperation in the Commission’s investigation.”
• Self –reported
• Conducted a through and independent internal investigation
• Shared results of investigation – including not asserting any
applicable privileges and protections with respect to written
materials
• Terminated responsible wrongdoers
• Facilitated Commission staff’s investigation overseas
• Implementing remedial actions designed to prevent recurrence
of fraudulent activity
Goals of New Initiatives
 Anticipate risk
 Create greater deterrence
 Change corporate culture and
tone at the top
Coordination with Criminal
Authorities
 In FY 2004, Commission coordinated with
41 U.S. Attorney’s Offices and 8 state
prosecutors
on 159 indictments or informations for 302
individuals
verses 64 indictments or informations in
1999
 Corporate Fraud Task Force