Ahold Is Further Proof Cooperation With SEC Pays

If there's any doubt that cooperation pays when it comes to SEC investigations, just look at the case of Royal Ahold.

Last week, the Dutch grocery giant settled charges that it overstated sales by a whopping $30 billion between 2000 and 2002, but the company will not pay any fines in part because of it's "extensive cooperation with the Commission's investigation."

The SEC's complaints alleged that the company's SEC filings for "at least" fiscal years 2000 through 2002 were materially false and misleading due to a variety of accounting errors, irregularities, and improperly consolidated joint ventures through fraudulent side letters. According to the SEC, Ahold overstated net sales by approximately $30 billion, and overstated net income by approximately $829 million.

Newkirk

"This case is yet another deplorable example of a massive, multifaceted fraud at a major corporation," said the SEC's Associate Enforcement Director Tom Newkirk in announcing the settlement.

Cooperation May Equal "No Fine"

But in announcing the settlement of the fraud accusations, Newkirk also noted that the case was "an example of the clear corporate advantage to conducting a comprehensive internal investigation and fully cooperating with the SEC."

Instead, without admitting or denying the allegations in the complaint, the company will be permanently enjoining from violating the antifraud and other provisions of the securities laws.

van der Hoeven

Former Chairman and CEO Cees van der Hoeven, and ex-CFO A. Michiel Meurs also settled with the Commission, consenting to permanent injunctions and officer and director bars. The Commission did not seek penalties against the executives at the request of the Dutch Public Prosecutor's Office, which is conducting a parallel criminal investigation in The Netherlands and wanted to avoid "potential double jeopardy issues under Dutch law."

The company has already agreed to pay Dutch authorities $10 million in fines, and other investigations are still ongoing.

According to the settlement announcement, the Commission did not seek a penalty from Ahold because of, among other reasons, the company's extensive cooperation with the Commission's investigation. Among other actions, the company:

Self-reported the misconduct;

Conducted an extensive internal investigation;

Expanded its original fraud investigation to analyze accounting practices and internal controls at 17 operating companies;

"Promptly" provided SEC staff with internal investigative reports and supporting information;

Waived the attorney-client privilege and work product protection with respect to its internal investigations;

Made its current personnel available for interviews or testimony;

"Significantly assisted" the SEC in arranging interviews with, or testimony from, former Ahold personnel located in the United States and, "of even greater importance, abroad."

Promptly took remedial actions by revising internal controls and terminating appropriate employees, as well as other actions.

Those actions are directly in line with prior SEC guidance noting that it may credit self-policing, self-reporting, remediation and cooperation during investigations (see "How Cooperation Affects Severity Of SEC Enforcement" in column above, right).

In a speech back in April, SEC Division of Enforcement Director Stephen Cutler noted that providing extraordinary cooperation with SEC investigations would play a role in the determination of fines. “Being forthcoming during the investigation, and implementing appropriate remedial measures (including, in the case of an entity, appropriate disciplinary action against culpable individuals), can contribute significantly to a conclusion by the staff that a penalty recommendation should be more moderate in size or reduced to zero," he said. "For example, in two recent actions involving Reliant Resources and Conseco, Inc., the Commission declined to impose civil penalties on either public-company respondent."

Non-Cooperation And Fines

In addition, the settlement stands apart from recent cases in which non-cooperation was a factor.

In August, for example, Halliburton paid a $7.5 million fine in settling charges that it changed its accounting method without notice. While the media focused on the fact that the dispute stemmed from the days when Vice President Dick Cheney ran the company, overlooked was the fact that the company wasn't fined for failure to disclose a 1998 change to its accounting practice—the SEC imposed the penalty for not fully cooperating with its investigation.

The penalty against Halliburton "serves as yet another reminder that the SEC will not tolerate lapses by companies that delay or hinder the Commission's investigative processes," said Spencer Barasch, an regional enforcement director in announcing the settlement.

The Halliburton fine was reminiscent of another fine doled out in March to Lucent Technologies, which agreed to pay a penalty of $25 million as part of a settlement with the SEC stemming from an accounting probe. "The staff made it clear that the penalty is not based on any additional violations of law, but on what the staff considered Lucent's lack of cooperation during the investigation and certain actions taken by the company subsequent to the agreement in principle," Lucent said in a statement at the time.

The Lucent announcement had come one week after the SEC fined Banc of America Securities $10 million for failing to produce documents in an SEC probe. BAS "repeatedly failed to promptly furnish documents requested by the staff, provided misinformation concerning the availability and production status of such documents, and engaged in dilatory tactics that delayed the investigation," the Commission charged.

Other companies recently fined for not cooperating with investigations include Xerox, AIG and Dynegy.

We've made available in the box above, right, a number of resources on cooperation, including the speech from Cutler and related information on the U.S. Sentencing Commission's federal sentencing guidelines.