Corporate executives, spokespersons and counsel should be aware that the period immediately following an SEC investigation needs be treated as the "No-Spin Zone."
Consider last week's rollercoaster ride at AGCO Corp., which is a $3.5 billion farm equipment manufacturer.
Statement And Retraction
On Wednesday, March 10, 2004, AGCO Corp., which had been the subject of an informal SEC inquiry into its accounting practices, received great news in a letter from the SEC that stated:
This [the previously announced] inquiry has been terminated, and no enforcement action has been recommended to the Commission. We are providing this information under the guidelines in the final paragraph of Securities Act Release No. 5310 ...
Later on Wednesday, the Atlanta Journal-Constitution reported that AGCO Corp. had publicly announced the end of the SEC's inquiry, and quoted AGCO Corp.'s CEO as stating that "It's a good day…. When you're sure that you haven't done anything wrong — but to the outside world it looks like you're guilty of something — it's a real relief to be vindicated from any accusations."
The CEO reportedly added that although AGCO Corp was not going to make the SEC's letter public, "[t]hey confirmed that all procedures are accurate and in accordance with prescribed accounting procedures…. The issue, as far as we're concerned, is closed and we can now devote more time to the management of the business and the company."
A Closer Look
Not so fast — take another look at that final paragraph of Securities Act Release No. 5310 attached to the SEC's letter. The Release states the following (our emphasis is in red):
The Commission is instructing its staff that in cases where such action appears appropriate, it may advise a person under inquiry that its formal investigation has been terminated. Such action on the part of the staff will be purely discretionary on its part for the reasons mentioned above. Even if such advice is given, however, it must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff's investigation of that particular matter. All that such a communication means is that the staff has completed its investigation and that at that time no enforcement action has been recommended to the Commission. The attempted use of such a communication as a purported defense in any action that might subsequently be brought against the party, either civilly or criminally, would be clearly inappropriate and improper since such a communication, at the most, can mean that, as of its date, the staff of the Commission does not regard enforcement action as called for based upon whatever information it then has. Moreover, this conclusion may be based upon various reasons, some of which, such as workload considerations, are clearly irrelevant to the merits of any subsequent action..
It is unclear what communications, if any, occurred between the SEC and AGCO following the Wednesday publication of the article in the Atlanta Journal-Constitution.
By Thursday afternoon, however, AGCO had issued what must have been a painful press release entitled, "AGCO Corrects Reports Regarding Letter Received from SEC." This press release acknowledged the "non-exoneration" language in Release No. 5310, and included a very different quote from AGCO's CEO:
The termination of the SEC inquiry does not indicate that our accounting procedures or disclosures are correct or that we have been vindicated. That is not what the SEC letter said, and I want to correct what was reported in the media. All the letter said was that the inquiry was terminated. Neither that letter nor anything else said by the SEC staff in any way suggested that AGCO's accounting or related disclosures are correct.
Consistent Response
Although it is unknown whether this correction was prompted by a call from the SEC, such a call would be consistent with the SEC's hard-line approach in similar "post-investigation" situations.
Take, for instance, the common scenario when a defendant in an SEC enforcement action settles a case without admitting or denying any of the
allegations in the SEC's complaint. The SEC has made it clear that this is a binding, two-way street, and that it will not tolerate defendants who subsequently "spin" such settlements to suggest that they did nothing wrong.
On March 20, 1996, for example, the SEC filed a settled insider trading action against Michael P. Angelos, in which Mr. Angelos agreed to settle the case without admitting or denying the allegations against him. Shortly thereafter, counsel for Mr. Angelos made statements that were "construed by the Commission as denials of the allegations in the Complaint and thus violative of this agreement to settle the action without admitting or denying these allegations."
In response, on March 27, 1996, just one week after the settlement, the SEC actually filed a motion to vacate the judgment entered against Mr. Angelos. On April 22, 1996, the SEC finally agreed to withdraw its motion to vacate (and to let the settlement stand) after receiving the following public corrective statement from Mr. Angelos:
I settled this case without admitting or denying the
allegations of the complaint. To comply with my
settlement with the Securities and Exchange Commission,
I withdraw any statement made on my behalf that may
have been inconsistent therewith. I am pleased that
this settlement resolves the SEC's lawsuit against
me. I will have no further comment other than any
sworn testimony I may give in this or any other matter.
Michael P. Angelos
The lesson from these cases seems clear: in the days following the conclusion of an SEC investigation or settlement, companies should be careful not to "spin" the resolution beyond its actual terms. Those that do risk having to publicly reopen the issue yet again in a far less positive light.
The column solely reflects the views of its author, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.
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