In a speech last week before the UCLA School of Law, SEC Division of Enforcement Director Stephen Cutler outlined the Commission's enforcement program as it pertains to the themes of Sarbanes-Oxley.
According to Cutler, three themes unified his division's activities, and aligned it with Sarbanes-Oxley. Those themes included:
Gatekeepers
Cutler mentioned "the fundamental significance of gatekeepers in maintaining fair and honest markets," specifically the auditors who sign off on financials, the lawyers who advise companies, the research analysts who warn investors, and the boards responsible for corporate oversight.
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Cutler
According to Cutler, while the focus on "gatekeepers" is not necessarily new to the Commission, his division has changed its approach in some ways.
Regarding auditors, Cutler noted that in the past the SEC had focused only on individual auditors for deficient audits. Now, he said, the Commission "more regularly grapples with the question of firm responsibility for those audits." And though some might argue that it doesn't make sense to hold an entity responsible for securities law violations, Cutler stated that such violations "are very often the product of the corporate culture in which they arise."
As a result, "enterprise liability can have a significant deterrent and preventive effect." At the same time, Cutler noted that his division does not view firm liability as a substitute for individual accountability.
Regarding lawyers, Cutler noted that the Commission has stepped up scrutiny of the role of lawyers in corporate frauds. "We have named lawyers as respondents or defendants in more than 30 of our enforcement actions in the past two years," he said.
According to Cutler, in most cases the lawyers had "gone astray," and had "twisted themselves into pretzels to accommodate the wishes of company management, and failed in their responsibility to insist that the company comply with the law."
He also noted that, based on the SEC's investigative docket, we're likely to see actions against lawyers who allegedly assisted their clients in engaging in illegal late trading or market timing arrangements. "We are also considering actions against lawyers, both in-house and outside counsel, who assisted their companies or clients in covering up evidence of fraud, or prepared, or signed off on, misleading disclosures regarding the company's condition." Cutler noted that one area of focus will be the role of lawyers in internal investigations. "We are concerned that, in some instances, lawyers may have conducted investigations in such a manner as to help hide ongoing fraud, or may have taken actions to actively obstruct such investigations."
Cutler also noted that independent directors would be under particular scrutiny. "Over the next year, we intend to continue focusing closely in our investigations on whether outside directors have lived up to their role as guardians of the shareholders they serve."
Integrity Of Investigations
The second theme outlined by Cutler related to the importance of maintaining integrity in the investigative process aimed at ferreting out securities law violations.
Citing the infamous Andersen shredding incident, Cutler noted that the SEC would be especially tough on those who interfere with the Commisson's investigations. "Perjury and obstruction of justice in our investigations are serious threats to investor protection."
Accountability
The final theme outlined by Cutler was the need for greater personal accountability and deterrence at the top of the corporate world.
Citing recent actions against executives who certified financials that were later deemed false and misleading, Cutler noted that he would continue to "send a strong message that we will make sure corporate violators take responsibility for egregious conduct."
Specifically, Cutler noted that Sarbanes-Oxley strengthened the Commission's hand by lowering the threshold that the SEC had to meet in seeking director and officer bars. The SEC only needs to show that a defendant was "unfit" to serve, where previously the Commission had to prove that the individual was "substantially unfit." As a result, the Commission's use of D&O bars has increased dramatically—from 51 in 2001 to approximately 300 in the last two years.
And while the Commission's new stance is indeed tougher, Cutler brought a dose of reality to the proceedings by pointing to a recent article about the Chinese government's response to corporate fraud, which noted:
China executed four people, including employees of two of its Big Four state banks, for fraud totaling $15 million, the Xinhua state news agency said Tuesday, amidst a high-profile campaign against financial crime. The executions come after a string of arrests in white-collar crime as China prepares to sell shares in its big banks.
The article concluded, that "[l]egal experts have called for a 'kill fewer, kill carefully' policy for non-violent crimes."
Though Cutler noted that compliance with Sarbanes-Oxley has not exactly been inexpensive, he also clarified that he was still a supporter of The Act. "While I'd be the first to acknowledge that the legislation's costs are not insignificant," he said, "I also think it would be a profound mistake to roll back or dismantle the statute's central dictates..."
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