There can be no doubt that there are more parallel proceedings being conducted by the SEC and the Department of Justice. The court’s decision in United Sates v. Stringer, CR 03-432-HA (D. Or. 1/9/06) highlights some of the difficulties, however. In Stringer, the U.S. Attorney’s office determined early in an SEC investigation that a criminal prosecution was warranted and elected to work with the SEC staff rather than conduct a separate grand jury investigation. The court found the government’s actions violated the defendants’ right to due process and the Fifth Amendment and were an egregious ploy by criminal prosecutors hiding behind a civil SEC investigation. See also United States v. Scrushy, CR-030-BE-0530-S (N.D. Ab. 4/15/05) (failure to tell witness that SEC testimony was being coordinated with the U.S. attorney’s office resulted in suppression).
Three recent settlements by the SEC raise questions concerning how fines are calculated and the standards for cooperation are applied:
First, on February 22, 2006, the SEC announced a settlement involving four KPMG auditors who worked on the Xerox engagements that were involved in the now settled SEC enforcement action. See SEC v. KPMP LLP, et al., Litigation Release No. 19573, available at http://www.sec.gov/litigation/litreleases/lr19573.htm. Xerox had previously been accused of engaging in what the SEC called a $1.2 billion fraudulent earnings manipulation. Three KPMG partners involved in the audits during that period consented to the entry of permanent injunctions based on alleged violations of Securities Act Sections 17(a)(2) and (3) and various other provisions. One auditor agreed to a fine of $150,000, while two others agreed to fines of $100,000 each. A fourth consented to being censured pursuant to Rule 102(e). In a related news release the SEC stated that the fines were “record civil penalties . . . for auditors.” Enforcement Chief Linda Chatman Thomsen noted in the release that, “[t]his case represents the SEC’s willingness to litigate important accounting fraud allegations against major accounting firms . . . .” See Four Current or Former KPMG Partners Settle SEC Litigation Relating to XEROX Audits, available at http://www.sec.gov/news/press/2006-23.htm.
Second, about two weeks earlier, the SEC announced a settlement with AIG. This was part of a global settlement with various regulators in which AIG agreed to pay over $1.6 billion to resolve claims of improper accounting, bid rigging, and other improper practices. In the SEC settlement, the insurer consented to the entry of an antifraud and books and records injunction. In the consent decree, AIG also agreed to a series of undertakings including appointing a new CEO and CFO, creating a statement of “philosophy committed to achieving transparency . . . .” and establishing other compliance programs and a code of conduct. The company agreed to pay $700 million in disgorgement and a $100 million fine. In its release, the SEC commended AIG for “substantial cooperation” during the investigation following the service of initial regulatory subpoenas. See Litigation Release No. 19560, available at http://www.sec.gov/litigation/litreleases/lr19560.htm.
Third, on February 8, 2006, the SEC announced a settlement with the former CFO of Gemstar-TV Guide International. Previously, the SEC had alleged that Gemstar overstated revenues by at least $248 million by using improper accounting practices. The complaint charged the former CFO with securities fraud, falsifying Gemstar’s books and records, aiding and abetting Gemstar’s reporting and record-keeping violations, and making false statements to auditors, in violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, and 13b2-2 thereunder. In the settlement, the former CFO agreed to be enjoined from future violations of the federal securities laws, an officer director bar and to pay disgorgement of $600,000, pre-judgment interest of $14,866, and a penalty of $750,000. See Litigation Release No. 19558, available at http://www.sec.gov/litigation/litreleases/lr19558.htm.
Clearly all of these settlements resolve significant enforcement actions. At the same time, what may be most interesting about them is what is not said. None of these settlements discuss the Commission’s prior guidance on fines or cooperation. To be sure, the guidance announced in January regarding fines only applies to issuers, not individuals. But there is no discussion in the Releases of how the fines were calculated. While the Release says three KPMG auditors paid the largest fines to date for auditors, there is no clue about the methodology for arriving at the amount for individuals the agency has long claimed are critical “gatekeepers” of financial information. Regardless of the amount, the penalties paid by the auditors pale in significance when compared to the $750,000 fine levied on the former Gemstar CFO. Again, however, there is no clue as to how the amount of the fine was calculated. Likewise, one can only speculate about the rewards for cooperation if the result of “substantial” cooperation by AIG is a fraud injunction, a $100 million fine and the imposition of extensive remedial procedures – all after the senior executives claimed to have been involved were fired. Collectively, the three settlements suggest that in the future it would be instructive for the SEC to articulate standards for levying fines on individuals and state how those and other standards are applied in arriving at a settlement as an aid to transparency.