Speech by SEC Chairman:
Statement of Chairman Cox Concerning Objective Standards for Corporate Penalties
Chairman Christopher Cox
U.S. Securities and Exchange Commission
January 4, 2006
Today the SEC is announcing the filing of charges against two U.S. software companies accused of financial fraud. We are simultaneously announcing that these charges have been settled, with the result that in one case, there will be a $50 million penalty against the corporation.
In the other case, while the Commission has settled with the corporation on terms that do not include a penalty against the corporation, we will pursue the individuals responsible for the fraud and seek penalties against them in federal court.
The $50 million penalty against McAfee is consistent with a very recent trend in the SEC's use of its penalty authority. All but three of the penalties of $50 million or more obtained in Commission settlements since 1986 have been obtained in the last three years.
For instance, in 2002, when the Commission filed its financial fraud case against Xerox, the $10 million penalty we obtained was the largest civil penalty the Commission had ever imposed against an issuer in a financial fraud action.
Because of the sea change that has occurred in the SEC's use of its penalty authority, the Commission for some time now has been looking with great particularity at the questions of whether, and to what extent, monetary penalties should be imposed on an issuer found to have committed securities law violations.
After much deliberation the Commission has reached unanimous agreement on guidelines that will inform our future actions.
Our intention is that these principles will establish objective standards that will provide the maximum degree of investor protection.
The two settled actions we are announcing today illustrate how the principles guiding our actions will be applied in practice.
The framework for our consideration of the propriety of corporate penalties was grounded in the Commission's statutory authority as well as in the legislative history supporting that authority. The two most important pieces of legislation guiding our work were the Remedies Act of 1990 and the Fair Funds provision of the Sarbanes-Oxley Act of 2002.
It is our hope that our work will provide a high degree of transparency to the workings of the Securities and Exchange Commission. For it to be effective, our corporate penalty authority should be exercised with the highest possible degree of clarity, consistency and predictability.
The Commission is in unanimous agreement that corporate penalties are an essential part of a comprehensive program of enforcement of our securities laws. A key question for us as we explored the appropriateness of imposing civil penalties on a corporation-as opposed to an individual wrongdoer-was whether an issuer's violative action resulted in benefit or harm to the shareholders.
Other considerations also come into question. One is the deterrent effect of a corporate penalty in a particular case. Others include the level of harm that was inflicted on society; the extent of corporate complicity in the violation; the presence (or absence) of deliberate, intentionally fraudulent conduct; and the extent of corporate cooperation with authorities.
The principles behind our guidelines are clear. In protecting investors it is important to punish wrongdoers and deter further malfeasance. And it is important not to compound the harm already caused to investors.
I want to thank my fellow commissioners, Cynthia Glassman, Paul Atkins, Roel Campos, and Annette Nazareth, for the hard work they have put in on this initiative. It is a source of particular satisfaction to me that, through careful deliberation, our various views were forged into a single general framework.
I also want to congratulate the head of our Enforcement Division, Linda Thomsen, for her dedication and hard work. She will now give an overview of the two settled actions we are announcing today and of the significance of the statement of principles that we are publishing contemporaneously with the announcement.
Linda, you have the floor.