From: dryhou@earthlink.net Sent: Thursday, December 04, 2003 10:40 AM To: rule-comments@sec.gov Subject: File No.: S7-25-03 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0609 Subject: File No. S7-25-03 Dear Mr. Katz: The discussion section of "Proposed Amendments to the Rules of Practice and Related Provisions" states: “The purpose of disgorgement is to require a wrong-doer to pay back the ill-gotten gains that the wrong-doer obtained by virtue of his or her violation.” It would appear that some companies are transferring the cost of disgorgement to the victims, the shareholders of the company. This can be seen, for example, in the following news article: “The dispute stems from the 2002 settlement of a Securities and Exchange Commission investigation into the company’s accounting practices. Xerox agreed to pay a $10 million fine and restate several years of financial statements. Also fined were former Chairman Paul Allaire, former Chief Executive G. Richard Thoman and former Chief Financial Officer Barry Romeril. Xerox said its bylaws required it to pay nearly all the executives’ fines — some $19.4 million of $22.5 million — which the company expected would be reimbursed by the AIG policies protecting Xerox directors and officers.” http://www.tscpa.org/welcome/AcctWeb/acctweb110703.asp#2 It is unimaginable how a corporation bylaw providing for reimbursement for fraud penalties could provide any deterrent to such conduct. Such action raises “the danger that the insured will be induced by the fact that it has insurance to commit the act against which it has insurance and thereby escape the cost of the act while reaping its benefits.” (See Richard Posner, “An Economic Theory of Criminal Law,” 85 Columbia Law Review 1193, 1203, no. 20 (1985).) As an investor, it is troubling when a company pays for insurance covering defrauders, and doubly troubling when the company itself is ultimately responsible to make whole those defrauding it. Section 1103 of Sarbanes-Oxley provides that during an investigation of a public company or its officers or directors, the Commission may seek a temporary order from a federal court to escrow "extraordinary payments". This should be implemented to disallow any such reimbursement regardless of company provisions to the contrary. Such D&O payments are statutorily prohibited, for example, by California Insurance Code Section 533, which provides that “an insurer is not liable for a loss caused by the willful act of the insured.” This language is implied into every insurance contract. (California Cas. Mgmt. Co. v Martocchio, 11 Cal App 4th 1527 (Cal App 1992)). Thank you for your consideration. Joseph E. Dryer Houston, Texas dryhou@earthlink.net