Speech by SEC Chairman:
Remarks before the U.S. Department of Justice Corporate Fraud Conference
Chairman Harvey L. Pitt
U.S. Securities and Exchange Commission
September 26, 2002
These remarks reflect solely the personal views of Mr. Pitt, and do not necessarily reflect the views of the Commission, the individual members of the Commission, or its Staff.
Good morning. I'm enormously pleased and honored to be here with this distinguished group of law enforcers.
By now, we're all painfully familiar with the long-festering problems that caused a spate of high-profile corporate failures. These failures on the part of securities professionals, accountants, lawyers and senior corporate executives have eroded confidence in our capital markets and in the honesty and integrity of those who serve them.
Under the President's able leadership, and in partnership with the Department of Justice, the U.S. Attorneys, the securities industry self-regulatory bodies and state securities officials, we are embarked upon a multi-faceted program to eradicate the bitter aftermath of the over-exuberance of the 1990s, and to restore transparency and safety to investors.
I've been asked to take a moment to describe the view from our agency, and to spell out some of the elements of our effective partnership with each of you. Fortunately, you will be hearing, over the next two days, from those who toil in our vineyards, and do so effectively and efficiently. As you know, ours is an independent regulatory agency, with extensive civil and administrative enforcement powers. Our arsenal of weapons is extensive, both in its own right and in assisting your efforts, just as your criminal prosecutorial powers are a critical adjunct to our own increased focus on the pursuit and prosecution of securities fraud.
The Commission oversees the conduct of all the key participants in our securities markets, including public companies, stock exchanges, broker-dealers, investment advisers, mutual funds, and public utility holding companies. We are small by federal agency standards, with approximately 3,000 employees. That staff is spread throughout our four main divisions - Enforcement, Corporation Finance, Investment Management, and Market Regulation - and our 18 Offices, including the: Office of the Chief Accountant, Office of Compliance Inspections and Examinations, Office of Economic Analysis, Office of Investor Education and Assistance, as well as 11 regional and district offices throughout the country.
All these Divisions and Offices have been extremely busy this last year. Beginning last fall, we launched some of the most aggressive reforms in the Commission's history. These include major rules addressing the speed and content of corporate disclosures, reports on trading by insiders, conflicts of interest faced by research analysts, and oversight of the accounting profession - to name just a few. We have also been focusing closely on corporate governance issues, in partnership with the New York Stock Exchange and Nasdaq, because those issues affect the quality of financial statements and the stability of companies.
On July 30, President Bush signed the Sarbanes-Oxley Act into law, which codifies many of the initiatives that the President called for in his Ten-Point Plan to Improve Corporate Responsibility and Protect America's Shareholders, as well as ones that we had begun to undertake by rule. The reforms in the Act are broad ranging, including provisions affecting the governance of the accounting profession, disclosures by public companies, and enhanced criminal penalties for securities fraud. We view our work in implementing the Act as an important opportunity to effect dramatic changes in the way our capital markets are governed.
Among our major tasks under Sarbanes-Oxley is to create a new private sector regulatory regime for the accounting profession. After consulting with Secretary O'Neill and Chairman Greenspan, we must pick five "prominent individuals of integrity and reputation who have a demonstrated commitment to the interests of investors" to serve as our first Board. We face a statutory deadline of October 28th to select Board members, but we hope to complete the effort sooner in order to give the Board more time to focus on start-up issues.
The Board will register all accountants that audit public companies, oversee standard setting for their conduct and independence, perform regular quality control reviews, and discipline them if they err. We believe our work with this private sector Board will be in the best tradition of cooperative oversight, and we look forward to its being up and running in the new year.
While we are making steady progress in our effort implement specific legislative directives, we have not been idle in our other activities. We've been focusing our Enforcement program on the priorities in the President's Ten-Point Plan by seeking bars of officers and directors from serving in public companies, and seeking disgorgement of salaries, bonuses and stock options, among other things.
The SEC's enforcement program is critical to the achievement of our mission of investor protection, and is key to the restoration of public confidence in the markets. Combating financial fraud continues to be our highest enforcement priority, as is reflected in the record number of accounting and disclosure cases we have filed this fiscal year.
Now, let me focus for a moment on ways in which, working together, the members of the task force can contribute to a comprehensive response to the recent wave of corporate fraud. The SEC has had, and continues to have, a close relationship with its fellow law enforcement agencies. Indeed, some of the most significant SEC actions over the last several months have been brought in tandem with criminal complaints and indictments.
By creating a dually enforceable system of laws, the drafters of the securities statutes understood that not all securities violations warrant the same degree of punishment. When criminal sanctions are warranted, coordination between the civil and criminal agencies gives life and meaning to that scheme. Imposition of jail time ensures a violator will be out of the securities or accounting fraud business in a way that an administrative or court order may not and exceeds the deterrent effect that the SEC can achieve on its own.
Recent criminal cases, like those against officers of WorldCom, Adelphia, and Rite Aid unquestionably send an important deterrent message to public company officers. And to the extent that institutional or legal barriers to this process exist - such as the SEC's access to grand jury materials - it should be a goal of the task force to advocate their removal.
Prosecutions for lying to the SEC, destroying documents under SEC subpoena, or otherwise seeking to illegally frustrate our investigations also yield huge programmatic benefits. They have a significant deterrent effect. While the conviction of Arthur Andersen for obstructing our Enron investigation may be the most well known prosecution to date, there've been many other important examples in the last 12 months.
These include the charges brought by the U.S. Attorney for the Central District of California against Reed Slatkin, for, among other things, providing false documents to the SEC to obstruct our investigation. And charges brought by the U.S. Attorney here in D.C. against Steven Bolla for making false statements to the SEC in connection with a settlement of our charges against him. Also this year, in an insider trading case jointly prosecuted by the SEC and U.S. Attorney for the Eastern District of New York, the U.S. Attorney charged several of the defendants with perjury and making false statements to the Commission staff in the course of our investigation. I can't overstate the importance of cases like these to the effectiveness and efficiency of our own enforcement program.
In the civil context, we've also taken steps to create strong incentives for companies to behave cooperatively during our investigations so that our enforcement staff can move on an expedited basis. Similar to the DOJ's guidance on prosecution of corporations, we have made it known that meaningful and complete cooperation will be favorably considered by the Commission.
For example, in the Homestore matter jointly announced by DOJ and us just yesterday we determined not to bring charges against the company itself, because of its swift and extraordinary cooperation, including by quickly reporting the potential problems to us, sharing results of its internal review, terminating the wrongdoers, and implementing remedial actions. Similarly, when companies drag their heels in responding to our subpoenas and other requests, that too will be reflected in our actions.
Creating strong incentives for companies to cooperate with our investigations as we did with Xerox and Dynegy is only one aspect of our "real-time" enforcement initiative. The objective of real time enforcement is to protect investors by rapidly filing actions to halt misconduct, make public our suspicions of wrongdoing so that investors also may take steps to protect themselves, and freeze the assets of fraudsters so that, whenever possible, monies may be returned to harmed investors.
One of our primary tools is to seek a court freeze of the assets of the wrongdoers. This is the first step toward returning such ill-gotten gains to defrauded investors. And, we are using asset freezes to protect investors' funds at an extraordinary rate we have obtained 57 so far this fiscal year a third more than all of last fiscal year. We've also dramatically increased our use of TROs up more than 50% from last year and trading suspensions imposing more than 5 times the number sought last year.
To me, one of the most important new tools we have received under Sarbanes-Oxley is the FAIR Fund provision of Section 308. The provision sponsored by Chairman Oxley and Congressman Baker allows us to add civil penalties to disgorgement funds and see these civil fines go to investors. In this way we are making good on our principle goal of taking care of innocent investors and trying to make them whole when they have been defrauded.
Our case against WorldCom filed a scant 24 hours after the company revealed its massive accounting problems is another example of how the "real time" enforcement initiative has galvanized our enforcement program. The Commission sought and received relief in the form of an order prohibiting WorldCom from making any extraordinary payments to any present or former officer, director, or employee of WorldCom (including severance, indemnification and bonus payments). We also secured appointment of a corporate monitor to ensure that the company complies with this aspect of the order and that documents are not destroyed. We intend to pursue this approach frequently in the coming months.
The Justice Department, through the U.S. Attorney's Office for the Southern District of New York, also filed criminal complaints against WorldCom's former CFO and controller, as well as other employees. This has been a spectacular example of SEC-DOJ teamwork of which we should all be proud.
I'm proud of the cooperative spirit we've shared and continue to share, and I invite every U.S. Attorney here to continue to take advantage of the expertise we, and the other civil task force members, have to offer you. I hope you know that we stand ready to assist all of you in any way possible.