Do huge corporate fines deter fraudulent behavior or harm the very shareholders they are intended to benefit?
The five Securities and Exchange Commissioners are becoming more divided on the question, as the two Republican commissioners are frequently voting against huge fines imposed upon publicly traded companies for shaky accounting procedures, mismanagement and fraud.
The Wall Street Journal gave these examples: Republicans Paul Atkins and Cynthia Glassman earlier this month voted against a $37 million fine against Wachovia Corp. for failing to reveal a $500 million purchase of First Union Corp. shares during their merger in 2001. They also voted against the $250 million fine on Qwest Communications International Inc. for its many accounting tricks. The fines were approved because SEC Chairman William Donaldson, also a Republican, formed a majority by voting with the two Democratic commissioners.
While Donaldson believes stiff fines change corporate behavior and return money to aggrieved investors, Glassman has said the fines damage the value of corporate shares and re-injure the shareholders victimized by the fraud in the first place.
"When the boards and management are agreeing to these penalties, they're agreeing to pay with other peoples' money," Glassman told the Journal.
According to several attendees at a private commission meeting last month, Glassman said restitution to investors often amounts to just pennies on the dollar. Meanwhile, companies must take a charge against earnings to cover the expense, preventing that money from being invested elsewhere.
In addition, Glassman and Atkins have said that a company's new shareholders end up paying former shareholders but don't get any of the restitution. They contend the fines should focus on the individuals involved in the fraud.
"The question becomes, 'When it is appropriate to benefit certain groups of innocent shareholders at the expense of others?' " said Richard Sauer, a former SEC enforcement official and now a partner at Vinson & Elkins law firm in Washington.
Donaldson, the Democratic commissioners and others say that the fines deter fraud - not only because the companies don't want to pay but also because it damages their reputations. The threat of fines also encourages companies to cooperate with investigators because the companies that do work with the SEC see smaller penalties.
"Getting a fine assessed causes reputational damage to the company, to the management that was there, and I think it has an impact on some shareholders and some potential investors who would say, 'I'm not sure I want to be in a company that engaged in that behavior,' " said Commissioner Roel Campos, a Democrat.