SEC: Perpetrators of Fraud Should Pay Their Own Fines

Should executives who settle corporate fraud cases be made to pay fines out of their own pockets? This is the issue raised this week by the U.S. Securities and Exchange Commission, which has put the brakes on settlements that are being paid by insurance companies, rather than those who committed the crime.

Some argue that the only winners in this game are the insurance companies, which would escape paying out hefty fines for insured or indemnified executives trying to settle their cases. Others say the action would lead to more lengthy and costly trials, since defendants facing the possibility of forking over multi-million-dollar fines out of their own pockets might not be so quick to settle.

David Kornblau, the SEC's chief litigation counsel, said the possibility of more trials shouldn't keep the SEC from requiring that executives pay their own fines.

"The whole idea of the penalty is to punish, and if the defendant doesn't have to pay the penalty he's not being punished," Kornblau said.

SEC Commissioner Harvey Goldschmid, one of two Democrats on the five-member SEC, is all for making the guilty parties pay.

"It's critical when we take money for a civil penalty, which involves a serious wrong, the money not circle back into the hands of those who have been involved in the wrongdoing," SEC Commissioner Harvey Goldschmid said. He went further to state that the SEC should make defendants admit they violated securities laws.

The issue first came up in April when the SEC made violators involved in the $1.4 billion settlement with Citigroup Inc. and nine other firms pay their own civil penalties, rather than the usual process of having insurance policies or the firm cover the fines.

"This is a critically important policy change to create appropriate deterrence and accountability," Goldschmid said.

The policy also came into play in the SEC’s $3 million fine of six former Xerox Corp. executives in a case that was settled for a total of $22 million this month. The SEC has also stated that fines paid by defendants are not tax deductible, which represented another departure from earlier policy.


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