SEC Under Scrutiny For Settling Fraud Cases
What’s more important in disposing of corporate fraud cases — speedy settlements or lengthy jury trials? The SEC, which settled cases this week with WorldCom and PricewaterhouseCoopers, is under fire for brokering speedy settlements over the more drawn out jury trial option.
"The SEC should be enforcing the law to its fullest extent," not negotiating compromises, said Mitch Marcus, a former WorldCom manager who founded BoycottMCI.com to lobby for stiff punishment. When compared to investor suffering, WorldCom ended up with "a very, very insignificant fine."
Others say that the SEC settlement path is more advantageous, bringing swift punishment that comes along with required changes in behavior to keep the problems from occurring again.
"You get things much more quickly than would otherwise be the case," said Thomas Newkirk, associate director of the SEC's enforcement division. "The typical litigation case probably takes between two and three years. One needs to balance the benefit of getting remedial provisions into place now, as opposed to getting them three years from now."
Earlier this month, WorldCom resolved fraud charges by agreeing to pay $500 million, which is the largest fine ever levied for accounting fraud. U.S. District Court Judge Jed Rakoff will decide in June whether to approve the settlement.
The SEC also reached a settlement this month with PricewaterhouseCoopers LLP, which will pay $1 million to settle charges of improper conduct in its audits of SmarTalk TeleServices, a now-bankrupt provider of prepaid telephone cards and wireless services.
Newkirk says the settlements also ensure that shareholders will be protected from further fraud.
He said that after the WorldCom accounting fraud was uncovered last June, "we got a monitor put into place to make sure we didn't have another Enron-type situation where the managers were giving themselves big bonuses on the way out of the door. We also got controls put into place to fix what was wrong with their record keeping and the accounting."
PricewaterhouseCoopers will establish new document-retention policies as part of its settlement.
J. Boyd Page, a securities attorney in Atlanta, said there are often more advantages to quick settlements as opposed to protracted court battles.
"Settlements can make sense because white-collar crime is ofttimes very, very complicated," Page said. "It can take weeks on end simply to present a case" to the jury after years of investigative work.
The longer the case, the more costly it becomes to get justice, he said. "There is a huge cost of going to trial, just in terms of absolute dollars, to retain lawyers, pay experts and pay employees to sit in a courtroom instead of doing their own jobs," he said. "Furthermore, trials, whether you win or lose, can be quite devastating simply because of adverse publicity."
But Page said the speedy settlements can hurt the chances of shareholders who want to sue.
"From a plaintiff's perspective, I prefer to go to trial because during the course of that, there is a lot of testimony developed, a lot of documentary evidence made public," he said. "That type of evidence often bolsters the claims of individual investors who have lost their life savings."
Victims can also be hurt when the perpetrators do not have to admit guilt, which is the case in the WorldCom settlement.
Page said companies insist on that provision because typically, "they remain subject to a number of class-action civil lawsuits. An admission of guilt would pretty much stop them from fighting those lawsuits."