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."

You may like these other stories...

KPMG LLP has agreed to shell out $8.2 million to settle charges from the US Securities and Exchange Commission (SEC), which found that the Big Four firm violated auditor independence rules by providing certain nonaudit...
By Jason Bramwell, Staff WriterJuly 1, 2014, is the date when the first set of municipal advisors will be required to register under new rules the US Securities and Exchange Commission (SEC) finalized last year.The SEC...
The Financial Accounting Standards Board (FASB) on December 18 released the 2014 US Generally Accepted Accounting Principles (GAAP) Financial Reporting Taxonomy, which contains updates for accounting standards and other...

Upcoming CPE Webinars

Apr 22
Is everyone at your organization meeting your client service expectations? Let client service expert, Kristen Rampe, CPA help you establish a reputation of top-tier service in every facet of your firm during this one hour webinar.
Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
Apr 30
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.