SEC unveils new guidelines on punishing companies with fines

WASHINGTON — A federal agency announced new guidelines today for fining companies for fraudulent conduct, addressing an issue that has split securities regulators along political lines.

The guidelines are meant to bring "clarity, consistency and predictability" to the SEC's enforcement efforts, agency chairman Christopher Cox said at a news conference.

They take into account the seriousness of the alleged corporate misconduct, how cooperative the company was in the investigation and the punishment's deterrent effect.

To illustrate, SEC officials announced settlements of accounting-fraud charges with two software companies, McAfee Inc. and Applix Inc.

McAfee, formerly known as Network Associates Inc., is paying a $50 million civil fine under its deal; Applix agreed to tighten its accounting policies, but is not being fined.

McAfee benefited from the alleged misconduct by using inflated stock for acquisitions, while Applix did not gain from the alleged fraud, said the agency's enforcement director, Linda Thomsen.

McAfee is financially strong and shareholders are unlikely to be unduly harmed by the $50 million fine, but Applix is relatively small and its stockholders could be hurt, she said.

Thomsen said that in McAfee's case, "the conduct was pervasive and occurred over a significant time period. In Applix, the conduct, while certainly fraudulent, was more limited."

The standards were adopted unanimously by Cox and the other four SEC commissioners after some 40 hours of discussion in a series of private meetings. There are three Republican commissioners and two Democrats.

"I think it's a major step forward," said David Becker, a former SEC general counsel who now is in private law practice. Addressing concerns that the guidelines could represent a more lenient stance toward corporate wrongdoers, he added, "I don't think it signals any retreat from vigorous enforcement."

Following the wave of corporate scandals in 2002, the SEC imposed record fines in settlements of accounting-fraud charges with several major companies. Among the deals were civil fines and restitution of $750 million for WorldCom Inc., $715 million for Adelphia Communications Corp. and $300 million for Time Warner Inc.

Under legislation enacted in response to the scandals, the money paid by companies under the SEC's settlements goes to repay shareholders affected by the alleged frauds.

But in recent years, the SEC commissioners have split over the issue of whether heavy fines are an effective crime deterrent or actually hurt shareholders. In several cases, Republican commissioners Paul Atkins and Cynthia Glassman objected to stiff penalties imposed during the tenure of the previous SEC chairman, Bush appointee William Donaldson.

Donaldson voted with the two Democratic commissioners in favor of the harsher fines; their three votes prevailed as a majority. Since Cox, a longtime Republican congressman from California, became SEC chairman last August, the highest fine the agency has imposed is $10 million.

Agency lawyers recommend enforcement actions against companies and individuals to the five commissioners. In the new settlements, Santa Clara, Calif.-based McAfee and Applix, based in Westborough, Mass., neither admitted nor denied wrongdoing.

At the Justice Department, a recently instituted strategy allows corporations to avoid criminal prosecution in exchange for information about discussions between employees and company lawyers. The disclosure of communications that normally are confidential gives companies the chance to escape with fines and the promise of internal changes.