Saturday, January 07, 2006

How the SEC Views Civil Penalties

There has been a lot of "buzz" in the media recently about the SEC imposing civil penalties, along with speculation on how this might hurt investors.

On January 4th, they issued a press release regarding this:

"Today the Commission announced the filing of two settled actions against corporate issuers, SEC v. McAfee, Inc. and In the Matter of Applix, Inc. In one, the company will pay a civil money penalty; in the other, a penalty is not part of the settlement.

The question of whether, and if so to what extent, to impose civil penalties against a corporation raises significant questions for our mission of investor protection. The authority to impose such penalties is relatively recent in the Commission's history, and the use of very large corporate penalties is more recent still. Recent cases have not produced a clear public view of when and how the Commission will use corporate penalties, and within the Commission itself a variety of views have heretofore been expressed, but not reconciled."

For the full statement, go to: SEC Statement Concerning Financial Penalties.

So far as to where the money goes, it appears they could be using it in certain instances to repay victims.

"The Sarbanes-Oxley Act of 2002 changed the ultimate disposition of penalties. Section 308 of Sarbanes-Oxley (the Fair Funds provision) allows the Commission to take penalties paid by individuals and entities in enforcement actions and add them to disgorgement funds for the benefit of victims. Penalty moneys no longer always go to the Treasury."

As I posted earlier in the week, McAfee has agreed to pay a $50 million dollar fine. Recent history has seen Adelphia fined $715 million, Worldcom $750 million and Time Warner $300 million.

Part of the contreversy, even at the SEC is (whether or not) these fines will impact investors. In fact, it appears that investors, who were damaged could benefit from some of these actions. The other fear seems to be the weakening of the "deterrent" factor since corporations are allowed to pay without admitting wrongdoing.

Time will tell, but if victims are compensated, some of this could be extremely positive for those who lost money as a result of some of these wrongdoings. So far as the "deterrent" factor, there seems to be a lot of individuals (executives) going to jail and in many of these cases, they are being prosecuted separately from the civil actions.

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