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SEC wants violators to pay up personally
Source: Milwaukee Journal Sentinel
Publication date: 2003-06-17

SEC wants violators to pay up personally
By ROBERT SCHMIDT Bloomberg News

Tuesday, June 17, 2003

The Securities and Exchange Commission is refusing to approve fraud settlements with companies and executives unless the defendants agree to pay civil penalties out of their own pockets.

"It's critical when we take money for a civil penalty, which involves a serious wrong, that the money not circle back into the hands of those who have been involved in the wrongdoing," SEC Commissioner Harvey Goldschmid said in a telephone interview about the new approach.

Goldschmid, one of two Democrats on the five-member SEC, also said last week that the agency should consider requiring defendants to admit they violated securities laws rather than use boilerplate language that they don't admit or deny wrongdoing.

The SEC first required that violators pay their own civil penalties, rather than have insurance or the company pick up the costs, in April with the $1.4 billion settlement with Citigroup Inc. and nine other Wall Street firms over biased stock research. The new policy, which was instituted without public announcement, is intended to further punish executives and companies that commit fraud.

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

The SEC also applied the policy to the $3 million fine against six former top Xerox Corp. executives in an overall $22 million settlement earlier this month. The case prompted agency Chairman William Donaldson to say executives cited should pay a bigger portion of the penalties.

Who benefits?

In these cases, the settlement language says defendants cannot rely on indemnification or insurance policies to cover the fines. The language also says payments are not tax-deductible.

Senate Finance Committee Chairman Charles Grassley (R-Iowa) complained that previous SEC settlements often were tax-deductible. Grassley also told the SEC that defendants shouldn't use insurance to pay their settlement costs.

While likely to be popular with investors and Congress, the change may make it harder for the SEC to settle cases, securities lawyers said.

Former SEC trial attorney Stephen Crimmins said the payment requirement shows that the SEC is "more focused on law-enforcement objectives, and the law-enforcement mission of the commission would be better served by making the wrongdoer pay."

Former SEC enforcement director and federal judge Stanley Sporkin said he was "troubled" by the SEC's policy change because one of the reasons companies buy insurance is for covering these types of settlements.

"It seems to me that the only person who benefits by this is the insurance company, and I don't see why they should get a windfall," said Sporkin, who headed the agency's enforcement division from 1974 to 1981. "For the SEC to come out and say you can't get insurance for these things, I think they are going pretty far."

Defense lawyers say they likely will take more cases to trial if the SEC insists on requiring defendants to pay a greater portion of the settlement.

"When there are amounts to be paid and the commission seeks to foreclose insurance and indemnification, then the cost of settlements goes up," said attorney Andrew Vollmer. Vollmer, who represented former Xerox Chief Executive Paul Allaire and former Xerox Chief Financial Officer Barry Romeril, declined to comment specifically on that case.

David Kornblau, the SEC's chief litigation counsel, said the possibility of more trials shouldn't deter the SEC from demanding 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.

Publication date: 2003-06-17