Shifting Legal Sands: Growing Pressure on Early Cooperation, Settlement and Waiver in SEC Enforcement Actions

Abstract

Public companies face new and aggressive SEC enforcement practices in response to profound patterns of corporate fraud, the Sarbanes-Oxley Act, and enlarged compliance expectations under revised Federals Sentencing Guidelines. In a determined enforcement agenda, the SEC brought more than 1,300 civil cases and has obtained orders for disgorgement and penalties in excess of $5 billion between 2004 and 2005.During the same time period, the SEC sued approximately 100 chief executive officers of public companies and the Department of Justice has initiated criminal cases alleging securities related misconduct by more than 500 defendants. The wide scope of these actions marks a new world of expected corporate conduct that demands careful attention of management and counsel.In its charging and sanctioning decisions, as well as decisions not to charge and not to sanction, the SEC explicitly recognizes efforts by companies to police themselves, report problems to the government and establish a solid culture of compliance. The SEC specifically targeted the "hearts and minds of senior executives" with penalties of $750 million against WorldCom, $250 million against Qwest, $100 million against Bristol-Myers Squibb or $100 million against Alliance Capital as "serious, real-world consequences."Through its new enforcement regime, the SEC has radically reshaped the rewards and consequences for prompt and cooperative action by companies discovering misconduct or facing enforcement actions. This paper will identify different elements of the SEC’s new expectations and practices through significant cases and SEC statements.