In a contentious closed-door meeting on June 6, Democrats and Republicans on the Securities & Exchange Commission demonstrated again why the agency has become so fractured. In settling three cases against companies accused of violating securities laws, GOP commissioners Paul S. Atkins and Cynthia A. Glassman objected to plans to impose big fines directly on corporations. In the case of HealthSouth Corp., accused of a $2.7 billion accounting fraud, the Republican commissioners were outvoted when SEC Chairman William H. Donaldson sided with two Democratic commissioners in backing a $100 million fine. But Atkins and Glassman succeeded in scuttling a $30 million penalty that Veritas Software Corp. (VRTS) had agreed to pay to settle allegations concerning its questionable accounting. The deal was rejected on a 2-2 vote after Donaldson recused himself.
Atkins and Glassman may not be in the minority much longer. Securities lawyers say Representative Christopher Cox (R-Calif.), President George W. Bush's pick to succeed Donaldson, is likely to share their skepticism about big corporate fines, especially in instances of financial fraud. The GOP commissioners argue that such penalties hurt shareholders who already have been victimized by management's misdeeds. Insiders say Atkins also has questioned the scope and aggressiveness of some SEC enforcement probes -- a skepticism that lawyers say Cox may share. For Atkins and Glassman, "this is their time," says Donald C. Langevoort, a Georgetown University law professor.
That doesn't mean corporate crooks can rest easy. Cox may be business-friendly, but he's unlikely to go after the agency's much-strengthened enforcement efforts. Indeed, he struck a gunslinger pose when Bush announced his nomination at the White House on June 2: "The rule of law that the SEC enforces has given America the most dynamic and vibrant capital markets in the world," he said. "The natural enemies of this economic marvel are fraud and unfair dealing."
Still, policing markets is more complicated than a showdown at the O.K. Corral. Every enforcement case the SEC brings -- or doesn't bring -- turns on a series of choices about policies and tactics that are largely invisible to the public. And lobbyists and securities lawyers expect that under Cox the tone will shift as staff and commission decide how sweeping probes should be, what kinds of charges to pursue, when to play hardball with targets, and how high to set civil penalties. Those subtle changes could take some of the heat off business and Wall Street. "The pendulum is swinging back," crows U.S. Chamber of Commerce Chair Maura W. Donahue.
Yet Cox can't risk letting the agency be seen as going soft on crime. New York Attorney General Eliot Spitzer and other state prosecutors will pounce on any wrongdoing they think the feds are missing. That's why, despite business gripes about the Enforcement Div.'s heavy hand, the new chairman isn't likely to replace Linda Chatman Thomsen, Donaldson's recent pick to lead the division's 1,130 lawyers and accountants. Booting Thomsen could hurt SEC morale and spark an outcry among investors.
Still, Thomsen is likely to get new marching orders. The GOP commissioners' stance on corporate fines, for instance, could force the Enforcement Div. to focus more on punishing executives who engineer corporate frauds. That will win Glassman's support: "Individual deterrence is even more critical than corporate deterrence because it's really individuals whose reputations and lifestyles are affected by what we do," she says.
To avoid commission fights over fines, staffers have recently funneled some big penalties through the Justice Dept. Last September, when the SEC and Justice settled fraud charges against Computer Associates International Inc. (CA) and three former top CA executives, Justice deferred prosecution against the company in return for $225 million in restitution to injured investors. But Deputy Attorney General James B. Comey, who ran Justice's crackdown on corporate crimes, has resigned, clouding the prospects for more such deals.
Cox's track record in Congress suggests that he will focus on cases where misconduct is blatant and where it has violated clear-cut legal standards. In the early '90s, disappointed shareholders often sued companies that missed earnings targets. And Cox once sponsored legislation requiring investors to prove that managers intended to deceive -- a high hurdle.
That history could mean that Cox may steer clear of some cases Donaldson's SEC pursued. Management behavior that is questionable but not clearly illegal may escape harsh punishment, as would lapses in judgment. Last December the SEC settled charges with Walt Disney Co. over its failure to disclose fully its ties with directors, but it didn't charge CEO Michael D. Eisner. Insiders say Atkins and Glassman opposed holding Eisner to standards they believed weren't in force at the time. Cox may also deemphasize suits against lawyers, accountants, and other gatekeepers who simply fall short in carrying out their duties.
For many businesses, the biggest SEC irritant has been Donaldson's sweeping "risk-based" probes to root out possible abuses before they become full-blown scandals. Corporate lawyers fume that these industrywide inquiries are often costly and unreasonable fishing expeditions. Cox might rein in some probes, but he's unlikely to abandon the approach entirely, since it multiplies the SEC's resources and lessens the risk of unforeseen scandal.
The changes could give accused companies and execs more leverage. Instead of rushing to settle potential charges, targets may appeal to the commission. But business shouldn't be complacent. The worst corporate bandits are still likely to face a sheriff who's quick on the draw.
By Amy Borrus in Washington