Will New Blood Improve The Sec's Circulation?Michael Schroeder
Central & South West Corp. is a prisoner of the Securities & Exchange Commission. Back on Apr. 1, 1987, the company asked the SEC for permission to expand its burgeoning financial subsidiary, CSW Credit Inc. The Dallas electric-utility holding company wanted the credit unit to increase its purchases of accounts receivable from other utilities. The SEC staff recommended that the issue be heard by an SEC administrative law judge. Nearly two years later, in February, 1989, the judge O. K.'d the utility's request. But the SEC staff appealed the ruling to the full commission, which must approve such changes for utility holding companies under the Public Utility Holding Company Act of 1935.
Now, six years after the initial request, CSW still awaits an answer. The reason, SEC insiders say, is that the four sitting commissioners are deadlocked 2-2. Of course, the commission could have let the application fail on a tie vote. But Chairman Richard C. Breeden, who is expected to be succeeded by former American Stock Exchange Chairman Arthur Levitt Jr. within a few months, supports the application and won't allow that to happen, the sources say. The company declines comment. Through a spokesman, Breeden declined to comment because all the issues raised in the story are either in litigation or involve confidential SEC deliberations.
The CSW case is but one example of the SEC's often glacial system for handling contested administrative cases, which can involve anything from utility mergers to accounting irregularities to civil fraud. A two-year SEC task force study, issued in February, found that appeals decided by the SEC in fiscal 1992 took an average of four years to complete, more than double the average in 1983. Meanwhile, the backlog of unresolved cases more than tripled.
The snail's pace creates enormous uncertainty for business and leaves those charged with civil violations of securities laws twisting in the wind, often for years. To get the lead out, the SEC task force guidelines recommend a 10-month deadline for administrative law judge decisions and nine months for commission rulings on appeals. "Justice delayed is justice denied," says Commissioner Mary L. Schapiro, who led the task force.
'VETO POWER'? In part, the problem stems from staff cutbacks. But there are more systemic reasons. The SEC's complex multistep process for adjudicating appeals is very time-consuming. And headstrong commissioners often wrestle for a year or two before reaching a majority opinion. The system also gives the chairman great power to tie up the process. According to interviews with current and former SEC officials, Breeden on several occasions delayed the disposition of cases if his view didn't prevail. Says former SEC chief economist Gregg A. Jarrell: "Breeden operated as though he had veto power on any commission matter."
To be sure, contested administrative proceedings constitute only a fraction of the hundreds of cases resolved each year. Over 90% of SEC administrative proceedings are settled. And Breeden has streamlined the process, doubling the adjudication staff to 17.
But those accused of violating the law still often pay a heavy price for the slow grinding of the wheels of SEC justice. Consider Arthur J. Huff. In 1986, SEC staff charged the PaineWebber Inc. compliance officer with inadequately supervising a salesman who had bilked customers out of $7.6 million. The next year, a law judge recommended suspending Huff from the securities business for 60 days. But, due largely to wrangling among the commissioners, Huff's ordeal didn't end until March, 1991. The SEC overturned the law judge's decision, with two commissioners saying Huff--who remained with PaineWebber--fulfilled the standards for performing his job, and two others declaring the salesman wasn't even subject to Huff's supervision. Huff couldn't be reached for comment.
Perhaps most vexing to insiders and outsiders is the extent to which delays at times are induced for political reasons. Sources cite a case involving two Coopers & Lybrand accountants. In 1989, an administrative law judge found that from 1981 to 1984, accountants David J. Checkosky and Norman A. Aldrich negligently allowed Stamford (Conn.)-based Savin Corp. to violate accounting rules by deferring costs in a failed photocopier venture. The law judge recommended five-year suspensions for the accountants, who declined comment through lawyers.
ORNERY. As previously reported (BW--Feb. 10, 1992), Breeden wanted to uphold the suspensions, but a majority of the commission disagreed. Knowing that one member of the majority was about to leave the commission, nullifying his vote, Breeden refused to sign the opinion, sources say. The arrival of a new commissioner would allow Breeden to lobby for the third vote needed to impose sanctions. That happened on Aug. 26, 1992, although the penalty was reduced. "Breeden decided to shuffle the deck after the cards had been played," says one knowledgeable source. "That's cheating."
After reading about the episode in BUSINESS WEEK, the accountants sued in federal court, alleging that the SEC had denied them a fair hearing. The agency vigorously opposed efforts to probe its proceedings and contended that the BUSINESS WEEK article was false. But Edward H. Fleischman, a Breeden critic then on the commission, wrote the court: "I disagree with arguments made and conclusions presented to you on behalf of the commission." What's more, after his dissent from the Aug. 26 SEC decision, Commissioner Richard Y. Roberts demanded a retraction of the majority's claim in a court filing that the accountants shouldn't get access to SEC deliberations in the case.
Most disturbing for the SEC was Roberts' suggestion in his dissent that the whiskers on the case were reason enough to throw it out. "Countries have disappeared, and new ones have emerged during the decade that has passed since the alleged violations occurred," he noted. But the case remains unresolved.
The SEC deserves credit for undertaking an internal study and making progress in speeding administrative decisions. But critics claim proposed reforms don't go far enough. The commission, in fact, could be an ideal place for the Clinton Administration to deliver on promises to bring more efficiency to government. Getting the lead out of the SEC would be a worthy goal for incoming Chairman Levitt.
THE SEC'S SLOW WHEELS COOPERS & LYBRAND NOV. 12, 1987 SEC launches proceeding against two Coopers & Lybrand accountants, David J. Checkosky and Norman A. Aldrich, alleging they improperly audited Savin. SEPT. 5, 1989 SEC administrative law judge recommends five-year suspension. AUG. 26, 1992 SEC upholds decision, but reduces suspension to two years. Accountants later appeal. Appeal still pending. CENTRAL & SOUTH WEST APR. 1, 1987 Central & South West applies to SEC to expand its subsidiary, CSW Credit. FEBRUARY, 1989 SEC judge recommends granting CSW's request. SEC staff appeals decision to full commission. Appeal still pending. ARTHUR J. HUFF AUG. 12, 1986 SEC launches action against Arthur J. Huff, PaineWebber vice-president, for failing to supervise an employee. DEC. 15, 1987 SEC judge rules against Huff, recommends a 60-day suspension; Huff appeals. MAR. 28, 1991 SEC overturns decision. GEORGE C. KERN JR. JUNE 29, 1987 SEC brings action against George C. Kern Jr., a lawyer at Sullivan & Cromwell, alleging he failed to disclose promptly a client's talks with a third party during a takeover contest. NOV. 14, 1988 SEC judge recommends dismissing allegations; SEC staff appeals. JUNE 21, 1991 SEC upholds ruling. DATA: BUSINESS WEEK