Company, Police Thyself

In 1976, the Securities & Exchange Commission was rounding up U.S. companies that fudged their books to conceal bribes paid to foreign officials. To speed up cases, the SEC announced an amnesty: turn yourself in, clean up, and we won't sue. The program netted hundreds of companies without much effort--a fact noted by a young SEC lawyer, Harvey L. Pitt.

Fast-forward a quarter-century to the first major enforcement action of Pitt's era as SEC chairman. On Oct. 23, the commission laid out guidelines for companies that cooperate with investigators probing securities violations. For the first time, firms have a blueprint to minimize--or perhaps even escape--legal action by the agency.

The plan arises from a $7 million accounting fraud allegedly committed by Gisela de Leon-Meredith, formerly controller of a subsidiary of food processor Seaboard Corp. (SEB ) of Shawnee Mission, Kan. According to the SEC, Meredith underreported the subsidiary's expenses from 1995 until early 2000. When Seaboard discovered her actions, it promptly investigated, fired her and two superiors, and cooperated with the SEC, even providing privileged legal documents. As a result, the agency sued Meredith--but not Seaboard. Meredith accepted the SEC's sanction without admitting the charges.

TONE CHANGE. The lesson, according to the SEC report on the probe: "When businesses seek out, self-report, and rectify illegal conductinvestors can benefit more promptly." Cases will be finished faster, satisfying Pitt's desire for "real-time enforcement." And the SEC can stretch its thin resources. "The SEC will always have plenty of really bad guys to go after," says William R. McLucas, a former SEC enforcement chief now at Wilmer, Cutler, & Pickering. "If they can increase the companies that self-police, investors will reap an exponential benefit."

Not so, say critics: The SEC blueprint "creates a tone at the top of a lack of accountability," says Lynn E. Turner, former SEC chief accountant. Lawyers who advise corporate miscreants are taking a wait-and-see attitude. The SEC "hasn't really given any quarter," says one defense attorney, particularly since it won't be lenient if outsiders discover wrongdoing before the company does. But Pitt's back-to-the-future amnesty clearly signals a new approach--cooperation, not confrontation--for the SEC.

By Mike McNamee in Washington

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