Making The Fine Fit The Crime

Chris Cox, on a crusade for clarity, will issue new guidelines for the SEC

While its back-log of big enforcement cases grows, the Securities & Exchange Commission is getting ready to publish guidelines on a question that has split the agency's commissioners for a year: When should the securities cops impose stiff fines on corporate wrongdoers?

SEC insiders say settlements in major fraud cases are stacking up while new Chairman Christopher Cox pushes for standards. Hammering that out hasn't been easy. The five commissioners have met behind closed doors four times this fall for two hours at a stretch. In a Nov. 29 interview with BusinessWeek, Cox said he hopes to publish the guidance by yearend.

The new standards won't lay down the size of fines. But investor advocates see a strong chance that business will emerge with a smaller risk of mega-fines.


The push is a deft move by Cox. His fellow Republicans, Paul S. Atkins and Cynthia A. Glassman, rebelled in the SEC's private sessions against some stiff fines handed down under former Chairman William H. Donaldson. Spelling out rules could end the infighting and give corporate leaders an unambiguous signal. "There needs to be a very clear understanding of what the law requires of us and, among Americans, what the law requires of them," says Cox.

Until recently, the SEC was reluctant to hit companies with big fines. Officials reasoned that penalties hurt shareholders whose stocks had already been hammered by scandal. But the 2002 Sarbanes-Oxley Act let the SEC use the funds to repay stockholders, and the agency jacked up fines. Accounting frauds cost WorldCom, now MCI Inc. (MCIP ), $750 million and Qwest Communications (Q ) International $250 million. But since Cox was sworn in on Aug. 3, the SEC has not imposed penalties topping $10 million against any company -- leaving corporate lawyers puzzled about the chief's enforcement priorities.

Cox says he wants "a series of objective measures so there can be continuity from case to case." That's easier said than done, warns Georgetown University law professor Donald C. Langevoort. A good baseline, he says, is whether a company benefited from its wrongdoing. Commissioners will also debate how much credit a company should get for dumping its CEO or cooperating with the SEC, he says.

Companies will want a high threshold for fines. But corporate lawyers just want guidance. "There needs to be an understanding that certain behaviors will get certain punishments," says Diane E. Ambler of Kirkpatrick & Lockhart Nicholson Graham LLP. Any signposts will be better than today's unmarked landscape.

By Amy Borrus

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