A review of the SEC’s model case and a number of other cases before the commission reveals a definite pattern: An entity’s level of cooperation directly corresponds with the penalties levied against it.
The review also shows what securities lawyers say are large gaps in the city’s cooperation, from the timely turning over documents to the very law firm hired to investigate its accounting practices. The consequences could endanger the city institution all the way to the taxpayers.
SEC officials don’t comment publicly on ongoing investigations. But Paul Berger, associate director of enforcement at the SEC, bluntly defined the commission’s stance on cooperation in May when charges of accounting fraud were levied against Lucent Technologies officials:
“Companies whose actions delay, hinder or undermine SEC investigations will not succeed. Stiff sanctions and exposure of their conduct will serve as a reminder to companies that only genuine cooperation serves the best interests of investors.”
The company was ordered to pay a $25 million fine for its failure to abide commission wishes.
Timely cooperation is key
Time and again SEC cases reveal that when an entity cooperates fully, only specific individuals receive sanctions while the entity is spared. However, when cooperation falters, the files show a long record of multi-million dollar fines and other sanctions handed down to the institutions as a whole, in addition to individual charges.
The SEC consistently and prominently stresses the importance of cooperation in its documents.
“So the carrot is also a stick, and they will beat you with it,” said Ed McIntyre, a securities attorney with the firm Solomon Ward who offered a bleak assessment of the city’s cooperation to date.
Indeed, in his first public report last week, the city’s hired disclosure expert Lynn Turner, a former SEC accounting chief, said federal officials were “making it very clear that there would have to be a high level of cooperation due to what had been a lack of cooperation that had ‘had an effect on their investigation.’”
The SEC has been investigating errors and omissions in the city’s financial disclosures to investors for more than a year, and the U.S. Attorney’s Office is looking into possible public corruption.
Seaboard Corp. is a model case
The model case held up by the SEC, the regulator of public financial markets, to all entities with disclosure and accounting problems is that of Seaboard Corp., a conglomerate company with holdings in agriculture, shipping and energy.
Because of Seaboard’s rapid cooperation, no action was taken against the company. Instead, proceedings were only taken against its controller for manipulating its financial records.
“My sense is overall they [city officials] have not demonstrated the type of cooperation that Seaboard calls for. That’s kind of a baseline. That’s where you start with the SEC nowadays and go from there,” said Bill Sullivan, national chairman of firm Paul Hasting’s securities litigation practice.
The record for non-cooperation is clear. During the past three years hosts of corporations such as Banc of America Securities, Xerox Corp., Halliburton Co. and Dynegy Inc. all faced multi-million fines for lapses of cooperation.
“If companies wish to receive the maximum benefit from their cooperation, the cooperation must be complete and meaningful from the outset,” according to SEC documents in the Dynegy case. Company officials eventually cooperated, but didn’t self-report and at first made public statements denying allegations, according to SEC documents.
While they head a municipality and not a corporation, city officials have been advised to study Seaboard officials conducted themselves and are likely to be held to many of the same standards as a corporation. It is the first case of municipal securities a post-Enron era rife with cases of financial malfeasance.
To measure the city’s level of cooperation, Voice of San Diego identified six key steps taken by Seaboard officials that gained them good grace in the eyes of regulators and compared these efforts with the city’s known actions to date.