The Securities and Exchange Commission, trying to put several years of angry battles behind it, announced yesterday an agreement on principles governing when the commission will impose financial penalties on companies and when it will refrain from doing so.
The commission said it would seek such penalties when a company had profited from a violation and when punishment was needed to deter violations by other companies. But it said that it would try to avoid hurting shareholders.
At the same time, the commission announced a $50 million penalty against McAfee Inc., a software company. The commission said the company had engaged in fraudulent accounting that enabled it to make acquisitions using overpriced shares and that it was now strong enough to survive the large payment. The commission said the $50 million would be distributed to injured shareholders.
But in another case, involving a smaller software company, Applix Inc., the commission said the company had not benefited as much from an accounting fraud and that shareholders would be harmed by any penalty.
Both companies settled cases, and former executives from both companies still face S.E.C. action. In the McAfee case, criminal charges have also been filed.
"This is intended to be a strong and clear statement from a unanimous commission," Christopher Cox, the S.E.C. chairman, said in an interview. "Penalties on corporations are an important part of our enforcement program. They enable the commission to achieve deterrence, and we believe it is essential to our mission of investor protection."
He added in a news conference, "We will be united in our understanding of what the principles are" when discussing future cases.
Under William H. Donaldson, Mr. Cox's predecessor, the other two Republican commissioners sometimes dissented in enforcement cases, arguing that large penalties were merely hurting shareholders and were inappropriate. That led to the penalties being approved on 3-to-2 votes, with Mr. Donaldson, a Republican, prevailing only because he had the support of the two Democratic members of the commission.
The most vigorous dissident has been Paul S. Atkins, a Republican commissioner who clearly had hoped the commission would radically change course after Mr. Cox became chairman.
In an interview last night, Mr. Atkins praised Mr. Cox, but said the agreement did not indicate he thought any of his previous dissents were wrong.
"I think we have a new era of consensus building and different attitudes," he said. "It is less politicized, and we are getting to work."
In an interview, Mr. Cox said that the unanimous agreement came after about 40 hours of meetings during which the commissioners and two senior staff members, Giovanni Prezioso, the general counsel, and Linda C. Thomsen, the director of enforcement, extensively reviewed the legislative history of the laws that gave the S.E.C. the right to impose financial penalties on companies.
Told that many of the principles enunciated seemed difficult to dispute, Mr. Cox replied, "You should have been in our discussions."
Because the principles are general, and some cases will include aspects that argue for financial penalties and others that argue against them, disagreements are still possible in the future.
"We have reconciled the varying perspectives," Mr. Cox said, adding, "I don't believe any commissioner fundamentally changed his or her views."
Mr. Atkins, besides dissenting on some enforcement penalties, has also been critical of policies adopted by the commission, speaking with a bluntness that surprised some. In a speech to a lawyers' group in November, he strongly criticized Mr. Prezioso, the general counsel, for filing legal briefs defending a commission rule passed on a 3-to-2 vote under Mr. Donaldson.
"The staff has contented itself to rely on 'dead-hand' authority," Mr. Atkins said. "It has prepared and filed briefs in the name of the commission without the commission's advance review, let alone any commission input."
The public criticism stunned S.E.C. staff members and commissioners, coming after Mr. Prezioso had privately told people he was preparing to leave the commission; his resignation has since been announced.
Mr. Cox had made clear that he was committed to enforcing and defending rules adopted before he arrived.
Last night Mr. Atkins said he thought his speech had been appropriate and could have been stronger.
The S.E.C. has historically been run by the chairman, to whom the senior staff reports, and commissioners have sometimes chafed at having little input beyond voting on issues. Mr. Cox appears to have made an effort to make the four other commissioners feel more involved, in hopes of reducing the level of public bickering and criticism.
In determining whether to seek monetary penalties against companies, as opposed to corporate officials who planned the frauds, the commission said two considerations would be most important, "the presence or absence of a direct benefit to the corporation as a result of the violation," and "the degree to which the penalty will recompense or further harm the injured shareholders."
But it added that deterrence was also important, and that in crimes that were difficult to detect, severe penalties could be needed to deter similar violations.
It also said it would consider how widespread complicity in the fraud was within the company.
"The imposition of a corporate penalty is most appropriate in egregious circumstances, where the culpability and fraudulent intent of the perpetrators are manifest," it said.
Finally, it said that companies that aid the commission in its investigation and quickly take remedial steps would be more likely to escape financial penalties.
In the McAfee case, the commission contended that the company, from 1998 to 2000, overstated its revenue and profit by hundreds of millions of dollars, largely through channel-stuffing in which distributors were persuaded to order products they did not need or want.
The company, without admitting or denying the allegations, accepted a court injunction barring it from future violations of securities laws. Its former chief financial officer, Prabhat Goyal, and its former controller, Terry Davis, are awaiting trial on criminal charges.
Applix accepted a lesser punishment, a cease-and-desist order from the commission that required it to hire an independent consultant to oversee its financial policies. The commission noted that the company's board had acted quickly when it learned of improper accounting in 2002.
- 192 Technology & Telecommunications