VideoWhen CFO sat down with New York Attorney General Eliot Spitzer this past fall, he claimed that all was well between state and federal regulators as they worked to pursue securities fraud without stepping on each other's toes (see "Wall St. Warrior," November 2003). In fact, the two sides had just announced the establishment of a joint task force to explore ways to work together.
But the former partners in crime-fighting are now fighting each other. Tension over the best way to handle the mutual-fund scandal set off a war of words between Securities and Exchange Commission chairman William Donaldson and Spitzer, who publicly scolded the SEC after it an-nounced a settlement with Putnam Investments (which has been accused of allowing market timing in its mutual funds). "To Chairman Donaldson I would say, obviously we're on the same team, but don't cut deals behind my back in the middle of the night and call me the next morning and not expect to get criticized," fumed Spitzer in late November at a Practising Law Institute forum on hedge-fund regulation. In an op-ed piece in the New York Times, he wrote that any resolution with his office would "go far beyond what the [SEC] has obtained from Putnam."
Donaldson defended the SEC, telling the Senate Banking, Housing, and Urban Affairs Committee that criticism of the settlement was "misguided and misinformed." And in his own Wall Street Journal op-ed piece, Donaldson countered that "many state agencies (including that of the New York attorney general) willingly and regularly forgo blanket admissions...to achieve meaningful and timely resolutions of civil proceedings."
But that hasn't put an end to the criticism. "The states don't think the SEC has done all it can to protect investors," says Ralph Lambiase, president of the North American Securities Administrators Association. "The public doesn't care whose role it is."
Others claim the criticism is unwarranted. "As soon as the SEC became aware of the market-timing issue, it papered the Street with subpoenas," says Ron Geffner, a former SEC enforcement at-torney now with Sadis & Goldberg LLC, in New York. Richard Phillips, a former SEC official and a senior partner in the San Francisco office of Kirkpatrick & Lockhart LLP, agrees. "There was nothing wrong with what the SEC did when it made a partial settlement with Putnam," he says. "Spitzer is upset because the SEC got in ahead of him." He adds that the likely result of all the bickering is that the SEC and state regulators will go after cases more aggressively. —Joseph McCafferty
Blameless
Unlike the recent accounting scandals, which brought the world images of CFOs being led away in handcuffs, finance chiefs have not played a role in the mutual-fund scandals. So far, no CFOs have been fired or forced to resign from mutual-fund companies that have been accused of market timing or after-hours trading.
For example, while former Putnam Investments CEO Lawrence Lasser was forced to resign in November—a few days after Putnam was accused of securities fraud—CFO Irene Esteves remains in her position. CFOs at Strong Financial Corp. and Invesco Funds Group have also remained while their companies have come under fire.
The reason, say mutual-fund industry experts, is that CFOs are not usually responsible for compliance. "It is not typically the responsibility of the CFO to manage the regulatory-compliance function at mutual-fund companies, as it might be at a manufacturer," says Douglas Zingale of law firm Greenberg Traurig LLP. "These firms have separate compliance departments, and those folks have a lot to answer for right now," he adds.
However, says Zingale, the CFOs are in a good position to get involved in the damage-control effort: "It's likely that they are being sought out as a trusted adviser." —J. McC.
Courting Disaster
By many accounts, merger-and-acquisition activity is poised to roar back in 2004. But just as companies are considering new deals, along comes another potential roadblock: Section 404 of the Sarbanes-Oxley Act of 2002.
At this point, the Securities and Exchange Commission has not issued guidance on how to interpret Section 404—which calls on companies to certify that they have auditable internal controls—in relation to mergers and acquisitions. But since any com-pany that consolidates another is then responsible for the target's internal controls, finance executives are understandably concerned that Section 404 may chill certain deals.
"Any acquisition we do next year has to be 404-ready," says Steve Paladino, CFO of Henry Schein Inc., who adds that such verification could prove to be a problem if the target is a private firm. Moreover, he says, the Melville, N.Y.-based health-care supplies company may postpone acquisitions if there's any question a deal might impede its ability to certify financial statements or meet the deadline for Section 404 compliance.
Paladino's sentiment is understandable, says James E. Hoffman, managing director at Robert Baird & Co. "Buyers want to make certain that a particular deal is not going to jeopardize their ability to certify their own financials and internal controls." So while Section 404 may not "hurt M&A volume over the longer term," he says, "it will change the nature of due diligence and the timing of deals."
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