Risk & Compliance

House Panel Approves Bill to Boost SEC

But state authorities -- including Eliot Sptizer -- blast amendment that would shelter investment banks from state rules. Also: shareholders may ga...
Stephen Taub and Craig SchneiderJuly 14, 2003

A bill to strengthen the Securities and Exchange Commission’s enforcement powers is one step closer to becoming law. But some critics say the proposal will trample on the power of state regulators.

On Thursday, the House Financial Services Capital Markets Subcommittee approved H.R. 2179, the Securities Fraud Deterrence and Investor Restitution Act, which is sponsored by Rep. Richard Baker (R-La.), the subcommittee’s chairman. The bill, as CFO.com reported in May, would grant the SEC, among other things, freedom to issue money penalties in civil cease-and-desist proceedings, to access grand jury information, and to ditch state laws preventing property repossession.

State authorities, however, are irate about an amendment to the bill that would prevent local authorities from imposing structural reforms on investment banks. New York Attorney General Eliot Spitzer, for one, is none too pleased with the tack-on. “This action shreds one of the most basic protections that investors have against fraudulent activities, and is an attack on the 75 percent of Americans who own stock,” Spitzer said.

Spitzer gained national attention for a probe that eventually led to a $1.4 billion global settlement with 10 investment banking firms in April. That settlement also established stringent rules to prevent the firms from providing tainted research to investors.

Spitzer is worried that the amendment in H.R. 2179 could undermine similar efforts in the future. “Proposing state preemption is particularly outrageous because federal regulators and the Congress failed to act against these well-known frauds,” Spitzer fumed.

The subcommittee states that the measure is designed to keep state legislators from creating federal securities laws. But territorial concerns for the SEC clearly grew out of the attorney general’s probe into the investment banks. “This is Wall Street’s revenge on Eliot Spitzer,” said Barney Frank, the senior Democrat on the House financial services committee, referring to the measure in a Financial Times article.

The provision also faces opposition from The North American Securities Administrators Association (NASAA), which represents state regulators. “Restricting the ability of states to tailor corrective actions to specific instances of misconduct severely limits state securities regulators and will have a chilling effect on us doing our jobs of protecting investors,” NASAA President Christine Bruenn, said in a Reuters report.

Next step for the legislation: consideration by the full House Financial Services Committee.

SEC Set to Step-Up Shareholder Power

As federal regulators push for more enforcement power for the SEC, the agency is reportedly considering empowering shareholders.

Specifically, the SEC staff plans to recommend that the securities regulatory body move to give shareholders more power in nominating and electing corporate directors, according to The Wall Street Journal. The report is expected to be delivered on Tuesday, after which time the five-member commission would conceivably work with the staff to issue proposed rules.

While certain details of the report are being hammered out, the paper cited unnamed sources who said the SEC staff is likely to suggest, among other things, that companies in limited circumstances should have to include a shareholder-selected board nominee on a company’s official proxy material. Currently, SEC rules allow shareholders to elect directors and nominate candidates, but they stop short of requiring the name placement. An SEC spokesman declined to comment for The Journal‘s story.

Ex-Xerox CFO Barred, Fined by SEC

The SEC came down hard on two former Xerox Corp. finance executives following an investigation into the company’s accounting problems.

Former chief financial officer Barry Romeril was barred for life from being an accountant, while former director of accounting policy Gregory Tayler was suspended for three years. Tayler has the right to apply for reinstatement afterward.

The commission ordered Romeril to disgorge nearly $3 million of ill-gotten gains, and levied more than $1.2 million in prejudgment interest and a $1 million civil penalty. He was also permanently barred from being an officer and director.

Tayler was ordered to pay $92,603 in disgorgement of ill-gotten gains, $32,397 in prejudgment interest, and a $75,000 civil money penalty.

The SEC claims that from 1997 to 2000, Romeril fraudulently misled investors about Xerox’s true financial performance through the use of numerous accounting actions, most of which failed to comply with generally accepted accounting principles (GAAP). The alleged chicanery accelerated the recognition of equipment revenues by approximately $3 billion and increased pretax earnings by about $1.4 billion, according to the commission.

“Romeril directed or allowed lower ranking defendants in Xerox’s financial department to make accounting adjustments to results reported from operating divisions to accelerate revenues and increase earnings, including the use of accounting practices known internally within Xerox as margin normalization, return-on-equity, and price uplifts and lease extensions,” the commission said in its complaint.

In addition, the SEC claims Romeril — with the help of other senior Xerox financial executives — fraudulently established a $100 million reserve for “unknown risks” arising out of a 1997 acquisition by Xerox. According to the complaint, Romeril “knew and approved of the improper release of the reserve in later years to cover expenses unrelated to the acquisition.”

The SEC also charged that Romeril authorized Xerox’s use of $315 million of numerous other excess or cushion reserves and $157 million of interest income from tax refunds to manage Xerox’s earnings.

The complaint alleges that Romeril failed to disclose the use and financial impact of all of these accounting actions, as well as certain lease transactions that Xerox entered into in 1999 (known as Partnership Asset Strategy, or PAS, transactions) that resulted in substantial and material increases in the company’s financial results and earnings trends at the expense of future periods.

As for Tayler, the commission alleges that from 1997 to 2000, he misled Xerox investors by participating in and failing to disclose the use of Xerox’s most material accounting actions, including margin normalization and return-on-equity that accelerated equipment revenues and earnings in violation of GAAP. The complaint also alleges that Tayler fraudulently failed to disclose the use and financial impact of Xerox’s 1999 PAS transactions.

In April 2002 the SEC brought an injunctive action against Xerox, which consented to the entry of a final judgment that permanently enjoined the company from violating the antifraud, reporting, and recordkeeping provisions of the federal securities laws.

Xerox also paid a $10 million civil penalty, agreed to restate its financial statements, and agreed to hire a consultant to review the company’s internal accounting controls and policies.

In a related-story: it seems former Xerox execs accused of wrongdoing, however, can still make a living despite career curbing settlements with the SEC. The New York Times reported last week that The Ford Foundation will keep Paul Allaire as its chairman, despite allegations by federal regulators that he committed accounting fraud as chairman and chief executive of Xerox.

Under an SEC settlement, Allaire was banned for five years from serving as a director of a public company, was ordered to pay a $1 million penalty and forfeit $7.6 million in bonus pay and proceeds from stock sales at Xerox. The Ford Foundation, which does not consider itself a public entity, cleared Allaire for further service.

SEC Launches Formal Probe of Tenet

In another SEC action, Tenet Healthcare Corp. said it received a civil subpoena for documents from the commission, indicating that it is conducting a formal investigation of the company.

This follows disclosures by Tenet last November that the SEC had initiated an informal inquiry.

The subpoena seeks documents since May 31, 1997, related to Medicare outlier payments, stop-loss payments, and increases in gross charges, as well as the company’s financial and other disclosures.

The company said it would supply the requested documents and continue to cooperate with the SEC.

Late last year, CFO David Dennis resigned while COO Thomas Mackey retired after the company reported two separate unrelated investigations-one regarding outlier payments to Tenet hospitals and the other stemming from the merger of two of its hospitals in Missouri.

HealthSouth Finance Executive Pleads Guilty

The U.S. Justice Department has widened its investigation into HealthSouth Corp. from its accounting department to the treasury department. In doing so, Jason Brown, vice president of finance at HealthSouth Corp. agreed to plead guilty to fraud, the U.S. Justice Department announced last week.

Brown is the twelvth HealthSouth officer to accept charges and cooperate with the government’s probe. Among the dirty dozen: all five of the company’s previous finance chiefs. “We will continue to widen the net of our investigation to reach all those individuals who participated in this fraud.” U.S. Attorney Alice Martin said in a statement.

Specifically, Brown agreed to plead guilty to conspiracy to commit securities fraud, falsifying books and records, and wire fraud, the Justice Department said. The agency charges that Brown participated in a 2001 conspiracy to sell about $27 million of stock in another company but failed to record the sale on HealthSouth’s books.

Brown was also allegedly instructed to create a false sale document that showed HealthSouth sold the stock in 2002. He’s also charged with altering HealthSouth’s “same-store volume” records for the third quarter of 2002 to lessen their decline. The falsified numbers were then allegedly included in a news release that was sent to industry analysts and the public.

Prosecutors said the conspiracy charge carries a maximum penalty of five years in prison and a fine of $250,000. Government investigators have charged that HealthSouth deliberately inflated its value by $2.5 billion over several years.


  • July 31, 2003: Comment Deadline for FASB Exposure Draft, Qualifying Special-Purpose Entities and Isolation of Transferred Assets — an amendment of FASB Statement No. 140
  • August 28: FASB will hold a public roundtable discussion about the exposure draft. An individual or organization desiring to participate must notify the FASB by sending an email to [email protected] by August 7, 2003, and submit a position paper or a comment letter addressing the provisions of the proposed Statement by July 31.

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