Risk & Compliance

Razing the Bar

A settlement with the SEC doesn't have to spell the end of a CFO's career.
Alix StuartJuly 23, 2008

Most CEOs and CFOs trying to clear up fraud charges with the Securities and Exchange Commission these days face a difficult dilemma: roll the dice at a jury trial, where the odds of winning are low, or agree to a settlement that includes a bar on holding an executive position at a public company for at least five years.

At least one former CFO has found success with a new legal strategy, however: settle on nearly all charges, and put only the officer and director bar before a jury. “This case provides a new avenue for reaching settlements with the SEC,” says John Sten, an attorney with Greenberg Traurig who handled the case. He considers it a “win-win” approach, since it required fewer resources from both sides, but it’s a particular win for his client, Frank McPike, who avoided a bar after five long years of fighting. Already, one other executive is currently awaiting trial in a similar split settlement.

In 2004, the SEC sued McPike and six brokers at four different brokerage firms for allegedly participating in a scheme to manipulate the stock price of Competitive Technologies (CTT) through a stock buyback. McPike, interim CEO for CTT at the time of the charges, had been the company’s CFO from 1983 to 1998, and was later promoted to CEO. He was also a director of CTT for nearly 15 years.

As part of the charges, the SEC sought to bar McPike from being an officer or director of a public company for five years. Such bars, which can last anywhere from five years to forever, are nearly a standard part of enforcement proceedings these days. For C-level employees facing allegations that they knowingly violated anti-fraud laws, “the numbers are pretty substantial and pretty consistent — there is going to be a request for an officer and director bar in the SEC’s lawsuit,” says R. Daniel O’Connor, an SEC trial attorney until this past January, when he left to join the law firm Ropes and Gray.

McPike, 58, however, was willing to settle on all points (without admitting or denying guilt) except the bar. His reticence is also not uncommon. “In this day and age, officer and director bars are the biggest single sticking point in settlement negotiations,” says Sten. “A bar carries a stigma far greater than having to pay a monetary penalty.”

Traditionally, the only alternative to settling has been to press the case to a trial, typically an unpopular option since “the SEC is overwhelmingly successful” at such trials, says O’Connor. Trials can drag on much longer than settlement negotiations, and if a jury finds an executive guilty, he or she is also likely to lose their directors and officers (D&O) insurance coverage, leaving them to personally foot the often staggering costs of defending themselves.

In this case, however, McPike’s attorneys pressed for what’s called a bifurcated settlement, in which the executive settled with the SEC on all terms except the officer and director bar, and the decision about whether or not to impose a bar went before a federal judge. “This way, Frank was able to settle without admitting or denying any of the allegations, and yet put to the test whether the bar would be appropriate even if the allegations were true,” says Sten. To his knowledge, this is the first time a case was split along these lines. As part of McPike’s settlement, he accepted an order enjoining him from violating securities laws in the future, and agreed to a $60,000 civil penalty.

The strategy was a success. A judge in the U.S. District Court of Connecticut decided in April not to impose the bar, and in fact wished McPike well in his future endeavors. McPike is currently employed in the finance department of Fairfield County Bank, a local private bank, after stepping down from his previous position as assistant vice-president and controller in late 2004 after a local newspaper highlighted his litigation.

What made the split decision work in this case? The fact that McPike had not personally benefited economically from the scheme, despite ample opportunities, was “very important” to the judge’s decision, says Sten. The former CFO held approximately 125,000 vested stock options but did not exercise any of them as the stock price climbed from $8 to $22 per share over the repurchase period. The passage of time also helped, since the likelihood of McPike repeating any offense he committed looked dimmer after five years without any further allegations.

The case may set a helpful precedent for others in a similar situation. “This is an opportunity for defendants who don’t want to face risk of jury trial, but may have some items weighing in their favor, like a long career and a good track record,” says O’Connor.
He says it also shows “a shift in SEC policy” to be more open to alternative solutions.

The strategy will likely be put to the test again in the coming months. Earlier this month, Richard Selden, 49, the former CEO of Cambridge, Massachusetts-based Transkaryotic Therapies settled charges that he made misleading statements about clinical trials, and agreed to pay a $125,000 penalty, plus over $1 million in disgorgement/ill-gotten gains. But Selden will have a judge decide whether he should be barred from further executive positions at public companies. O’Connor says regulators are planning to announce a third case using the same approach soon.

Unfortunately, even without an officer and director bar, it may still be difficult for executives in McPike’s situation to find a new CFO role. It’s “certainly helpful” when an executive is exonerated, says Chris Langhoff, an executive recruiter in Russell Reynolds’ financial officers practice, but even “people who are found not guilty still have a stigma.” He says the plethora of CFO candidates generally give his clients the luxury to choose someone without SEC issues in their background.

One bright spot, however: past SEC charges shouldn’t significantly affect future D&O insurance coverage, at least for now. While some insurance carriers “might be reluctant to get involved,” says Kevin M. LaCroix, a partner with Oakbridge Insurance Services, “it is a very competitive marketplace right now, and it is still likely that there would be a number of carriers willing to cover him.”