By Verschoor, Curtis C.
Strategic Finance , Vol. 92, No. 6
July could have been a slow summer vacation month this year. Instead, it turned out to be surprisingly productive for the Securities & Exchange Commission (SEC)--not because of the number of fraud cases it charged or settled, but because of the size of penalties and the prominence of the guilty companies. There were only seven enforcement cases considered significant enough to merit a press release that month, but five of those cases involved large and very-well-known companies.
On July 7, the SEC concluded a case about a joint venture that bribed foreign officials in Nigeria, a violation of the Foreign Corrupt Practices Act (FCPA). The venture companies consisted of Italian oil company ENI and its subsidiary Snamprogetti; Technip, a global engineering, construction, and services company based in Paris; and the U.S. defense contractor KBR, the former subsidiary of Halliburton Company. Through agents in the U.K. and Japan, the joint venture funneled more than $180 million in bribes to Nigerian government officials. In addition to the use of Swiss bank accounts, carloads of cash were hand-delivered to a hotel in Abuja, Nigeria. The total sanctions to the companies amounted to $1.28 billion, including disgorgement of profits from the illicit contracts of $400 million. According to the SEC, this is "the largest combined disgorgement amount ever in an FCPA violation." A criminal settlement with one of the companies involves a fine of $240 million and a deferred prosecution agreement, but no prison time for anyone.
A few days later, the SEC announced a record-setting settlement fine of $550 million with Goldman Sachs & Co. because of the firm's misleading actions in marketing to investors a subprime mortgage product just as the U.S. housing market was beginning to collapse. In disclosures about Goldman's synthetic collateralized debt obligation (CDO), facts were hidden that hedge fund Paulson & Co. Inc. played a role in selecting the contents of the CDO while simultaneously taking a short position against the product in the marketplace. Goldman neither admitted nor denied guilt in the transaction. Two-and-a-half months after the settlement, Fabrice Tourre, the principal Goldman officer involved, asked a judge to dismiss the SEC's fraud claim against him because the transaction didn't occur in the Unites States.
As part of the settlement, Goldman also agreed to "reform its business practices" as a part of its "present comprehensive, firm-wide review of its business standards." New procedures include submitting residential mortgage products to a firm-wide capital committee for approval and requiring marketing materials to be approved by the legal or compliance department. At least once a year, the Goldman internal audit function must provide assurance that these actions are being taken. Further, where Goldman is lead underwriter, its outside counsel must also review pertinent compliance documents. At least once a year, all individuals involved with structuring or marketing of mortgage securities offerings must complete training in federal disclosure requirements. None of the individuals involved faces prison time.
On July 22, the SEC reported settling with Dell, Inc., the computer maker, for a penalty of $100 million. Dell also agreed to enhance its disclosure processes, including the retention of an independent consultant to recommend improvements and enhance training regarding the disclosure requirements of the federal securities laws. Dell was charged with using fraudulent accounting to make it falsely appear that the company was consistently meeting Wall Street earnings targets and reducing its operating expenses.
The SEC's complaint further alleged that Dell's most senior former accounting personnel engaged in improper accounting by maintaining a series of "cookie jar" reserves that they used to cover shortfalls in operating results. …