SEC Decision on Corporate Penalties Could Harm Investors

Watchdog
Group Urges Chairman Schapiro to Reconsider

Washington,
D.C., February 6, 2008—In one of her first actions as Securities
and Exchange Commission chairman, Mary Schapiro announced today that she
was axing a policy that required SEC officials to get approval
from the commissioners before negotiating corporate penalties.

Schapiro
said the requirement slowed the agency’s enforcement efforts against corporate
wrongdoing. But John Berlau, director of CEI’s Center for
Investors and Entrepreneurs, disputes that notion, explaining why this change
will unfortunately have the effect of further harm to shareholder
victims of corporate fraud.

Statement
by John Berlau:

Corporate penalties take money, not from individual
executives guilty of fraud, but from the corporate treasury. That’s money that ultimately belongs to the
ordinary investors in the company. Frequently,
these penalties have the effect of harming shareholder victims of corporate
fraud twice: once when the corporate executives misuse a company’s money, and a
second time when the corporate penalty further reduces the company’s assets
that belong to all shareholders. That’s why it is more just and effective for
the SEC to levy penalties against individual wrongdoers, rather than the
corporation as a whole.

The 2006 policy Schapiro wants to reverse was a sensible
change that didn’t outlaw corporate penalties but ensured that their use was
carefully considered by SEC commissioners before enforcement staff could levy
an arbitrary fine that could harm shareholder interests. Moreover, the
policy only applied to penalties on corporations, not individuals accused
of wrongdoing or private broker-dealers such as the firm of Bernard Madoff.

Ms Schapiro is correct in wanting the agency go after
corporate wrongdoers with full force. But she should seriously rethink
instituting this policy that would have the unintended but predictable effect
of punishing innocent shareholders twice."

Read recent
blog posts from John Berlau on OpenMarket.org.

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SEC Decision on Corporate Penalties Could Harm Investors

SEC Decision on Corporate Penalties Could Harm Investors