Don’t Punish the Shareholders, Too

In justifying a change of policy on negotiating corporate penalties, the new
chairman of the Securities and Exchange Commission, Mary Schapiro, stressed the
need to apply "the full force of the law" to "those who break the law and take
advantage of investors" ["New SEC Chief Moves To Toughen Enforcement," Business, Feb. 7].

This is a goal shared by all those who advocate for investors and honest
entrepreneurs. Unfortunately, Ms. Schapiro’s decision to give the SEC staff free
rein to seek penalties from firms under investigation is likely to inflict
further harm on the victims of a firm’s fraud.

Corporate penalties take money not from individual executives guilty of fraud
but from the corporate treasury 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 again when the corporate penalty further reduces
the 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 against a corporation as a whole.

The 2006 policy that Ms. Schapiro is reversing was prompted by concerns expressed by former commissioner Paul Atkins and other experts
that the interests of innocent shareholders weren’t being given enough weight in
the negotiation of corporate penalties. The SEC made a sensible change that
didn’t outlaw corporate penalties but ensured that the use of this tool was
carefully considered by SEC commissioners before the enforcement staff could
seek an arbitrary fine that could harm shareholder interests.

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



Center for Investors and Entrepreneurs

Competitive Enterprise Institute


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