December 15, 2004
Power and corruption go hand in hand. It now appears that Republican savy SEC Commissioners are protecting their power base. Unbelievably the Commission rejected a settlement agreement worked out by staff and dropped charges against a non-executive chairman who sold $734 million in stock before his company sought bankruptcy protection. Either the powerful are being protected or the fine was so deficient that the Commission thought it would be an embarrassment with a guilty plea, in which case it was better to claim that the Commission could not find anything wrong. In either case, the SEC as protectors of the investing public is an illusion.
Link: WSJ.com -
SEC Won't Charge, Fine Global Crossing Chairman.
SEC Won't Charge, Fine Global Crossing Chairman Agency's Donaldson Goes Against Staff, Noting Winnick's Nonexecutive Role By DEBORAH SOLOMON Staff Reporter of THE WALL STREET JOURNAL December 13, 2004;
Page A1 WASHINGTON -- The Securities and Exchange Commission won't file civil securities charges against former Global Crossing Ltd. Chairman Gary Winnick over disclosure violations or impose a $1 million fine, according to people familiar with the matter.
The action came despite objections from the SEC's two Democratic members and represents a rare reversal by the commission of its enforcement staff. It also caps a lengthy investigation of Global Crossing, the former Wall Street darling that helped set off a gold rush to capitalize on the Internet boom of the late-1990s.
The company, which sold fiber-optic capacity, eventually crumbled under a $12.4 billion debt load and filed for bankruptcy protection in January 2002. It emerged from bankruptcy last year and is still on shaky financial footing.
The SEC had been expected to fine Mr. Winnick $1 million for failing to properly disclose a series of transactions undertaken by the telecom company, and he had tentatively agreed to pay that sum as part of a settlement agreement. But at a closed-door commission meeting last week, SEC Chairman William Donaldson and his two fellow Republican commissioners, Cynthia Glassman and Paul Atkins, opposed a staff recommendation to charge Mr. Winnick. Mr. Donaldson expressed concern that Mr. Winnick was a nonexecutive chairman and hadn't signed off on the inadequate disclosure, these people said.
In its investigation, the SEC had been looking for such things as potential insider trading by the company's executives, including Mr. Winnick, and use of sham deals to boost revenue. Much of the investigation, which lasted more than two years, had focused on Global Crossing's use of so-called swap transactions, in which telecom companies trade roughly equal amounts of fiber-optic capacity and book the sale as revenue and the purchase as a capital expense. The SEC also looked into $734 million in stock that Mr. Winnick sold before the company sought bankruptcy protection.
The probe discovered no evidence of fraud or insider trading, but it did find that executives failed to provide regulators with adequate disclosure about the swap transactions. While the accounting for the transactions was wrong, the SEC concluded that it wasn't done with intent to commit fraud and didn't have a material effect on the company's finances, said people familiar with the matter. Global Crossing's demise stemmed from a glut of capacity and mounting debt.
Mr. Winnick declined to comment on the case. His lawyer, Gary P. Naftalis, said, "We always believed that the evidence demonstrated that Gary Winnick acted lawfully and properly in connection with Global Crossing."
The vote not to take action against Mr. Winnick could jeopardize the SEC's deals with three other former Global Crossing executives over the alleged disclosure violations. The executives, including Joseph Perrone, former chief accounting officer, and Dan Cohrs, former chief financial officer, wanted Mr. Winnick to accept some responsibility for the company's actions, people familiar with the matter said. The name of the third executive couldn't be determined. SEC enforcement lawyers are now expected to try and get the executives to accept the settlements without Mr. Winnick's agreement, these people said.
In previous commission enforcement actions, Mr. Donaldson has tended to side with the SEC's two Democrats, commissioners Harvey Goldschmid and Roel Campos, and push for tough sanctions on companies and individuals accused of wrongdoing, and Mr. Atkins and Ms. Glassman have tended to oppose financial penalties for corporations.
Appointed by President Bush, Mr. Donaldson has also split with his fellow Republicans on several rule proposals, including a mutual-fund governance rule and a plan to register hedge-fund advisers.
He has faced opposition on some key issues by members of the Bush administration. The commission is also encountering some push-back from business groups, including the U.S. Chamber of Commerce which sued the SEC over its mutual-fund governance rule.
At the meeting last Thursday, a heated and lengthy session, SEC lawyers recommended fining Mr. Winnick, whom they believe constructed and pushed for the swap transactions as a way to help hit revenue targets. They argued that while Mr. Winnick may have held the title of nonexecutive chairman, he was functionally a hands-on officer of the company who showed up at the office every day and was involved in major business decisions, these people said. SEC enforcement lawyers also argued that Mr. Winnick told others to make sure the transactions were disclosed properly, but didn't follow up to make sure it was done correctly.
But Mr. Donaldson objected to sanctioning Mr. Winnick, saying he didn't believe the former chairman had enough involvement in the company's day-to-day operations to warrant civil charges, according to people familiar with the meeting. He expressed concern that Mr. Winnick didn't write, review or sign off on the disclosure the company filed with the SEC about the swap transactions. While the three Republicans agreed the disclosure was inadequate, they argued that the other operating executives -- and not Mr. Winnick -- should be held liable.
Some within the commission are concerned that the SEC's action on Mr. Winnick could send a message to executives that they can escape legal action by claiming a hands-off role at their company. A standard defense from many executives in trouble with regulators is that they didn't know anything about the problems at their company and that any wrongdoing was carried out by subordinates. Executives at companies from Enron Corp. to WorldCom Inc. have assumed such defenses.
Others within the SEC say Mr. Winnick's situation was unique because he was a nonexecutive chairman who was able to show he had no direct responsibility for the problematic disclosure and had delegated those duties to the company's executives.
Some SEC insiders say they are angry that Mr. Donaldson rejected the settlement when Mr. Winnick was willing to agree to the charges and pay a fine. The commission's rejection of a case in which a defendant agreed to settle and pay a fine is extremely rare. In some instances, the SEC will reject the enforcement staff's recommendation to file a lawsuit when the case hasn't been settled. And the SEC at times tells the enforcement staff to go back and rework a settlement agreement and to make it tougher. An SEC spokesman declined to comment.
The Global Crossing case differs from other former telecom highfliers that crashed. In October, the SEC fined Qwest Communications International Inc. $250 million for engaging in a series of misdeeds, including accounting fraud. Qwest agreed to settle the charges and didn't admit or deny the allegations. The SEC is expected to sue Qwest's former chairman and chief executive, Joseph P. Nacchio, soon for his role in the alleged fraud.
Mr. Winnick, who resigned from the company in 2002, has been an active political donor, spreading his wealth on both sides of the aisle. He pledged $1 million for the libraries of former presidents Bill Clinton and George Bush. The company pledged $250,000 each to the Republicans and Democrats to support their political conventions in 2000.
Write to Deborah Solomon at firstname.lastname@example.org
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