Regulators Feeling Pressure to Aggressively Pursue Fraud
WorldCom Inc.’s disclosure of a potentially titanic accounting fraud ratchets up the pressure on securities regulators and criminal prosecutors to prove they are taking aggressive steps to punish executives who break the law.
In a demonstration of that urgency, the Securities and Exchange Commission filed a civil-fraud lawsuit against WorldCom in U.S. District Court in Manhattan on Wednesday evening.
It is unusual for the SEC to file a lawsuit so quickly after a surprise disclosure of accounting irregularities. The agency normally launches an in-house investigation and takes months to decide whether to bring charges.
Still, the SEC already had a head-start in the case: The agency began a widely reported probe of WorldCom’s accounting earlier this year. But a fresh barrage of criticism that the SEC has moved too slowly against corporate fraud forced it to act rapidly Wednesday, analysts said.
WorldCom “will cause the Department of Justice and the SEC to put on a full-court press in an attempt to weed out the corporate misfits,” said Christopher Bebel, a former prosecutor who now is a partner at Shepherd Smith & Bebel in Houston. “If they don’t, they know they’re going to have to provide a lot of explanation to Congress.”
Key members of Congress on Wednesday renewed their attacks on the SEC and its embattled chairman, Harvey L. Pitt, even as the House voted to nearly double the agency’s annual budget to $776 million. Critics say Pitt’s long tenure as a lawyer representing many accounting firms and brokerages before taking over the SEC last fall has left him unwilling to press those industries for reform.
Pitt struck back at his opponents Wednesday night, saying he was being unfairly targeted. “I will not stoop to the level of those who seek to attack a diligent agency for political advantage,” he said.
Several experts sided with Pitt, saying he was being made a scapegoat for deep-seated problems in the accounting industry and lapsed executive suite ethics.
“What was the guy supposed to do in the last six months?” said James Cox, a Duke University securities law professor. The attacks are “totally off-base and undeserved.”
In another uncommon action Wednesday, the SEC said it will require WorldCom to furnish it with a complete report detailing its accounting irregularities by Monday morning. The report will have to be done under oath. It marks only the third time in recent history the SEC has required such a report.
“Clearly, they’re trying to make it look a little more serious than an ordinary investigation,” said Alan Bromberg, a Southern Methodist University law professor.
The WorldCom revelations also increase the likelihood that the corporate scandals will result not only in civil suits by the SEC, but also in criminal prosecutions of some corporate executives--and in jail time, experts said.
Pitt alluded to that possibility in comments Wednesday. “We are fully partnered with the Department of Justice and the U.S. attorneys across the country to ensure that where conduct warrants criminal prosecution, justice will not only be swift it will be maximized,” Pitt said.
More immediately, the WorldCom case may push the SEC to put more teeth in its proposal for a new accounting industry oversight board. Critics say Pitt’s proposal, which the SEC recently put out for public comment, is weaker than a plan passed by the Senate Banking Committee this month. Some reports Wednesday suggested the White House may now back the Senate plan.
