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The U.S. Securities and Exchange Commission’s recent actions against Parmalat Finanziaria SpA-accusing the Italian dairy giant of fraud-and other overseas companies show that the SEC is willing to pursue its focus on corporate governance well beyond U.S. borders. Besides Parmalat, the SEC also has recently filed fraud complaints against Vivendi Universal S.A., the media and telecommunications conglomerate based in Paris, and against retailer Spiegel Inc., with offices in Chicago but whose controlling owner is in Hamburg, Germany. “It’s part of a developing trend,” said Richard Kosnik, head of the securities practice at Jones Day in New York. “Enforcement cases follow the trends in the market,” Kosnik continued, “so as the markets become more global, so does the enforcement.” Kosnik coordinates Jones Day’s U.S. and international capital markets efforts. He previously worked at the SEC, in charge of the international corporate finance program. Attorney Michael Mann of Richards Spears Kibbe & Orbe agrees with Kosnik. Mann, a former director of the SEC’s office of international affairs, said the SEC’s attention has evolved “because of the increased number of foreign issuers” and the subsequent increased number of their disclosure violations. Mann noted that a few years ago, there were only about 600 foreign issuers of securities in the United States; today, he said, there are more than 1,400 of them, “and that has changed the focus.” ‘It won’t wash’ Michael P. Malloy, a law professor and director of the Capital Center for Government Law and Policy at the University of the Pacific McGeorge School of Law, said the SEC interest in foreign companies is not new. “In the heydays of the 80s, the SEC was going hammer and tongs against foreign-based companies, pursuing insider trading,” Malloy said. “Now they seem to be back at it again but with a change of focus on corporate governance and the capital markets. “If we know anything from [the 80s] . . . it is that responding to the SEC that we are a foreign company and our home country will take care of us, that is not going to wash. It didn’t wash then, and it won’t wash here.” Malloy said the trend stems from a combination of capital markets being significantly more globalized and of the SEC’s major push on corporate governance issues. “Inevitably [SEC enforcers] are going to bump into things like Parmalat and Vivendi,” he said. The ongoing Parmalat scandal, labeled the “Enron of Europe,” became public last month when Parmalat disclosed it did not have billions of dollars in previously claimed assets. Ten days later, the SEC filed its complaint against Parmalat, accusing it of fraudulently inducing U.S. investors over the past five years into buying more than $1.5 billion worth of securities. Securities and Exchange Comm’n v. Parmalat Finanziaria SpA, No. 03 CV 10266 (PKC) (S.D.N.Y.). The complaint alleges that Parmalat engaged “in one of the largest and most brazen corporate financial frauds in history,” and it seeks “a substantial civil monetary penalty.” The owner and founder of the company has been arrested in Italy, and several other executives are under investigation there. It has also filed for bankruptcy protection under Italian law. In the United States, Parmalat has engaged Weil Gotshal & Manges of New York to defend it here and to offer U.S. bankruptcy advice. Irwin H. Warren, co-head of Weil Gotshal’s business and securities litigation unit in New York, said the criminal investigation is primarily in Italy, but is expanding here under the aegis of the U.S. attorney’s office in Manhattan. He declined further comment, except to say that the company’s new chief executive, Enrico Bondi, is cooperating fully with all investigations. Lawrence West, the associate director of the SEC’s enforcement division in Washington, recently returned from Italy where, he said, he was cooperating with his Italian counterparts and prosecutors. West said he is also working with prosecutors in New York, who have yet to file any criminal charges. He declined further comment. An Italian mystery Most intriguing to Malloy, the law professor, is how the alleged fraud at Parmalat could go on for years before it was uncovered. “How is it possible that so many people in upper corporate management, both on its board and in outside companies like auditors, banks and securities firms . . . how is it possible that these market professionals could have missed over a long period of years the fact that this shell game was being played?” Malloy said. “It strains credibility.” For Malloy, “the most obvious answer and the most disturbing is that nobody was doing due diligence.” Jones & Day’s Kosnik said, “If there had been more emphasis on corporate governance 10 years ago, we might be seeing less of this today.” Instead, the trend is growing, with Parmalat simply the latest after the Spiegel and Vivendi actions. The SEC filed its civil suit against Spiegel in U.S. district court in Chicago on March 7, 2003, alleging failure to file its periodic Form 8-K and 10-K reports, and failure to disclose its auditors’ doubts about whether the business could remain a “going concern.” Spiegel filed for U.S. bankruptcy 10 days later. A Sept. 12 report by a court-appointed independent examiner details repeated efforts by Spiegel’s Chicago-based general counsel, and by its outside attorneys at Kirkland & Ellis of Chicago, to convince the company to file the reports. Still, Spiegel’s German owner refused, according to the report. Deborah Koopman, Spiegel’s vice president of corporate and investor relations, said the company would not comment on the SEC investigation or on the examiner’s report. The case is pending. Spiegel attorney, Samuel Seymour, a white-collar criminal defense lawyer at Sullivan & Cromwell in New York, also declined comment. C.J. Kerstetter, head of the SEC’s Chicago office, said only that the investigation is ongoing. In contrast to such drawn-out cases, Vivendi reached an agreement with the SEC, announced on Dec. 23 at the same time as the SEC’s civil fraud action was filed. The action named Vivendi, its former CEO and its former chief financial officer. The SEC’s complaint said Vivendi, which also has New York offices, acted to disguise company “cash flow and liquidity problems, improperly adjusted accounting reserves . . . and failed to disclose material financial commitments, all in violation of the antifraud provisions of the federal securities laws.” Paul Saunders, a partner at New York’s Cravath, Swaine & Moore, represents Vivendi, which is one of Europe’s largest companies. It did not admit liability in the case. Saunders said the company would have no comment beyond its Dec. 23 press release, which reiterated the terms of the settlement, including: The company agreed to pay a $50 million civil penalty, the former CEO agreed to relinquish legal claims to a multimillion-dollar severance package and both accused executives agreed to pay disgorgement and civil penalties totaling more than $1 million. In announcing the SEC’s action against Vivendi, David Nelson, director of the SEC’s office in Miami, said, “Our lawsuit today demonstrates that even the most complex schemes involving foreign issuers will be uncovered and pursued.”

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