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For every action, there is a reaction. The recent, well-known corporate scandals certainly justified a regulatory and legislative response. Unfortunately, prosecutors have overreacted to these events by pursuing investigations and indictments for technical violations of the securities laws-conduct traditionally investigated by the enforcement division of the Securities and Exchange Commission (SEC). When securities violations could not be proven, prosecutors have brought charges of obstruction of justice; such was the fate of Martha Stewart. But results vary: The long and expensive trial of Frank Quattrone ended with a hung jury. It remains to be seen how well such charges will fare over time. In the post-Enron world, prosecutors and SEC staffers commenced an increased number of parallel civil and criminal investigations involving alleged violations of the federal securities laws. The list of indictments is lengthy and includes cases involving officers of Enron, WorldCom, ImClone, HealthSouth and Adelphia. Parallel civil and criminal proceedings are also expanding into new areas that have traditionally fallen under the exclusive purview of the SEC. For example, the flurry of mutual fund investigations touched off by New York Attorney General Eliot Spitzer late last year has already resulted in a series of criminal investigations. The pending mutual fund investigations primarily involve alleged market-timing trades in mutual funds. These investigations are unheralded, since market timing-which involves the rapid purchase and sale of fund shares for short-term gain-has not previously been treated by the SEC as a civil offense. Still, Richard Strong, the chief executive officer and founder of Strong Financial Corp. and Strong Funds, resigned in the face of an investigation by Spitzer. And financial intermediary Security Trust Co. was shut down after three former executives were criminally charged. More criminal charges are likely to follow in the mutual fund industry. For example, it has been reported that a federal grand jury in Boston has issued subpoenas to Putnam Investments and Prudential Securities, among other entities. Prosecutors also have increased their scrutiny of certain financial institutions, such as Merrill Lynch, which recently adopted a series of reforms after facing threats of criminal prosecution. In addition, the investigation of Parmalat and its relationship with financial institutions is just beginning. Innocents hurt along the way The increasing frequency of criminal investigations involving issues traditionally left in the hands of the SEC can have significant collateral consequences to institutions and individuals. The most notable example is the loss of thousands of jobs by Arthur Andersen employees who had no personal connection to the misconduct of its Houston employees. Innocent people who are merely witnesses in a criminal case can have their lives thrown into turmoil. For example, those who try to provide exculpatory evidence in connection with grand jury proceedings or in preparation for trial may be threatened with charges of perjury or making false statements to the government; such threats are intended to silence them at trial or induce them to offer testimony favorable to the prosecution. The mere possibility of expansive criminal proceedings serves as a deterrent to many highly qualified individuals to serve as members of boards of directors or trustees of publicly traded corporations and mutual funds. These events test a fundamental tenet of American law: the presumption of innocence. Prosecutors in the Stewart case took a very aggressive position on her public avowals of innocence, charging her with an unprecedented “crime” of securities fraud against her own company’s shareholders for trying to convince them of the continued value of her good name. Although dismissed by the court, the fact that the charge was brought is troubling. Similarly, although the U.S Supreme Court has expressly recognized that “one of the Fifth Amendment’s basic functions . . . is to protect innocent men,” regulators may now use that invocation against an individual. A prime example is the quandary facing Quattrone, who was asked to testify in an investigation conducted by the National Association of Securities Dealers while criminal charges were pending against him. His alleged failure to cooperate in the investigation�despite the government’s failure to obtain a conviction in its first criminal trial�caused him to be fined $30,000 and suspended for a year from the industry. Criminal prosecutions-successful or not-have the potential to ruin lives, cripple businesses and deter qualified executives from serving on boards. It is critical that prosecutors exercise restraint in matters involving issues arising under the federal securities laws, when such matters are more properly the subject of review by the SEC. Timothy E. Hoeffner is a partner and co-chairman of the corporate governance group of Philadelphia’s Saul Ewing. Risa B. Greene, resident in the same office, is an associate at the firm.

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