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Lawyers who represent companies on securities law enforcement matters are taking heart from recent statements that signal a more civil and cooperative Securities and Exchange Commission (SEC). Meanwhile, they’re advising clients not to get too complacent. The SEC took the extraordinary step on Oct. 23 of outlining the reasons it decided not to bring an enforcement action against Seaboard Corp. of Shawnee Mission, Kan. The pork processing and cargo shipping company issued misstatements in its annual and quarterly reports from December 1995 to March 2000 based on improper entries booked by a controller at its Miami-based Chestnut Hill Farms division. “This is the first time since the SEC was established in 1934 that it has publicly issued a list of factors relevant to its decision of whether or not to take enforcement action,” said Paul V. Gerlach, the SEC’s former associate director of enforcement and now a partner with Sidley Austin Brown & Wood in Washington, D.C. “To my way of thinking, this is very positive news for issuers out there trying to do the right thing. It gives a public precedent to argue to.” Although former SEC lawyers who are now in private practice say the commission would, in very rare instances, “give a pass” to a company with financial irregularities, the agency never talked publicly about doing so — let alone the reasoning behind it. And companies would never issue press releases saying they had been under investigation by the SEC — but the agency decided not to sue for securities law violations. Now, the SEC is offering some parameters for companies and defense counsel when they uncover fraud, lawyers say. The day before the report was released, new SEC Chairman Harvey L. Pitt, in a speech to the American Institute of Certified Public Accountants in Miami, said the SEC recently has been “saying what is on its institutional mind,” in part to provide guidance to those who have to implement the complex and intricate securities laws. Pitt, who spent 23 years at New York’s Fried, Frank, Harris, Schriver & Jacobson, was appointed in August. Pitt made references to a new era — one of cooperation and civility — unlike “recent history,” which many interpret to mean the agency under the leadership of Arthur Levitt Jr. Under Levitt, the SEC heightened efforts to reduce financial fraud by increased scrutiny of company financials. In 2000, the SEC announced more new litigation than in any year since 1996, according to the Pricewaterhouse-Coopers 2000 Securities Litigation Study. “At the end of the day, the reason the SEC did this was to offer more protection for investors,” said Stephen Cutler, the SEC’s director of enforcement. “It will bring in more cases and use fewer resources. It’s not a softening of the SEC.” In the Seaboard case, the SEC issued a cease-and-desist order against the former Seaboard controller, Gisela de Leon-Meredith, 37, of Pembroke Pines, Fla. Meredith discovered the company’s assets were overstated and the expenses understated in 1998, but covered it up through more improper entries and adjustments, according to the cease-and-desist order. SEABOARD SKATES The SEC, however, did not take any action against Seaboard because of Seaboard’s cooperation. The company shared the results of its internal investigation with the SEC, including notes and transcripts of the interviews with Meredith. The company, in its dealings with the SEC, did not invoke the attorney-client privilege, the work product protection or other protections — an extraordinary step for a company, lawyers say. “When businesses seek out, self-report and rectify illegal conduct, and otherwise cooperate with Commission staff, large expenditures of government and shareholder resources can be avoided and investors can benefit more promptly,” the SEC report in the Seaboard case says. Specifically concerning the privilege, the SEC stated in a footnote: “[T]he desire to provide information to the Commission staff may cause companies to consider choosing not to assert the attorney-client privilege…and other privileges….The Commission recognizes that these privileges…serve important social interests. In this regard, the Commission does not view a company’s waiver of a privilege as an end in itself, but only as a means (where necessary) to provide relevant and sometimes critical information to the Commission staff.” Carmen J. Lawrence, former director of the SEC’s Northeast regional office, said that in the past, companies were only given a pass in extraordinary circumstances. The recent SEC report gives “transparency” to its analysis to not bring action against Seaboard, Lawrence said. “I think it’s terrific that they did this,” said Lawrence, who now co-heads Fried Frank’s securities and regulatory enforcement group. Some law firms have already issued client letters outlining the case and possible implications. Sidley Austin said in one such letter that the case “demonstrates the importance of effective internal procedures to ensure legal compliance and dramatically underscores the value of prompt and effective action when a company discovers” wrongdoing in its financial reporting. NOT ALWAYS THE BEST COURSE “At the same time, strict compliance with the report’s numerous recommendations may not be the appropriate or advisable response in all cases,” the Sidley Austin letter said. “Despite the extraordinary actions taken by Seaboard, which included a waiver of all privilege claims, the SEC’s order against the controller included an explicit finding that the company violated the reporting and books-and-records provision of the Exchange Act.” Although a company that waives its attorney-client privilege might impress the regulators, lawyers say it can expose the business in civil lawsuits brought by unhappy shareholders. The PricewaterhouseCoopers study showed that 35 percent of all fraud cases since 1998 were filed after a company announced a financial restatement. Fifty-three percent of the 201 shareholder class actions filed in federal court last year contained allegations of financial fraud, compared with less than 40 percent of the cases in 1995.

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