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No question, Homestore.com was a great site. If you wanted to know just about anything about buying or selling a home, this was the dot-com to visit. In fact, the company went public with much fanfare during the IPO boom of the late 1990s and investors bid-up the stock price to staggering heights. And even after the dot-com implosion, Homestore.com continued to show impressive results with the stock price remaining fairly strong. The executives of the company were smart and hard-working. Unfortunately, however, they were spending a lot of time on one interesting activity: cooking the books. When the Securities and Exchange Commission learned of the chicanery, it moved extremely fast. The Commission brought suits against the executives. But, interestingly enough, nothing was done against the company. Why? Well, the company decided to engage in prompt cooperation with the SEC. This should be no surprise in light of a recent speech of the former Chairman of the SEC, Harvey Pitt who stated: “In the civil context, we’ve also taken steps to create strong incentives for companies to behave cooperatively during our investigations so that our enforcement staff can move on an expedited basis. Similar to the DOJ’s guidance on prosecution of corporations, we have made it known that meaningful and complete cooperation will be favorably considered by the Commission.” SEC AT NET SPEED For a federal agency, the SEC is running its operations at Internet time. And it won’t stop any time soon. The President and Congress are fully behind these actions so as to renew investor confidence that has so quickly evaporated with the scandals of 2002. At the Enforcement Division of the SEC, the new mantra is “real time” enforcement. In this era of electronic communications, it does not take long for criminals to flee with their money. Consequently, the SEC is taking aggressive steps, such as freezing assets and seeking temporary restraining orders and trading suspensions. Take WorldCom. Within 24 hours of the announcement of its huge restatement of earnings, the SEC swiftly filed suit. The SEC also appointed a corporate monitor to make sure there was no funny business. In this new climate, companies need to have a contingency plan in place to deal with the possibility of getting a call or Wells Notice from the SEC. Here are some elements of such a plan: Preventive Measures: A major part of the plan is to set up policies to help avoid regulatory investigations. A company should have a comprehensive compliance program, as well as strong internal controls. The reforms of Sarbanes-Oxley, which provide for more action of the audit committee, should be a big help. Informal vs. Formal Investigation: The SEC may get tips or see some red flags in your company’s financial statements. To see if there is any potential fraud, the SEC may launch an informal inquiry. Lately, this has become a regular practice for small and big companies alike. Even though the investigation is informal, it should nonetheless be taken seriously — as if it were an official investigation. Initially, it is very tempting for a company to deny any problems. However, a better approach is to not make an immediate response other than to say “we will cooperate fully.” Whether an informal or formal inquiry, the SEC will inevitably request documents. Thus, it is absolutely critical for a company to have a strong policy regarding documents. Such a policy should include an index system and perhaps a method to code documents; document destruction guidelines; and a log of who has had access to documents. Remember, in the electronic age, everything is fair game, such as e-mails, recorded phone calls, and so on. Internal Investigation: This should be done promptly and the SEC should be notified of the actions. Who should run the internal investigation? If conducted by senior management, it raises a conflict-of-interest problem. Rather, retaining an outside law firm — which specializes in securities matters — is a better approach. Moreover, the law firm needs access to the necessary information and persons to conduct its investigation. Taking Actions: In the Homestore.com case, the SEC noted that it was impressed with the company’s “extraordinary” cooperation. For example, the company immediately reported possible misconduct to the SEC when the audit committee first learned of it. The company also shared the results of its internal investigation to the SEC and terminated the wrongdoers. Moreover, the company implemented remedial measures to help prevent future problems. As a result, the SEC took no legal action against the company. Besides this, the swift actions likely reduced the time for the investigation, which can be beneficial to a company. The shorter the investigation, the less likely that a company will be draining its resources over several years of litigation, or living with a cloud of doubt from investors. Tom Taulli, JD, is an analyst at Newport Beach, Calif.-based Stewart Securities, a registered broker dealer that provides specialized financial services to executives and public companies. Mr. Taulli is author of the book “The Complete M&A Handbook” and runs a Web site dedicated to M&A at www.mergerforum.com.

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