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SEC Will Act Against Company Directors Who Neglect Duty, Enforcement Chief Says

Sep 25, 2002 | AP The Securities and Exchange Commission will take action against company directors who neglect their duty to protect shareholders against abuses by companies, the agency's enforcement chief said Wednesday.

In Enron's stunning collapse, the company's outside directors were found to have failed in their watchdog duties in two reports: one issued in February by a special Enron committee and a second by a Senate panel in July.

A Senate Governmental Affairs subcommittee found that Enron's directors closed their eyes to evidence the energy-trading company was careening toward financial disaster. Its report concluded that claims by former directors they were kept in the dark were untrue.

The SEC has been pursuing a civil investigation of Enron's accounting practices while the Justice Department has conducted a criminal inquiry.

The SEC's enforcement director, Stephen Cutler, was asked by a reporter whether the agency was pursuing directors of companies embroiled in the recent accounting scandals.

"Let me clear about this," Cutler replied. "There is no accounting or financial reporting case that we are investigating in which we don't closely scrutinize the conduct of the board of directors, including outside directors. And we will not hesitate to bring enforcement actions against outside directors if they are culpable."

The question was prompted by a report in Wednesday's Wall Street Journal that the SEC had decided not to pursue in the immediate future any enforcement action against Enron's directors.

Referring to the Journal report, SEC Chairman Harvey Pitt said in a statement: "Recent press speculation about purported (SEC) decisions with respect to 'forgoing' enforcement actions in connection with ongoing investigations is factually inaccurate and irresponsible."

"We're unaware of any inaccuracies in our story," said Byron Calame, a spokesman for Journal publisher Dow Jones & Co. Inc. "If the SEC chairman will specify what is 'factually inaccurate' in the story, we will carefully review his specific assertions to determine if a clarification or correction is warranted."

Legal experts acknowledge that it is difficult to make such cases against company directors because of stringent standards of proof under federal law.

"Those are very hard things to prove," David Ruder, a former SEC chairman who teaches law at Northwestern University, said Wednesday.

Besides, he noted, with the dozens of big companies it is investigating for accounting problems — including WorldCom, Global Crossing and Adelphia Communications, the SEC "has an enormous number of things on its plate right now."

In its 60-page critique of Enron's directors, the Senate panel said that "much that was wrong with Enron was known to the board."

Attorneys for the company and the directors have disputed the findings.

The internal Enron report, led by University of Texas Law School dean William Powers, found that the directors "failed in oversight duties."

Lawmakers have said Enron directors approved complex financial arrangements knowing that the company's management freely handed out bonuses, some $50 million for closing a deal for an electric power project in India that subsequently failed, for example.

In addition, many of the directors themselves had conflicts of interest, according to lawmakers who cited consulting contracts worth millions that some of them had with the company and ties they had with charities that received large donations from Enron.

The directors and top Enron executives have been widely criticized for reaping hundreds of millions of dollars from selling their company stock in 2000 and 2001. Many ordinary employees lost nearly all their retirement savings as Enron stock fell over a period of several months and they were blocked from selling it for about three weeks last fall.

Many of the directors, along with Enron executives, have been named in a lawsuit by shareholders.

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