Senators Want Whistle-Blower Law Enforced
By MICHAEL J. SNIFFEN, Associated Press Writer

WASHINGTON - Two senators who wrote a tough but little-understood law to protect corporate whistle-blowers are pressing the Securities and Exchange Commission for aggressive enforcement just as a case emerges that could determine how companies are policed.

Spurred by scandals at Enron, WorldCom and other large corporations, Congress passed the Sarbanes-Oxley Act in 2002. The law required chief executives to swear that their company's books are accurate. But it also gave corporate whistle-blowers more protection than any previous federal law has extended to insiders who report wrongdoing.

Sens. Charles Grassley, R-Iowa, and Patrick Leahy, D-Vt., who wrote the whistle-blower section, said they wanted to change a corporate culture that "valued profit over honesty."

In addition to making it easier and safer to report corporate misdeeds, the law also:

_requires corporate lawyers to report any misconduct they observe.

_exposes executives and companies that punish whistle-blowers to civil lawsuits under the Racketeer Influenced and Corrupt Organizations Act.

_provides the first criminal penalties - up to 20 years in prison and $5 million in fines - for firing a whistle-blower in retaliation.

"Congress noticed there was a whistle-blower in most major scandals, like Sherron Watkins at Enron and Cynthia Cooper at WorldCom," said Stephen M. Kohn, a director of the National Whistleblower Center.

Kohn said Congress' plan to use conscience-stricken company insiders as important players in reforming corporate culture can succeed "only if the SEC does its job."

The SEC has been silent about the whistle-blower provisions. Last week, Grassley and Leahy wrote SEC Chairman William H. Donaldson for details of the agency's enforcement plans.

The senators were prompted by a Labor Department finding on Oct. 7 - the first under the law - that a publicly traded company retaliated against a whistle-blower.

Asking for "aggressive enforcement," Grassley and Leahy noted that the law says any violation of its provisions "shall be treated for all purposes ... as a violation of the Securities Exchange Act of 1934," which the SEC is charged with investigating.

SEC spokesman Matthew Well declined comment.

In the Oct. 7 finding, the Office of Occupational Safety and Health ruled that CheckFree Corp. of Norcross, Ga., fired its product marketing director, Larry Hogan, after he told superiors the company was using deceptive marketing and overstating revenues and thereby defrauding its customers and investors.

CheckFree markets electronic software to banks and businesses that allows consumers to receive and pay bills over the Internet.

The Labor Department found that Hogan had complained to superiors that they were claiming capabilities for a new product being offered to Mellon Bank that the product did not have. He raised similar complaints about marketing to Anthem Blue Cross/Blue Shield and National City Bank.

In a preliminary order appealed by both sides, the Labor Department said CheckFree must pay Hogan more than $103,000 in back pay, interest, counseling and job search expenses, and compensation for mental pain and suffering and loss of professional reputation.

CheckFree spokesman Dave Fontaine declined comment.

Leahy said Friday that the ruling gives the SEC a "clear opportunity to show and tell the public how it will be handling allegations that could form the basis for a criminal violation of the whistleblower provisions" of Sarbanes-Oxley.

Kohn, who represents Hogan, said the Labor Department "can only protect the private interest of the whistle-blower." But the SEC, he said, "can use this law to protect the public interest of civilly and criminally investigating corporate wrongdoing."

Kohn said the law provides that any testimony given in a Labor Department hearing, such as Hogan's impending appeal, can be used in any subsequent SEC-generated civil or criminal case.

"This is truly a revolutionary law of vast scope," he said.


Questions loom about direction for SEC
BY RACHEL BECK ASSOCIATED PRESS/Chicago Sun Times, November 14, 2004

LINK

NEW YORK-- You wouldn't know that corporate scandals are still rampant in the business world by the talk coming out of Washington lately about possible changes at the Securities and Exchange Commission that could diminish its regulatory authority.

Business groups are pressing for the Bush administration to shake things up at the SEC by installing someone at the helm that is more sympathetic to their cause-- a move that could potentially undo at least some of the corporate reform that has taken place in recent years.

But what's pleasing to the business world might not be to the investing public, especially with corporate wrongdoing still so prevalent.

Since President Bush won a second term, there has been speculation of what could come at the SEC. Sure, it was this White House that appointed William Donaldson to lead the agency almost two years ago, but it is not clear if this administration wants to keep him around until his term expires in June 2007, or if he even wants to stay.

The only sure thing is that there is still plenty of work that needs to be done. The troubles now hitting the insurance industry come on the heels of many other scandals in recent years that have involved everything from the mutual fund industry to such high-profile companies as Enron and WorldCom.

And while the SEC at points in recent years has stood in the shadow of the aggressive corporate crime-fighting by New York Attorney General Eliot Spitzer, it has taken initiative in its own right on some cases including the accounting fraud investigations at both HealthSouth Corp. and Qwest Communications International Inc.

Hopefully, whatever way the administration goes, it takes past mistakes into consideration.

Just think back to the tenure of former SEC chairman Harvey Pitt, who resigned under pressure two years ago after a series of political missteps during his 14-month tenure that embarrassed the Bush White House. Here was an agency that had been working hard to boost investor trust amid all the corporate scandals, and it then found itself with a chairman under fire for his own maneuvering and mishaps.

Enter Donaldson, who replaced Pitt in early 2003. When first appointed, many assumed he would be a close ally to the business world thanks to his credentials-- a Republican who was a former investment banker and had previously led the New York Stock Exchange as well as Aetna Inc.

But he ultimately turned out to be a tough regulator and reformer.

He has backed several measures that were strongly opposed by the business community, including his push for increased oversight of the financial industry and tougher controls for the mutual fund business. He has moved to break down corporate conflicts of interest and demanded broader financial disclosure.

And he is willing to cross party lines to vote the way he thinks is right. For instance, when the SEC voted last month to make hedge-fund advisers register with the agency, the majority who favored that-- which included Donaldson and the two Democratic commissioners-- argued that the growing power of these funds and the growing interest from individual investors requires more detail in how they are run.

No wonder business groups want him out.

"Put 200 executives in a room, they will say we have seen enough regulation and legislation to stop for a while. But is that really the truth? ... We still need more effective regulation," said Paul Lapides, director of the Corporate Governance Center at Kennesaw University in suburban Atlanta.

On the flip side, Donaldson hasn't given shareholder advocates everything they have asked for either. A proposal that would give shareholders more power to nominate corporate board candidates has stalled, and while Donaldson has said that he is trying to come up with a compromise solution, he refuses to be pressured to quickly take action.

All these factors make it clear why someone like Donaldson is so important to have at the SEC right now. He doesn't toe a partisan line, and isn't easily bullied. He is doing just what the head of the SEC should be.

"As the chairman goes, so goes the commission," said Patrick McGurn, vice president of Institutional Shareholder Services, which advises large shareholders on proxy-voting issues. "It could set off a firestorm if he was asked to leave. Maybe the more important question is whether he wants to stay."

That's something Donaldson touched on last week, in comments to reporters after a speech to the annual meeting of the Securities Industry Association, Wall Street's biggest trade group.

"I serve at the pleasure of the president. Having said that, I also serve at my own pleasure. And by that I mean, I believe that there are a number of things we're working on, a number of things I know we're accomplishing, and as long as we're accomplishing those things, that's pleasing," he said.

Maybe the only certain thing is that Donaldson isn't changing his ways just to secure his job. In fact, in that speech last week, he used strong rhetoric to make his case for ethical business practices.

"Companies and managers and employees from top to bottom must embrace a spirit of integrity that goes well beyond simple adherence to the letter of the law," he said.

Hopefully, the administration heeds his words and doesn't get swayed by the business lobby. There is a real political benefit to staying the current course.


SEC VOTES TO PROPOSE CHANGES IN SRO GOVERNANCE AND ISSUE RELATED CONCEPT RELEASE
FOR IMMEDIATE RELEASE2004-154

LINK

Washington, D.C., Nov. 9, 2004 - The Securities and Exchange Commission at an open meeting today voted to propose new rules and amend existing rules and forms under the Securities Exchange Act of 1934 relating to the governance, transparency, oversight, and ownership of self-regulatory organizations (SROs), and to issue a concept release examining the efficacy of self-regulation.

Rulemaking Proposal Highlights
A summary of the rulemaking proposals follows:

Governance Proposal. This proposal would require SROs to adopt specified baseline governance standards, including a majority independent board and fully independent nominating, governance, audit, compensation, and regulatory oversight committees. It also would require each SRO to take steps to separate its regulatory function from its business operations.

Transparency Proposal. This proposal would require SROs to publicly disclose, and update at least annually, specified information about their operation and structure, including their governance processes, regulatory programs, financial condition, and ownership.

SRO Reporting Proposal. This proposal would require SROs to submit quarterly and annual reports to the Commission containing specified information on the operation of their regulatory programs, including their examination, investigation, and enforcement activities. This information is intended to support the Commission's SRO inspections program.

SRO Ownership Proposal. This proposal would restrict the ownership and voting levels of members that are broker-dealers to no more than 20% with respect to the SRO or any separate facility. It also would require SROs and their members to report to the Commission information about any significant accumulations of SRO ownership interests and voting power.

SRO Self-Listing Proposal. This proposal would require SROs to comply with additional reporting and other requirements in the event they list or trade their own or an affiliate's securities, or the securities of a facility or an affiliate of a facility.

Concept Release
The concept release will request public comment on a variety of issues relating to the efficacy of the self-regulatory system, including, the inherent tensions in this model and its strengths and weaknesses. The concept release also will request public comment on the advisability of implementing enhancements to the current SRO system or, alternatively, pursuing an alternative regulatory model.

Comments on the proposed rules and rule amendments should be received by the Commission within 45 days of publication in the Federal Register. The comment period for the concept release will be 90 days from the date of its publication in the Federal Register.


US Securities and Exchange Commission