Disclaimer

The SEC as a matter of policy disclaims responsibility for any private publication or statement by any of its employees. The views expressed in this presentation are those of Joan E. McKown and are not necessarily shared by the Commission or its staff.

Today’s Topics

• Overview of Commission Actions –FY 2004

• New Initiatives

• Criminal Cases

Annual Caseload by Fiscal Year

0

100

200

300

400

500

600

700

19951996

19971998

19992000

20012002

20032004

Fiscal Year

FY 2004 Statistics 639 Total Cases Largest categories

Financial fraud and issuer reporting ( 28%) Broker-Dealer (22%) Offering fraud (15%) Investment Adviser/IC/Transfer Agents (15%) Insider Trading (7%) Market Manipulation (6%)

Fair Funds – over $4 billion

Financial Reporting and Issuer Disclosure Actions

FY 2004---- 179 casesFY 2003-----199 casesFY 2002-----163 casesFY 2001-----112 casesFY 2000-----103 casesFY 1999-------94 cases

Significant Cases

Qwest - $250 million penalty Computer Associates - $225 million in

restitution to shareholders and settlement with criminal authorities

Royal Dutch Shell- $120 million penalty Bristol-Myers Squibb - $100 million penalty Symbol- $37 million penalty

Disclosure to Shareholders

Executive Compensation and Self-Dealing Cases

GE- executive compensation not disclosed Disney- failed to disclose employment and

compensation of director’s family and payment to corporation owned by director

TV Azteca- failed to disclose 3rd party transactions benefited COB

Disclosure to Shareholders (cont)

Numbers Right but Disclosure Incomplete

Warnaco- Numbers OK in restatement, but failed to disclose real reason for restatement

Hollinger- Numbers OK in 10-K but failed to disclose unauthorized transfer of assets to insiders

Third Party Responsibility Royal Ahold- employees and agents of vendors

held liable for aiding and abetting massive fraud by signing and returning materially false audit confirmations sent to them by the auditors of U.S. Foodservice (sub of Royal Ahold)

AIG- sold an earnings management product and held liable for misstatements in customer’s financial disclosures (PNC)

NEW INITIATIVES

Tone at the Top

Gatekeepers

Corporate Governance

Cooperation

Tone at the Top

Violations of securities laws are frequently the product of :

Individual failings and Deficient corporate culture

Creating Good Tone at the Top

Make ethics part of company DNA- day to day lives of employees

Senior management’s conduct should reflect company’s ethical standards– no double talk

Don’t tolerate compliance risks for short term profitability

Employees should be able to safely voice ethical concerns

Be ready to handle problems openly and honestly Punish those who violate ethical standards- let other

employees know why they were punished Make sure Board is involved

Personal Responsibility

Recent Actions against Corporate Officers and Directors

Enron – Kenneth Lay, Jeff Skilling and Andy Fastow WorldCom – Bernard Ebbers and Scott Sullivan HealthSouth- Richard Scrushy Tyco – Dennis Kozlowski Hollinger- Conrad Black and David Radler Adelphia – the Rigas family Schering-Plough – Richard Kogan Gemstar/TV Guide – Henry Yuen and Elsie Leung Computer Associates – Sanjay Kumar Warnaco- Linda Wachner Symbol Technologies – Tomo Razmilovic Vivendi- Jean-Marie Messier Xerox – Paul Allaire, Richard Thoman, Barry Romeril

Focus on Gatekeepers

First Line of Defense• Auditors

• Lawyers

• Board of Directors

Auditors Grant Thornton- $1.5 million penalty for

misconduct in connection with audit of MCA Financial Corp.

PricewaterhouseCoopers- $2.4 million penalty for aiding and abetting the reporting violations of Warnaco

Ernst & Young- $2.1 million in disgorgement and PI in connection with audit of PeopleSoft

Attorneys

Recently, the Commission has increased is scrutiny of the role of lawyers in corporate frauds

In past 2 years, Commission has named lawyers as respondents or defendants in more than 30 of our enforcement actions

David Drummond - Google

Settled C&D Drummond charged with causing Google’s Section 5 violation Google issued over $80 million worth of stock options to

employees during a 12 month period Securities laws require companies issuing over $5 million in

options during 12 month period to provide detailed financial information to recipients or to register options and make disclosures to public

Drummond advised Google’s Board that it could continue to issue options due to an exemption to the law, but failed to inform the Board that the registration and disclosure obligations had been triggered or that there were risks in relying on the exemption

“Attorneys who undertake action on behalf of their company are no less accountable than any other corporate officer.”

Board of Directors

Look hard at the responsibility of the company’s independent directors

Continue to focus closely in our investigations on whether outside directors have lived up to their role as guardians of the shareholders they serve

Corporate Governance

Post investigation, Commission takes a look at the shape of company

Lingering issues are handled by settlements that include corporate governance enhancements

Corporate Governance Enhancements

Qwest - Financial fraud$250 million penalty Chief Compliance Officer who reports directly

to new compliance committee of Board of Directors

CCO shall respond to employee’s concerns regarding matters of ethics or questionable business practices

Corporate Governance Enhancements (cont.)

CharterSpecific undertakings regarding the reporting

of subscriber numbers to deal with the fraud of the case

Establish web site and Toll Free number managed by independent 3rd party for employees to contact

Cooperation

What Does Cooperation Mean?

21(a) Report: Self-policing Self-reporting Remediation Cooperation

Effort to influence conduct

Rewarding Good Behavior

At the same time the Commission is seeking penalties to effect changes in corporate culture – they are also seeking to reward companies that can demonstrate that they had or have made significant efforts to achieve a culture of compliance

Recently the Commission brought 11 cases in which we publicly recognized cooperation and remedial acts

No penalties were sought in these cases

No Penalty Cases Conseco Corrpro Charter VantageMed Corp. Senetek Gateway

Royal Ahold Performance Food

Groups Gold Banc BJ Services Hanover Compressor

ElectroScientic

• No case against ESI because of its “swift, extensive, and extraordinary cooperation in the Commission’s investigation.”

• Self –reported

• Conducted a through and independent internal investigation

• Shared results of investigation – including not asserting any applicable privileges and protections with respect to written materials

• Terminated responsible wrongdoers

• Facilitated Commission staff’s investigation overseas

• Implementing remedial actions designed to prevent recurrence of fraudulent activity

Goals of New Initiatives

Anticipate risk Create greater deterrence Change corporate culture and

tone at the top

Coordination with Criminal Authorities

In FY 2004, Commission coordinated with41 U.S. Attorney’s Offices and 8 state

prosecutorson 159 indictments or informations for 302

individualsverses 64 indictments or informations in

1999

Corporate Fraud Task Force