(See my earlier column for background on this topic, To Fight or Not to Fight the SEC?)
The first enforcement action involved McAfee, Inc. and required it to pay a $50 civil penalty to be distributed to investors. The second enforcement action was against Applix, Inc. which was settled without a penalty, but the company was required to retain an independent financial policy consultant to recommend improvements to its financial policies and procedures.
The Commission noted that there are two primary considerations: (i) the presence or absence of a direct benefit to the corporation as a result of the violation; (ii) the degree to which the penalty will either recompense or further harm the injured shareholders. The SEC will also consider certain other factors: the need to deter a particular type of offense; the degree of difficulty in discovering a particular type of offense; the extent of the injury to innocent parties; whether the participation in the offense is pervasive throughout the corporation; the violator's level of intent; the presence or lack of remedial steps taken by the corporation; and the extent of cooperation with the staff and other law enforcement authorities.
The Commission's rationale for the different levels of penalties in the two cases was as follows: McAfee overstated its revenues and earnings by hundreds of millions of dollars and then used its overvalued stock to acquire other companies. When the alleged fraud was disclosed, the company's market capitalization declined by over $1 billion. Civil actions against McAfee's CFO and controller had been stayed because criminal proceedings are being pursued. In contrast, Applix materially overstated its net income relating to two transactions. According to the SEC, since Applix did not use its stock for acquisitions, it did not benefit. Also, Applix is a much smaller company than McAfee, so penalties would cause it undue harm.
CHARLES HECHT has been a principal of his own law firm specializing in securities law since 1971. He was previously on the staff of the Division of Corporate Finance of the Securities and Exchange Commission at its headquarters in Washington, DC. Contact him at 212.490.3232 or visit www.securitiescounselors.com
