Of course, these accusations in the SEC’s Litigation Release No. 21166 are not that much of a surprise for anybody who has attempted to read one of GE’s annual reports. These filings have ranked among the densest and least meaningful of all corporate reports. Any business enterprise that tries to keep analysts from understanding the details of their business is bound to be hiding something. One might not know the specifics, but the reality is revealed by the disrespect shown to the investment community.
GE has agreed to pay a $50 million dollar fine. And, as these things go, GE admits to nothing but promises never to do it again. Who among us is so naïve that they think that the managers of GE will never violate accounting principles again and that its directors will not approve?
The real tragedy is that the $50 million fine will be paid by the stockholders of GE rather than the criminals who created the fraudulent schemes and carried them out. We have again let the bad guys get away with their shenanigans and have penalized the innocent.
The SEC should understand that civil penalties and criminal sentences serve two purposes in this society. These objectives are first to satisfy our collective sense of justice and second to deter future crimes. By punishing shareholders, the SEC itself becomes a tool of managers and is an instrument to carry out their devilish plots. The organization also promotes future crimes because managers feel that, with a couple of exceptions such as Lay and Koslowski and Rigas, they can do whatever they want with impunity.
Mary Schapiro may have provided the perception that the SEC is doing something after the malaise of the Bush administration, but so far it is only perception. If she wants to do something substantive, she needs to go after the managers who commit accounting frauds and the directors who approve their tomfoolery. If she really wants to get their attention, and if she really wants justice and the deterrence of accounting crime, then send the leading perpetrators to prison.
Mary, which will it be—perception or substance?