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Can the government control corporate fraud?

Can the government control corporate fraud? Probably not, according to Securities and Exchange Commissioner Paul Atkins, and besides, ever-escalating regulation likely would hinder a free-market economy. Atkins, who has devoted much of his 20-plus year career to helping law enforcement investigate and rectify investing scams, recently spoke to students at the W. P. Carey School of Business on the subject of business ethics.

Can the government control corporate fraud? More than four years after passage of the Sarbanes-Oxley Act and long after the spectacular crash-and-burn displays of Enron, WorldCom, accounting giant Arthur Andersen and auto supplier Delphi, talk in Congress and among Securities and Exchange Commission honchos increasingly focuses on this question.

The answer is "probably not" — and besides, ever-escalating regulation likely would hinder our free-market economy, according to Securities and Exchange Commissioner (SEC) Paul Atkins. Atkins, one of four commissioners serving under SEC Chairman Christopher Cox, was appointed by President Bush in 2002 for a term that expires in 2008.

A lawyer, Atkins has devoted much of his 20-plus year career to helping law enforcement investigate and rectify investing scams. One of his biggest cases was the Bennett Funding Group, a $1 billion leasing company that ran the largest Ponzi fraud in U.S. history, bilking more than 25,000 investors. Atkins was brought in to assist the bankruptcy trustee.

He took over as "crisis president" of Bennett's only remaining subsidiary, first stabilizing its finances, then overhauling operations and even expanding the company. Thanks to his direct intervention, the remaining investors saw their share value rebound 2,000 percent. This isn't Atkins' first go-round at the SEC.

From 1990 to 1994, he worked for two former SEC chairmen, Richard Breeden and Arthur Levitt. Following that he spent two and a half years in a Paris corporate headquarters that culminated in his being admitted as conseil jurdique in 1988. Currently Atkins has taken on an intriguingly righteous assignment: cross-country speaking tours during which he urges Americans, especially those just starting out, like college students and enlisted men and women, to take the high road at work.

"It is sad to see the state of our business community, how some folks go the wrong way … there are people out there who will lie and cheat and steal. That's why talking about business ethics now is really important," he told students gathered January 29 at the W. P. Carey School of Business.

"It is important for you all to stand up if you think things are not right."

— Paul Atkins, commissioner under SEC Chairman

Before offering advice on how to be your own regulator, he related the harrowing tale of a law school grad who took a job as a compliance officer on the east coast. After making the expensive move and getting his family settled, he began to suspect that the company's chief financial officer was conducting illicit transactions.

"He was really torn. Was he right about this new boss? Does he blow the whistle? We know from documentation like e-mails that he did do some research into the transactions, but eventually he decided to go along with it and remain silent about where the bodies were buried," Atkins explained. "It was the wrong choice. Eventually it came out, he wound up disbarred, fined heavily by the SEC, he and his boss both lost their jobs and the company almost went under."

His advice is disarmingly simple. Remember how your parents brought you up, and strive to maintain firm ethical standards at work. Be willing to ask questions and check into your suspicions. And once you know someone is cheating, stand up and be counted. "Do your due diligence first, and then when it's time to stand up, do it so you maybe avoid pointing an accusatory finger. That said, don't be afraid to blow the whistle," Atkins continued.

"It is hard to make these decisions. It is hard to maintain honest, ethical business practices. But we wouldn't need such a large SEC if people didn't get caught in these things." The size of the SEC may be related to the increasing interest in boosting what could be termed consumer/employee self-regulation. SEC budget and personnel cuts in recent years have been partly remedied, but like most government agencies, there's more work than there are workers and resources.

Transferring some of the workload to on-the-spot eyes and ears makes fiscal sense. "The government cannot be everywhere, we cannot look over everyone's shoulders all the time. Many people reflexively look to the government for solutions, but you've got to keep thing in perspective. The government should not decide on business models or set prices … we need the free market. It is the best way," Atkins said.

He's careful to tell the W. P. Carey audience that his speaking-tour comments may not reflect the SEC's official stance, adding, "I hope the SEC is approaching it this way." Most likely, Atkins has the full blessing of Chairman Cox, who took over the SEC helm 18 months ago. Atkins spoke approvingly of Cox's "new sense of economic sensibilities, noting, "We had an extremely partisan experience until Cox."

One of his first big moves was to order a reassessment of the SEC's cost-benefits analysis. He's also asking staffers to examine how they work. For instance, most of the agency's employees are attorneys, with a few economists, MBAs and accounting professionals. As Atkins explained, "being a lawyer myself, I can say that we have a particular way of approaching questions. We need to reassess."

Congress has sometimes balked at signing off on the Cox-led agenda. "We didn't fare too well in Congress — we got slammed three times in the last session, because we didn't make our rules responsive to what was going on out there in the marketplace," he said. Cox's apparent regulatory-containment strategy is essential if the U.S. is to continue attracting foreign investors.

Already some investors are choosing Europe and other venues over U.S. investment opportunities, citing the high cost of SEC compliance, Atkins said. "The cost of regulation like Sarbanes-Oxley and the lottery system of litigation in our court system scares away foreign investors, and our jobs depend on this," he continued. "We have got to realize that we have to maintain the U.S., have to keep the markets clean but in a balanced way, without forcing too much regulation on the economy."

Bottom line:
  • The SEC's mission is not just to protect investors or maintain "fair, orderly and efficient" markets; it also is charged with facilitating capital formation.
  • The Sarbanes-Oxley Act of 2002, designed to combat corporate and accounting fraud, mandates greater corporate responsibility and enhanced financial disclosures. It also created the Public Company Accounting Oversight Board to oversee the auditing industry.
  • The earliest SEC regulation still in place is the Securities Act of 1933, referred to often as "the truth in securities law." It requires that investors receive financial and other information about securities being offered for public sale and prohibits "deceit, misrepresentations and other fraud in the sale of securities."

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