(The news featured below is a selection from the news covered in Federal Securities Law Reporter.)

SEC Announces Corporate Penalties Framework

The SEC released a statement on the framework by which it will determine corporate penalties. The five commissioners unanimously agreed upon the penalty principles which are based on legislative history and the SEC's statutory authority. The Commission made its statement at a news briefing at which it announced two settled actions against corporate issuers. In an action against McAfee, Inc., the settlement would require, subject to court approval, the company to pay a $50 million civil penalty to be distributed to harmed investors. The second action against Applix, Inc. was settled without a penalty, but the company must retain an independent financial policies consultant to recommend improvements to its financial policies and procedures.

Chairman Christopher Cox said the question of whether, and to what extent, to impose civil penalties against a corporation raises significant questions for the SEC's mission of investor protection. He noted that the SEC obtained the authority to impose penalties fairly recently and has only imposed significant penalties against companies in the last few years. Chairman Cox explained that the recent cases have not given a clear public view of when and how the SEC will impose corporate penalties, and that opinions within the Commission had not previously been reconciled. The statement describing the framework for penalty deliberations will provide clarity, consistency and predictability to the process, according to Mr. Cox.

Corporate penalties are an essential part of the SEC's program to enforce the federal securities laws and contribute to achieving a level of deterrence, according to the framework. The decision to impose a penalty against a corporation, as opposed to individuals who commit a securities violation, will turn on two considerations. The first is the presence or absence of a direct benefit to the corporation as a result of the violation and the other is the degree to which the penalty will either recompense or further harm the injured shareholders.

The Commission will also consider the need to deter a particular type of offense, or the degree of difficulty in detecting a particular type of offense. In addition, the Commission will consider the extent of the injury to innocent parties, whether the participation in the offense is pervasive throughout the corporation, the perpetrators' level of intent and the presence or lack of remedial steps by the corporation. The Commission will also consider the extent of cooperation with the staff and other law enforcement authorities.

Enforcement Director Linda Chatman Thomsen described the cases involving McAfee and Applix and the factors that influenced the decision to impose a penalty in one case and not in the other. McAfee allegedly overstated its revenue and earnings by hundreds of millions of dollars, she explained, and according to the SEC, the overvalued stock was used to acquire other companies. Ms. Thomsen said the company ultimately lost over $1 billion in market capitalization. This company allegedly achieved a significant benefit from its artificially inflated stock, and the SEC claimed that the investors suffered significant harm when the conduct came to light. The SEC also sued the company's chief financial officer and controller for their roles in the alleged fraudulent accounting, but those actions have been stayed while criminal proceedings are pursued.

According to the SEC, Applix materially overstated its net income relating to two transactions. Ms. Thomsen noted that McAfee allegedly benefited from its scheme, but Applix did not. The penalty against McAfee will not affect its financial situation, according to Ms. Thomsen, but Applix is a much smaller company where a penalty would cause undue harm. Applix's conduct was much more limited than that charged against McAfee, she added.

If law enforcement is random, Ms. Thomsen said that companies cannot conform their behavior to what is expected of them. The penalty framework was driven by the protection of investors, she said. Ms. Thomsen added that difficult work will not be made easy by the penalty determination process, but decisions will be better at the end of the day.