(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Enforcement Division Describes "Breakdown by Gatekeepers"

In remarks to the annual "SEC Speaks" conference hosted by the Practising Law Institute, SEC Enforcement Director Stephen Cutler observed that the recent high-profile corporate fraud cases and the increase in agency enforcement actions do not indicate a "sudden rash of wrongdoing." Rather, Mr. Cutler described a systemic breakdown in which auditors, the traditional gatekeepers, "lacked a focus on quality" and corporate boards were too often "uninterested rather than disinterested."

Mr. Cutler noted that the division filed a record number of enforcement actions last year, and while the numbers for 2003 may not reach this mark, the director said that the division will continue an aggressive enforcement stance. Increased funding and the growing cooperation of federal and state prosecutors will also aid the enforcement effort, he stated.

Auditors and Financial Fraud

Associate Director Paul Berger indicated that from 1997 to 2000, the number of restatements of earnings by reporting companies increased by 145 percent. He emphasized the critical role played by the auditors, and asked in this regard, "where were the professionals?" He referred to the January 2003 action brought by the SEC against KPMG LLP and four of the firm's partners in connection with the firm's audits of Xerox Corp. According to Mr. Berger, the wrongful conduct permitted Xerox to "manipulate its accounting practices to close a $3 billion gap between actual operating results and results reported to the investing public." The agency's action, said Mr. Berger, indicated the division's willingness to sue auditors in district court.

Another key focus of division attention will be auditor independence. Mr. Berger cited several cases of independence violations that led to audit failures." Each of these cases." he said, "erodes public trust and confidence."

Thomas C. Newkirk, associate director, described the Commission focus on improper disclosure of related party transactions. A notable example of such misconduct was Tyco International Ltd., in which the company allegedly failed to disclose multimillion dollar payments to a director. Mr. Newkirk said that a particular concern was that the director served on the compensation and corporate governance committees. As described by Mr. Newkirk, "shareholders entrusted him with the responsibility of watching out for their interests in Tyco's boardroom and executive suit," but the director "took secret compensation and kept those same shareholders in the dark."

Cooperation with Criminal Authorities

Randall J. Fons, director of the SEC's Denver regional office, described the growing cooperation between the SEC and criminal prosecutors. He admitted that prosecutors were formerly reluctant to take on financial fraud cases in part because of the difficulty in litigating these fact- intensive matters with activity occurring across the country. The SEC has, however, begun a cooperative program to educate prosecutors about securities law and fraud standards, and the prosecutors are, as Mr. Fons stated, educating the SEC about the "practicalities of prosecution."

He described a recent meeting with the Presidential Task Force on Corporate Fraud, including SEC representatives, with representatives from every U.S. Attorney's office. The key points addressed, he said, were the best ways to leverage resources and to share information. The prosecutors will be examining a broad range of criminal misconduct, he noted, including insider trading, financial fraud, Internet abuses and broker-dealer misconduct. According to Mr. Fons, the Department of Justice strongly supports the increased activity of U.S. attorneys in this area.