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SEC Debating Recent Tougher Penalties

Commissioners Divided Over Fairness

By Carrie Johnson
Washington Post Staff Writer
Thursday, December 16, 2004; Page E05

Although the specter of a criminal prosecution of Time Warner Inc. all but vanished with yesterday's Justice Department settlement, the company's tentative $300 million agreement to settle civil charges still requires the approval of a majority of the Securities and Exchange Commission's five members, Time Warner said yesterday in a news release.

That is not imminent. It may take weeks to complete the details, according to sources who spoke on condition of anonymity because the negotiations are confidential. The SEC deal also would require the company to adjust its accounting for advertising revenue and open its financial records to inspection by an independent examiner.

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The terms of the proposed settlement also could be changed by the commissioners. Last week, for example, the commissioners rejected a staff recommendation to bring civil charges against former Global Crossing Ltd. chairman Gary Winnick.

The SEC is engaged in an increasingly public debate about how to punish errant companies after a wave of financial scandals in the late 1990s.

The SEC has imposed increasingly larger monetary penalties against companies in the past few years in what one enforcement official has called "an evolution, if not a revolution, in thinking." Of a dozen settlements since 1986 reaching $50 million or more, nine have come in the past year alone, the SEC said in April.

Two Republican commissioners, Cynthia A. Glassman and Paul S. Atkins, argue that steep fines against companies wrongly penalize current shareholders, rather than executives responsible for fraud who may have long since left the company's employ.

"Corporate penalties, in my opinion, add insult to injury by further hurting the shareholders already victimized by fraud," Glassman said last week at a pension fund conference in San Francisco. "Fines should come out of the pocket of the responsible individual, not the shareholders."

But in several recent enforcement cases, Glassman and Atkins have been outvoted 3 to 2 on corporate penalty issues by Chairman William H. Donaldson and Democrats Roel C. Campos and Harvey J. Goldschmid.

"The numbers are very high, and they should be, if deterrence and accountability are to occur," Goldschmid said at a Washington accounting conference last week. "They must sting, and they should."

SEC enforcement officials declined to comment yesterday on the Time Warner settlement negotiations. Enforcement chief Stephen M. Cutler set out his philosophy on disciplining errant companies in an April speech. Cutler said he considers the nature of the fraud, the harm to investors that resulted from the infractions and the company's cooperation with investigators.

Time Warner has promised to cooperate with the Justice Department and other authorities as part of a separate deal announced yesterday.

"When the commission obtains a penalty against an entity, it provides a powerful incentive for companies in the same or similar industries to take steps to prevent and address comparable misconduct within their own walls," Cutler said. "Thus, a single enforcement action has the potential to effect change on an enormous scale."

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