Don't Punish the Shareholders, Too

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Thursday, February 12, 2009

In justifying a change of policy on negotiating corporate penalties, the new chairman of the Securities and Exchange Commission, Mary Schapiro, stressed the need to apply "the full force of the law" to "those who break the law and take advantage of investors" ["New SEC Chief Moves To Toughen Enforcement," Business, Feb. 7].

This is a goal shared by all those who advocate for investors and honest entrepreneurs. Unfortunately, Ms. Schapiro's decision to give the SEC staff free rein to seek penalties from firms under investigation is likely to inflict further harm on the victims of a firm's fraud.

Corporate penalties take money not from individual executives guilty of fraud but from the corporate treasury that ultimately belongs to the ordinary investors in the company. Frequently, these penalties have the effect of harming shareholder victims of corporate fraud twice: once when the corporate executives misuse a company's money and again when the corporate penalty further reduces the assets that belong to all shareholders. That's why it is more just and effective for the SEC to levy penalties against individual wrongdoers rather than against a corporation as a whole.

The 2006 policy that Ms. Schapiro is reversing was prompted by concerns expressed by former commissioner Paul Atkins and other experts that the interests of innocent shareholders weren't being given enough weight in the negotiation of corporate penalties. The SEC made a sensible change that didn't outlaw corporate penalties but ensured that the use of this tool was carefully considered by SEC commissioners before the enforcement staff could seek an arbitrary fine that could harm shareholder interests.

Ms. Schapiro is correct in wanting the agency to go after corporate wrongdoers with full force. But she should seriously rethink instituting a policy change that would have the unintended but predictable effect of harming innocent shareholders twice.



Center for Investors and Entrepreneurs

Competitive Enterprise Institute


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