pomtalk

Hit Them in the Wallets: What if Executives Were Held Personally Liable?

Some of you may recall our post from last year regarding the surprise rejection of the Citibank SEC settlement whereupon Judge Rakoff expressed his disdain with the evasive language "neither admit nor deny." 

In their  Dealbook article, Why S.E.C. Settlements Should Hold Senior Executives Liable the authors Claire Hill and Richard Painter review the findings of the Congressional hearing on the subject and  make a provocative argument to hit the defendent in their wallets instead. 

Hill and Painter say that "Requiring settlements to include an admission of guilt is not the best way to proceed. A more effective approach would be to make senior, highly compensated officers of the bank pay some portion of the fine."

"The Congressional hearing addressed the fact that a penalty assessed against an entity is effectively paid by its shareholders. The shareholders neither caused the behavior that led to the fine nor were they responsible for preventing it. By contrast, the Citigroup officers who were responsible do not bear a significant portion of the penalty, except to the extent they are shareholders or their bonuses are tied to earnings, now reduced by the penalty. They thus have little incentive to change their behavior."

SEC Charges Execs with Fraud at Fannie & Freddie

Following up on our September post "Big Bucks, No Whammies?" about the SEC's apparent inaction on the wells notices they had served to the execs of Fannie & Freddie. We write to report that Whammies finally came with  Friday's headlines . The SEC brought fraud charges after all, not just against Daniel Mudd, former CEO of Fannie Mae but also five others now charged with deliberately misleading government officials about the extent of their subprime exposure.

The NYTimes explores the charges in greater detail and there are new reports that an FBI investigation into the same conduct is underway which means the guys could face criminal charges.    Following the SEC announcement speculation had already begun that Mudd would soon step down as CEO at Fortress Investment Group (FIG).

“Can you really run a trading and investment firm with a guy accused of fraud in the corner office?”   a Fortress employee was reported to have asked.  Apparently not when the accusations become official. (UPDATE:  Mudd took leave as CEO of Fortress on Wednesday December 21)

Mudd has been on the board at Fortress since 2007,and was appointed CEO of Fortress when he left Fannie amid scandal after the bailout in 2008 Fortress is a publicly traded hedge fund which recently introduced new subprime mortgage bonds onto the market.... 

To Blog or Not to Blog

In today’s age of technological advancement the use of blogs has become commonplace and is now a tool that companies can utilize for the ongoing exchange of opinions and ideas among management, employees, and shareholders.  However, an SEC release that will become effective on August 7, 2008 cautions companies that maintain such blogs that the statements they make will be subject to the antifraud provisions of the Federal Securities Laws in the same way as other company statements.  So a corporation that decides to maintain such a blog must carefully evaluate the information it posts.  The release does clarify however that a company is only responsible for its own statements on the blog and not for statements posted by third parties unless the company clearly adopts or endorses those statements.  In addition, the company is not required to respond to or correct misstatements that the company itself does not post.  For more information on SEC Release 34-58288, please click here.