SEC vows to target directors over fraud
Case of Boston firm slated to be a model
boston.com
By Bloomberg News, 8/21/2003
The Securities and Exchange Commission is stepping up its effort to punish corporate fraud by pursuing charges against board members who ignore misconduct, SEC enforcement chief Stephen Cutler said.
Cutler said the agency will use a case against a former outside board member at Chancellor Corp., a Boston transportation equipment-leasing company, as a model for such enforcement actions. That case, which charged that the director failed to act on evidence of accounting improprieties, is the "first salvo in this area," he said in an interview.
By focusing on directors, the SEC is expanding its scrutiny of corporate watchdogs who oversee management. Since Enron Corp.'s collapse, the agency has sued accounting firms, auditors, and investment banks for colluding with management or overlooking wrongdoing. Cutler said he's not aware of any other SEC case against an outside director not directly involved in fraud.
"This case signifies the commission's willingness to pursue cases against outside directors who were reckless in their oversight of management and asleep at the switch," Cutler said of the action against Rudolph Peselman, the former Chancellor director who also served on its audit committee.
The effort reflects a change in the commission's mandate after accounting scandals at Enron and WorldCom Inc. The SEC is the principal agency enforcing the Sarbanes-Oxley corporate governance law passed last year, which has prompted it to more aggressively pursue wrongdoing among those who advise and supervise chief executive officers.
In the Chancellor case, filed April 24 in US district court in Boston, the SEC alleges that the company fraudulently overstated revenue in 1998 by 177 percent. The SEC charged several former Chancellor executives and Peselman with fraud.
Chancellor improperly booked $19 million in revenue in 1998 from a subsidiary Chancellor didn't control until 1999, the SEC said. The company fired an audit firm that disagreed with the accounting treatment, the SEC alleges, and hired another auditor, who signed off on it. Chancellor also paid "several million dollars" to entities controlled by Chancellor's chairman and chief executive, Brian Adley, the SEC alleges. Adley has denied wrongdoing.
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