Posted 2:13 PM by Robert

Now Please Don't Take This Personally

How much effect will the new SEC requirement that Chief Financial Officers and Chief Executive Officers of many large public companies "certify" their employer's financial statements? The Man Without Qualities has expressed doubts previously. And the Wall Street Journal correctly reports:

Some lawyers note the SEC action may not increase officers' criminal liability beyond what they already face for filing false statements with the SEC. "It's safe to say that the government already views a false filing as a potential violation of the False Statement Act," says Brian Lane, a partner at Gibson, Dunn & Crutcher in Washington and a former head of the SEC's corporate finance division.

That observation doesn't guaranty that the new rule will have no incremental beneficial effect, but it does suggest that any beneficial effect of the new rule will be marginal.

One possible gage of how well considered the new SEC "certification" rule might be to compare the rule with what the big boys do when they're in control. For example, what do the big commercial banks do when one of their borrowers wants to borrow more money? What kind of assurances does, say, Bank of America and Citibank get from their big borrowers when the borrower asks for, say, another Hundred Million Dollars? Do the banks make the borrower's chief executive officer, chief financial officer and maybe even the chairman of the board personally certify under penalty of perjury (at least to the best of their knowledge) that the last set of financial statements the borrower gave to the banks were good? After all, the banks know finance better than anyone else and they have the muscle to get the job done! We're not talking about some small, naive, personal investor here. We're talking about the Bank of America and Citibank! They must get the real thing from their borrowers, and there is nothing like the real thing.

The WorldCom banks are suing for fraud. The banks say they were defrauded by WorldCom when WorldCom drew down more than $2 Billion from an existing credit facility without telling the banks that the WorldCom financial statements were wrong.

What exactly did the WorldCom credit agreement require WorldCom to say when it borrowed all that money? Well, the credit agreement is an exhibit (Exhibit 10.1, to be exact) to WorldCom's filings with the SEC. That credit agreement did NOT require that for WorldCom to borrow any senior executive, or any individual at all, had to personally certify anything at all, the credit agreement only required that WorldCom as a corporation sign and deliver a notice of borrowing that included the following weak certification:

Borrower hereby certifies that the following statements are true and correct on the date hereof, and will be true and correct on the Borrowing Date specified herein after giving effect to such Borrowing ... all of the representations and warranties of any Borrower set forth in the Loan Papers are true and correct in all material respects (except to the extent that (i) the representations and warranties speak to a specific date, or (ii) the facts on which such representations and warranties are based have been changed by transactions contemplated or permitted by the Loan Papers); ... no Default or Potential Default has occurred and is continuing; and (d) the funding of such Borrowing is permitted by Law.

While the credit agreement did require that WorldCom deliver copies of its annual and quarterly financial statements to the banks that were certified in a manner similar to the certification required by the new SEC rule, the certification was not required to be made under oath or penalty of perjury (although such a requirement could have been included in the credit agreement), and could be signed by any senior vice president. And while the credit agreement also required that WorldCom to deliver to the banks copies of filings WorldCom made with the SEC, those copies did not have to be certified at all.

In short, the WorldCom banks, including Citibank and Bank of America, who have now sued WorldCom for fraud, required considerably less of WorldCom than the SEC has now generally imposed on most large public companies with that new rule. Does that suggest that the call for new regulation is excessive?

Mr. Lane's observation also again raises the question: Why hasn't the government indicted Mr. Fastow or any other Enron executive?

When the SEC first announced the rule, the Wall Street Journal interviewed lawyers who said "that a criminal case based on lying in a sworn statement is generally much easier to prove than a complex accounting fraud." But now we know from Mr. Lane, a former head of the SEC's corporate finance division, that the SEC and Justice department had what they needed all along.

And it has been a full month since the government said it picked up all that momentum from the conviction of Andersen, a display of prosecutorial team play that some might say is best compared with the earliest efforts of the New York Mets. The New York Times dismissed concerns that the prosecution was flawed, and reported:

[O]ver time, experts on white-collar cases said, those issues will wash away, and instead, the government will emerge the strategic winner, simply for not losing. Indeed, they said, the Andersen conviction provides prosecutors with critical momentum as they turn their attention to other potential defendants in the Enron debacle. Strangely, the fact that the Andersen case is now seen as weaker than previously believed could bolster government efforts, because potential witnesses will now recognize that these prosecutors, unlike some, are willing to move fast and go to trial even in cases where victory is not assured.

Perhaps a month is just not enough time for all those issues to “wash away”, as those "experts" predicted. Or perhaps the Enron team at the Department of Justice has been just too busy processing all those guilty plea offers and spontaneous confessions from Enron and Andersen operatives that were precipitated by the Andersen "win" to whip up a quick indictment or two Stranger things have happened, although I can't actually recall any at the moment.