Disclaimer The SEC as a matter of policy disclaims responsibility for any private publication or statement by any of its employees. The views expressed in this presentation are those of Joan E. McKown and are not necessarily shared by the Commission or its staff.

Today’s Topics Overview of Commission Actions –FY 2004 New Initiatives Criminal Cases

Annual Caseload by Fiscal Year

FY 2004 Statistics  639 Total Cases  Largest categories  Financial fraud and issuer reporting ( 28%)  Broker-Dealer (22%)  Offering fraud (15%)  Investment Adviser/IC/Transfer Agents (15%)  Insider Trading (7%)  Market Manipulation (6%)  Fair Funds – over $4 billion

Financial Reporting and Issuer Disclosure Actions  FY cases  FY cases  FY cases  FY cases  FY cases  FY cases

Significant Cases  Qwest - $250 million penalty  Computer Associates - $225 million in restitution to shareholders and settlement with criminal authorities  Royal Dutch Shell- $120 million penalty  Bristol-Myers Squibb - $100 million penalty  Symbol- $37 million penalty

Disclosure to Shareholders Executive Compensation and Self-Dealing Cases  GE- executive compensation not disclosed  Disney- failed to disclose employment and compensation of director’s family and payment to corporation owned by director  TV Azteca- failed to disclose 3 rd party transactions benefited COB

Disclosure to Shareholders (cont) Numbers Right but Disclosure Incomplete  Warnaco- Numbers OK in restatement, but failed to disclose real reason for restatement  Hollinger- Numbers OK in 10-K but failed to disclose unauthorized transfer of assets to insiders

Third Party Responsibility  Royal Ahold- employees and agents of vendors held liable for aiding and abetting massive fraud by signing and returning materially false audit confirmations sent to them by the auditors of U.S. Foodservice (sub of Royal Ahold)  AIG- sold an earnings management product and held liable for misstatements in customer’s financial disclosures (PNC)

NEW INITIATIVES  Tone at the Top  Gatekeepers  Corporate Governance  Cooperation

Tone at the Top Violations of securities laws are frequently the product of :  Individual failings and  Deficient corporate culture

Creating Good Tone at the Top  Make ethics part of company DNA- day to day lives of employees  Senior management’s conduct should reflect company’s ethical standards– no double talk  Don’t tolerate compliance risks for short term profitability  Employees should be able to safely voice ethical concerns  Be ready to handle problems openly and honestly  Punish those who violate ethical standards- let other employees know why they were punished  Make sure Board is involved

Personal Responsibility

Recent Actions against Corporate Officers and Directors  Enron – Kenneth Lay, Jeff Skilling and Andy Fastow  WorldCom – Bernard Ebbers and Scott Sullivan  HealthSouth- Richard Scrushy  Tyco – Dennis Kozlowski  Hollinger- Conrad Black and David Radler  Adelphia – the Rigas family  Schering-Plough – Richard Kogan  Gemstar/TV Guide – Henry Yuen and Elsie Leung  Computer Associates – Sanjay Kumar  Warnaco- Linda Wachner  Symbol Technologies – Tomo Razmilovic  Vivendi- Jean-Marie Messier  Xerox – Paul Allaire, Richard Thoman, Barry Romeril

Focus on Gatekeepers First Line of Defense Auditors Lawyers Board of Directors

Auditors  Grant Thornton- $1.5 million penalty for misconduct in connection with audit of MCA Financial Corp.  PricewaterhouseCoopers- $2.4 million penalty for aiding and abetting the reporting violations of Warnaco  Ernst & Young- $2.1 million in disgorgement and PI in connection with audit of PeopleSoft

Attorneys  Recently, the Commission has increased is scrutiny of the role of lawyers in corporate frauds  In past 2 years, Commission has named lawyers as respondents or defendants in more than 30 of our enforcement actions

David Drummond - Google Settled C&D  Drummond charged with causing Google’s Section 5 violation  Google issued over $80 million worth of stock options to employees during a 12 month period  Securities laws require companies issuing over $5 million in options during 12 month period to provide detailed financial information to recipients or to register options and make disclosures to public  Drummond advised Google’s Board that it could continue to issue options due to an exemption to the law, but failed to inform the Board that the registration and disclosure obligations had been triggered or that there were risks in relying on the exemption  “Attorneys who undertake action on behalf of their company are no less accountable than any other corporate officer.”

Board of Directors  Look hard at the responsibility of the company’s independent directors  Continue to focus closely in our investigations on whether outside directors have lived up to their role as guardians of the shareholders they serve

Corporate Governance  Post investigation, Commission takes a look at the shape of company  Lingering issues are handled by settlements that include corporate governance enhancements

Corporate Governance Enhancements  Qwest - Financial fraud  $250 million penalty  Chief Compliance Officer who reports directly to new compliance committee of Board of Directors  CCO shall respond to employee’s concerns regarding matters of ethics or questionable business practices

Corporate Governance Enhancements (cont.)  Charter  Specific undertakings regarding the reporting of subscriber numbers to deal with the fraud of the case  Establish web site and Toll Free number managed by independent 3 rd party for employees to contact

Cooperation

What Does Cooperation Mean?  21(a) Report:  Self-policing  Self-reporting  Remediation  Cooperation  Effort to influence conduct

Rewarding Good Behavior  At the same time the Commission is seeking penalties to effect changes in corporate culture – they are also seeking to reward companies that can demonstrate that they had or have made significant efforts to achieve a culture of compliance  Recently the Commission brought 11 cases in which we publicly recognized cooperation and remedial acts  No penalties were sought in these cases

No Penalty Cases  Conseco  Corrpro  Charter  VantageMed Corp.  Senetek  Gateway  Royal Ahold  Performance Food Groups  Gold Banc  BJ Services  Hanover Compressor

ElectroScientic No case against ESI because of its “swift, extensive, and extraordinary cooperation in the Commission’s investigation.” Self –reported Conducted a through and independent internal investigation Shared results of investigation – including not asserting any applicable privileges and protections with respect to written materials Terminated responsible wrongdoers Facilitated Commission staff’s investigation overseas Implementing remedial actions designed to prevent recurrence of fraudulent activity

Goals of New Initiatives  Anticipate risk  Create greater deterrence  Change corporate culture and tone at the top

Coordination with Criminal Authorities  In FY 2004, Commission coordinated with  41 U.S. Attorney’s Offices and 8 state prosecutors  on 159 indictments or informations for 302 individuals  verses 64 indictments or informations in 1999  Corporate Fraud Task Force