Thank you very much for that introduction. I would like to give a warm welcome to all members of the Corporate Fraud Task Force who were able to attend this morning. Your presence here today demonstrates your continuing commitment to this important mission and your ongoing support of the fine men and women in your agencies who have accomplished great success in their enforcement and regulatory work.
As the soon-to-be former Chairman of the Corporate Fraud Task Force, I’m very proud of our accomplishments. We have come a long way from the scandals of the early part of this decade - the unexpected loss of pensions and jobs, and the large-scale bankruptcies of Enron and Worldcom. When the Task Force was formed in July 2002, in the face of the loss of public confidence in our financial markets, we had to find a new approach for serving the tax payers and protecting shareholders. Working together, Task Force members considered changes in laws and regulations, committed to greater coordination, and stepped-up our enforcement to combat this crisis. As the President anticipated in forming the Task Force by Executive Order in 2002, teamwork was the best solution to this problem.
For the past five years, the Task Force has worked to restore public confidence and trust in the American business community. The Department, working with the FBI, the Postal Inspection Service, the IRS, and civil enforcement agencies like the SEC and CFTC, obtained 1236 corporate fraud convictions. And we concentrated on bringing to justice the individuals most responsible for corporate frauds – not the low-level employee, but the people at the very top of the organization. That meant convictions of 214 chief executive offices and presidents, 53 chief financial officers, 23 corporate counsels or attorneys and 129 vice-presidents. These prosecutions were complex and challenging. For example, the Enron Task Force alone, brought criminal charges against 27 former Enron corporation executives, and obtained 20 convictions. The chief financial officer was sentenced to 292 months in prison. And that sentence doesn’t stand alone – Adelphia’s senior executives were sentenced to 15 and 20 years; Worldcom’s CEO received a 25 year prison term; and the former CEO of Cendant Corporation was sentenced to more than 12 years in prison and ordered to pay $3.2 billion in restitution. These sentences sent a dramatic message -- corporate executives will be held accountable.
And along the way, we didn’t forget the victims in this effort. By forcing companies to disgorge their ill-gotten gains and pay stiff monetary penalties, joint recoveries by the SEC and DOJ resulted in the recovery of hundreds of millions of dollars - to name a few, Worldcom - $750 million, Enron - $450 million, AIG - $800 million. Although, in many cases, retirement dreams had to be recast in light of dire financial realities, our enforcement efforts brought some measure of hope to victim families in the aftermath of these devastating frauds.
Achieving these successes also demanded that we, as an enforcement team, retool the strategies that worked for us in the past. Congress provided the catalyst by passing Sarbanes-Oxley in 2002 which gave us new enforcement provisions and required company executives to take greater care in certifying financial statements. We also introduced and trained prosecutors in the concept of real-time charging. With the discovery of massive accounting frauds, prosecutors were encouraged to select the best, most provable charges and indict a case far more quickly.
That change in thinking [and prosecuting] saved the government time and resources and, in some cases, allowed recovery of money for victims that might otherwise have been lost. But the Task Force didn’t stop there. With the greater emphasis on expedited charging, the Task Force also recognized that it was important to identify and understand where and how fraud can occur -- before it happens, not after. This recognition prompted Task Force discussions about the benefits of increased monitoring of hedge fund activity, insider trading before merger and acquisition announcements, sub-prime lending practices and mortgage fraud, and stock option backdating. While the Task Force continues to be committed to the operation of a free and financially efficient marketplace, we must also remember that our vigilance against emerging threats is the best insurance against another crisis. And that’s why our continuation is so necessary.
Another focus of the past 2 years was the revision of the Department’s corporate charging policies. Although aggressive enforcement of corporate fraud is a high priority of the Department of Justice, it is also true that, in the past couple of years, we recognized and encouraged a public-private partnership with responsible corporate leaders to prevent corporate fraud at the outset. To that end, the revisions we made to our charging policies show our respect for the sanctity of the attorney-client privilege and encourage frank and candid communication between corporate counsel and employees during a corporation’s internal investigation. With these changes, we empowered, and we expect, corporations to engage in a more robust self-assessment of their internal controls.
In the last five years, our enforcement efforts sent a challenge to corporate America. And we are seeing results. As I noted when the Department revised its corporate charging policies in December 2006, corporations are increasingly recognizing the need for self-regulation and self-policing. We now see a greater focus on corporate compliance and ethics training for employees.
Corporations have also recognized the need for shareholders to have a greater voice. Many corporations are changing, or considering changes, in their voting processes -- such as majority voting in director elections -- to make shareholder participation in this process more meaningful. Proposals seeking majority voting in director elections are up 48% from last year.1 There is an increasing call for independence in our corporate boardrooms and corporations are hearing and heeding the message. Also, executive pay is more transparent. The SEC’s recent rules for executive pay require executives to explain their compensation policies, value different forms of compensation -- such as the use and timing of stock option grants -- and make a clearer disclosure of retirement benefits. Investors can now compare executive compensation from company to company and make informed decisions about how much they pay corporate officials entrusted with running their companies.
In addition to these rules, investors themselves are also asking for corporate proposals that request annual advisory votes on compensation. In the 2007 U.S. proxy season, more than 40 “say on pay” proposals were voted on.2 Along with our enforcement efforts, these corporate governance changes ensure that vital information is communicated to the marketplace so that shareholders and investors can take it into account in making their investment decisions. All stakeholders in this enterprise - the government, corporations, and investors -- are becoming active advocates for transparency and informed decision-making.
How are investors responding to these changes? As widely reported recently, statistics are promising. The number of securities-fraud class action lawsuits in 2007 is 42% below the average semi-annual filing rate observed over the previous nine-year period.3 Public confidence in the marketplace is high. While this can be attributable to many factors, increased fraud detection and prevention in the past few years have surely played a vital role.
So we have a real reason for optimism. Through vigorous enforcement and strong corporate governance reforms, we have a renewed commitment to corporate integrity. During my tenure as Chairman of the Corporate Fraud Task Force, we have emphasized that government cannot “walk the walk” alone; we must take a balanced enforcement approach and encourage a public-private partnership to ensure a lasting change. And our commitment must be authentic – an authentic effort not only by members of the Task Force, but also by our corporate leaders. Corporate quick-fix, revenue-enhancing solutions and paper compliance programs must be relics of the past.
We set out to root our corruption in corporate boardrooms and restore public confidence in July 2002. Today, as we mark this milestone, we can be thankful that our financial markets continue to be the envy of the world.
More Importantly, we can be thankful for the spirit of public service and integrity that has motivated our task force members to work hard and the leaders in our corporate community to establish a renewed culture of compliance. May these powerful forces for the public good grow stronger in the years ahead.
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