Now that shoes are dropping all over the market place, let's look at Phase 2 of any disaster - seeing if those responsible will ride off into the sunset in their limos or in orange jumpsuits? The place to look first is that favorite response to Enron that was supposed to ensure that everyone's balance sheets weren't toyed with - Sarbanes-Oxley.
More formally known as Public Law 107-204 (107th Congress) Sarbanes-Oxley had a stated objective:
To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws
I would say that was something the shareholders of Bear Stearns might want to discuss with the Board and the DA right about now, yes? So, looks like the problem - a balance sheet full of stuff that everyone admits:
is impossible to accurately value
might fall under the act.
So let's explore SarbOx below the fold:
For the really ambitious you can read the law here but I will try to summarize.
Articles 1 and 2 set up the oversight Board under SarbOx and set forth the responsibilities of the public accounting firms auditing the books (yeah, bet on lawsuits there too), conflict of interest rules for the accounting firms (a big issue in Enron - this time it will probably be the rating agencies and conflicts of interest that might get looked at).
Article 3 gets to the meat of the issue:
Section 301 sets up that audit committees must be independent and sets up standards for independence - so far, so good.
Section 302 gets fun.
Regulations Required.--The Commission shall, by rule, require,
for each company filing periodic reports under section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)), that the
principal executive officer or officers and the principal financial
officer or officers, or persons performing similar functions, certify in
each annual or quarterly report filed or submitted under either such
section of such Act that--
(1) the signing officer has reviewed the report;
(2) based on the officer's knowledge, the report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements made,
in light of the circumstances under which such statements were
made, not misleading;
(3) based on such officer's knowledge, the financial
statements, and other financial information included in the
report, fairly present in all material respects the financial
condition and results of operations of the issuer as of, and
for, the periods presented in the report;
(4) the signing officers--
(A) are responsible for establishing and maintaining
internal controls;
(B) have designed such internal controls to ensure
that material information relating to the issuer and its
consolidated subsidiaries is made known to such officers
by others within those entities, particularly during the
period in which the periodic reports are being prepared;
(C) have evaluated the effectiveness of the issuer's
internal controls as of a date within 90 days prior to
the report; and
(D) have presented in the report their conclusions
about the effectiveness of their internal controls based
on their evaluation as of that date;
(5) the signing officers have disclosed to the issuer's
auditors and the audit committee of the board of directors (or
persons fulfilling the equivalent function)--
(A) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the issuer's ability to record, process,
summarize, and report financial data and have identified
for the issuer's auditors any material weaknesses in
internal controls; and
(B) any fraud, whether or not material, that
involves management or other employees who have a
significant role in the issuer's internal controls; and
(6) the signing officers have indicated in the report
whether or not there were significant changes in internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
OK, let's see:
The chief executive must sign the annual and quarterly report and the officers must attest to their knowledge that the internal controls allow accurate assessment of the financial condition of the company.
Bingo - everyone admits that the JP Morgan buyout of Bear was so low because no one could asses the risk of the transactions on the books. Want to bet there was no reservation to the latest quarterly report stating something like:
Sorry, but management can not attest to the accuracy of the financial data in this report because our models have no accurate manner of assessing the value or risks of multiple billions of transactions on our books that were purchased at a leverage of over twenty to one.
Nope, don't see that in the annual report. So, it might be possible for a reasonably intelligent attorney to make a case that the executives and audit committee of bear Sterns violated Section 302.
Let's look at the penalties in Section 304:
SEC. 304. <<NOTE: 15 USC 7243.>> FORFEITURE OF CERTAIN BONUSES AND
PROFITS.
(a) Additional Compensation Prior to Noncompliance With Commission
Financial Reporting Requirements.--If an issuer is required to prepare
an accounting restatement due to the material noncompliance of the
issuer, as a result of misconduct, with any financial reporting
requirement under the securities laws, the chief executive officer and
chief financial officer of the issuer shall reimburse the issuer for--
(1) any bonus or other incentive-based or equity-based
compensation received by that person from the issuer during the
12-month period following the first public issuance or filing
with the Commission (whichever first occurs) of the financial
document embodying such financial reporting requirement; and
(2) any profits realized from the sale of securities of the
issuer during that 12-month period.
OOOH, a nasty little claw back provision. Any impact, here? let's look at that later because here comes Section 308:
SEC. 308. <<NOTE: 15 USC 7246.>> FAIR FUNDS FOR INVESTORS.
(a) Civil Penalties Added to Disgorgement Funds for the Relief of
Victims.--If in any judicial or administrative action brought by the
Commission under the securities laws (as such term is defined in section
3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47))
the Commission obtains an order requiring disgorgement against any
person for a violation of such laws or the rules or regulations
thereunder, or such person agrees in settlement of any such action to
such disgorgement, and the Commission also obtains pursuant to such laws
a civil penalty against such person, the amount of such civil penalty
shall, on the motion or at the direction of the Commission, be added to
and become part of the disgorgement fund for the benefit of the victims
of such violation.
So any SEC penalties go into the "victim's fund" - nice.
But then we hit the big Kahuna - Section 906:
SEC. 906. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
(a) In General.--Chapter 63 of title 18, United States Code, is
amended by inserting after section 1349, as created by this Act, the
following:
``Sec. 1350. Failure of corporate officers to certify financial reports
(a) Certification of Periodic Financial Reports.--Each periodic
report containing financial statements filed by an issuer with the
Securities Exchange Commission pursuant to section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) shall be
accompanied by a written statement by the chief executive officer and
chief financial officer (or equivalent thereof) of the issuer.
``(b) Content.--The statement required under subsection (a) shall
certify that the periodic report containing the financial statements
fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act pf 1934 (15 U.S.C. 78m or 78o(d)) and that
information contained in the periodic report fairly presents, in all
material respects, the financial condition and results of operations of
the issuer.
``(c) Criminal Penalties.--Whoever--
``(1) certifies any statement as set forth in subsections
(a) and (b) of this section knowing that the periodic report
accompanying the statement does not comport with all the
requirements set forth in this section shall be fined not more
than $1,000,000 or imprisoned not more than 10 years, or both;
or
``(2) willfully certifies any statement as set forth in
subsections (a) and (b) of this section knowing that the
periodic report accompanying the statement does not comport with
all the requirements set forth in this section shall be fined
not more than $5,000,000, or imprisoned not more than 20 years,
or both.''.
So, there are big fines and jail time for certifying and knowing.
So there is the rub - what was "knowing"? well, I would say that being unable to value for a sale of the company a major portion of the assets of the company can pretty much say that any inclusion of those assets on the books of the company constituted a "knowing" inadequacy of internal control standards.
But, going back to the claw back provision, what is the impact? Actually - NONE. Seems someone's lawyers may have been reading SarbOx.
This article notes:
Bear Stearns Cos. posted on Thursday its first-ever quarterly loss as the company's mortgage-related write-down grew to $1.9 billion after credit markets worsened in November.
...
Confirming news reports earlier this week, Bear Stearns said members of the executive committee will not receive any bonuses for 2007.
Sorry, folks, they are clean on the bonuses = no claw back. I do believe that there will be a long and expensive suit over Section 906. And I do think someone will get an orange jumpsuit and a paid vacation.