Every weekend you'll find me at yard sales, browsing among relics of past eras that people don't take seriously anymore. You know, junk you find in the attic, gathering dust, stuff like candlestick telephones, kerosene lanterns, Royal typewriters, and Sarbanes-Oxley.
I've been thinking a lot about SOX lately because of the latest scandal at the scandal factory,
. They may make pretty good printers, but there seems to be something in the air of the executive suite that makes people lose control there. There was a
a few years ago, and now there's a mess involving ousted CEO Mark Hurd.
Sarbanes-Oxley was enacted in 2002 for, among other things, the express purpose of preventing the Mark Hurds of this world from doing allegedly unethical stuff. If SOX was doing its job, Hurd would have been deterred by more than public embarrassment, or the likelihood of losing his job. He'd have been worried about falling afoul of the growling watchdogs at the
Securities and Exchange Commission
Section 406 of Sarbanes-Oxley
deals with such situations, even though it does so in a kind of back-handed way. Public companies must disclose if they have codes of ethics that apply to its "senior financial officers" -- a term that encompasses the CEO in addition to the green-eyeshade types. They also are required to disclose "any change in or waiver of the code of ethics." As far as I know, Section 406 has never been enforced. That's a shame, because a total lack of enforcement has rendered this Enron-era law just about meaningless -- at a time when corporate ethics seem to be widely viewed as akin to
Maimonides' 613 commandments
, to be fervently espoused but observed only in the breach.
Now I'm a realistic guy, and I don't expect the
to actually do something useful, when it has major tasks to perform like persecuting
Still, just suppose this agency decided to make itself useful and enforce Section 406. I could see it being brought to bear in not just this latest HP ethical challenge, but a host of recent situations in which boil down to "the suits can't find the word 'ethics' in the dictionary."
* Everybody's favorite vampire squid,
. Take a look at
Goldman Sachs' Code of Business Conduct and Ethics.
Section C, "Fair Dealing," is not supposed to be sarcastic. It says, "We do not seek competitive advantages through illegal or unethical business practices. Each employee and director should endeavor to deal fairly with the firm's clients, service providers, suppliers, competitors and employees. No employee or director should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any unfair dealing practice." When the SEC sued Goldman over the bank not disclosing that a prominent short-seller was involved in designing a mortgage-backed security, it did not invoke SOX even though, as
observed at the time, the firm stood "accused of simple, immoral, unethical behavior: withholding material data about products to cheat their customers." Which ain't contrary to SOX, by the way. What's bad, SOX-wise, is that no "waiver" of the code was publicly disclosed -- and Goldman effectively "waived" the code by letting it happen, and didn't disclose that. Like I said, back-handed.
* SOX could also be applied in the same way to
, for its morally bankrupt Repo 105 asset-shifting scheme. Its code of ethics is such a magnificent, awe-inspiring document that it was quoted approvingly in a recent study published by the
-- as an example of a terrific code of ethics. "Ethical business practices entail a clear understanding of right and wrong, and a motivation on the part of our directors and employees to act at all times in a manner," it said. "Insightful, mind-stretching and visionary," said EJBO. All Lehman lacked were insightful, stretch-minded executives. The SEC so far hasn't done a blessed thing about any of this, so let's see if it decides to use SOX, if it does something. (File this under "don't hold your breath.")
*I could easily see SOX used as a bludgeon in the
for not being scrupulously honest in marketing subprime securities. Well,
could, but not the SEC.
paid the SEC $75 million in penalties, and there were lesser fines imposed on Gary Crittenden, former chief financial officer, and another exec. SOX is supposed to target this precise kind of financial misdeed, but once again it was a nonissue. Ditto for
, which settled SEC charges that it failed to disclose conflicts of interest to its pension clients in its pre-
Bank of America
days. As usual, the SEC made no reference to SOX in its settlement, further cementing its reputation as the Rodney Dangerfield of securities laws.
*Section 406 can be applied in a host of situations in which corporations have been naughty. For instance, a health care company called
is being probed by the SEC for
allegedly manipulating the Medicare reimbursement system
contends that "the Company was in material violation of its Code of Ethical Business Conduct and compliance due to the scheme to inflate Medicare revenues."
* No discussion of corporate ethics is complete without my favorite
. Late last year, the company was enmeshed in a
, directed at journalists and others perceived as hostile to the company's effervescent CEO Patrick Byrne. A Byrne employee targeted a ragamuffin bunch, ranging from yours truly to financial commentator Barry Ritholtz, and members of our families. Does SOX apply in this situation? Well, here's a copy of the
Overstock code of ethics
, which contains a stricture against "even the appearance of improper behavior." In contrast to HP, Overstock's board did nothing.
That's the bottom line. If a board doesn't care about philandering, book-cooking, pretexting executives, you can pretty much count on the SEC looking the other way. Of course, there's a school of thought that holds the government has no business policing corporate ethics in the first place. I might feel that way myself, if I weren't reminded repeatedly how boardroom behavior can have a devastating public impact.
Congress is giving some thought to patching the numerous holes in Dodd-Frank, such as getting rid of an absurd clause exempting the SEC from the Freedom of Information Act. But Sarbanes-Oxley is already on the books. It just has to be enforced. If the SEC isn't up to the job, Congress should give that job to the new consumer protection agency being established at the
. I know, it doesn't seem to square too well with that agency's mission. But if the SEC won't enforce SOX, somebody has got to do the job.
Gary Weiss has covered Wall Street wrongdoing for almost a quarter century. His coverage of stock fraud at BusinessWeek won many awards, and included a cover story, "The Mob on Wall Street," which exposed mob infiltration of brokerages. He uncovered the Salomon Brothers bond-trading scandal, and wrote extensively on the dangers posed by hedge funds, Internet fraud and out-of-control leverage. He was a contributing editor at Conde Nast Porfolio, writing about the people most intimately involved in the financial crisis, from Timothy Geithner to Bernard Madoff. His book "Born to Steal" (Warner Books: 2003), described the Mafia's takeover of brokerage houses in the 1990s. "Wall Street Versus America" (Portfolio: 2006) was an account of investor rip-offs. He blogs at garyweiss.blogspot.com.