After Bear Stearns, SEC's Cox Tells Another Tale: Jonathan Weil

April 17 (Bloomberg) -- Fresh from his assertions last month that Bear Stearns Cos. was well capitalized, Christopher Cox has told another whopper.

In a two-page, April 1 letter to U.S. Senator Christopher Dodd, the Securities and Exchange Commission chairman sought to defend his agency against criticism that its enforcement division has gone soft. In doing so, Cox offered the Connecticut Democrat this example.

``Thus far in fiscal 2008, the commission has already broken the all-time record for the largest financial sanction ever assessed against an individual defendant in a commission action,'' Cox said. ``The former CEO of UnitedHealth paid more than $600 million to settle charges related to options backdating. That is a record that eclipses even what Michael Milken paid in the most notorious financial fraud case of all time.''

That was a stretch. Cox made it seem like the SEC got more than $600 million in the case all by itself. It didn't really happen that way, though. Assuming all goes according to plan, the SEC will never touch most of those dollars. If this isn't quite a Hillary Clinton sniper-fire moment, it's close.

The defendant Cox was referring to was William McGuire, the former chief executive of UnitedHealth Group Inc. He resigned in 2006 after an independent law firm said it found evidence he participated in backdating stock-option grants, or locking in unusually low exercise prices by misstating the dates the options were granted.

Settlement Terms

McGuire, who neither admitted nor denied wrongdoing, hasn't paid the settlement yet. His SEC agreement hasn't received court approval, and the assets McGuire would use to pay it are frozen under a court order. Additionally, the settlement amount actually was $468 million, just as the headline said in the SEC's Dec. 6 press release announcing the deal with McGuire.

Those nits aside, here's what's wrong with Cox's statement to Dodd, the chairman of the Senate Banking Committee.

On the surface, the $468 million settlement makes the SEC look tough. It included a $7 million fine and $12.7 million in disgorgement and interest. The rest represented reimbursement to the company for cash bonuses and stock-based pay that McGuire received from 2003 to 2006.

Now here's the catch. The SEC agreed to give McGuire credit for $461 million -- everything except the $7 million fine -- as long as he follows through on a previous pledge to return more than $600 million in cash and options to UnitedHealth to resolve separate lawsuits brought by shareholders on behalf of the company. So, by paying that other settlement, which also was announced Dec. 6, McGuire would satisfy almost all his obligations under the SEC deal.

At the Table

The SEC's Dec. 6 press release explained this. Cox's letter to Dodd didn't.

``It's not as if the SEC were somehow the impetus behind Dr. McGuire settling with us. They weren't even at the table,'' says Karl Cambronne, an attorney at Minneapolis-based Chestnut & Cambronne, the lead law firm representing shareholders in the settled suits against McGuire. ``The SEC's claim that it has broken an all-time record for the largest financial sanction ever assessed is entirely misleading.''

Michael Milken, the disgraced former junk-bond king, paid $400 million in disgorgement under his 1990 settlement with the SEC. The difference there was the SEC secured the money itself. Milken also paid another $700 million in criminal fines and other legal settlements.

In truth, the SEC could have done nothing more than fine McGuire the $7 million, and he still would be paying the same amount back to UnitedHealth, assuming the other settlement receives court approval. To be sure, McGuire might have felt an extra incentive to mend fences with the company and its shareholders, as a way of currying favor with the government.

Taking Credit

I asked SEC spokesman John Nester why Cox was taking credit for a settlement of more than $600 million. He said the agency reached its agreement with McGuire independently of the other parties in the private litigation, which included a committee of UnitedHealth directors.

``We did not gross up our settlement, but rather the credit acknowledges Dr. McGuire's payment of over $600 million,'' Nester said in an e-mail. That figure includes more than $180 million in value that McGuire relinquished in 2006 when he voluntarily repriced certain options, reducing their worth.

Nester also stressed that McGuire would be obligated to pay the full SEC settlement if his other deal falls apart. It's also true that McGuire's agreement in the private lawsuits, if approved by the court, still would be binding if the SEC's settlement falls through. At most, the SEC has provided a possible backstop to the private litigants' deal.

Fewer Penalties

The reason Cox was writing to the senator in the first place is that Dodd, along with Senator Jack Reed, a Rhode Island Democrat, had asked the Government Accountability Office to examine the SEC's penalties in enforcement cases. Cox noted that the request followed news reports showing that disgorgement and penalties were $1.6 billion in fiscal 2007, down from more than $3 billion in each of the three previous years.

With a slide like that, at a time of diminishing investor confidence, it's no wonder the SEC might reach to boost its numbers. If only it used the McGuire approach more often, maybe the SEC could take credit for most of the private settlements in U.S. securities litigation.

The SEC is supposed to be promoting transparency, though, not fuzzy math. With his letter to Dodd, Cox instead looks like a tired watchdog bragging about a bone some other dog got. The public deserves better.