Statement of The SEC Concerning Financial Penalties

January 4, 2006. The U.S. Securities and Exchange Commission today issued the following
statement concerning financial penalties:

Today the Commission announced the filing of two settled actions
against corporate issuers, SEC v. McAfee, Inc. and In the Matter of
Applix, Inc. In one, the company will pay a civil money penalty; in
the other, a penalty is not part of the settlement. The question of
whether, and if so to what extent, to impose civil penalties against a
corporation raises significant questions for our mission of investor
protection. The authority to impose such penalties is relatively
recent in the Commission's history, and the use of very large
corporate penalties is more recent still. Recent cases have not
produced a clear public view of when and how the Commission will use
corporate penalties, and within the Commission itself a variety of
views have heretofore been expressed, but not reconciled.

The Commission believes it important to provide the maximum possible
degree of clarity, consistency, and predictability in explaining the
way that its corporate penalty authority will be exercised. To this
end, we are issuing this statement describing with particularity the
framework for our penalty determinations in these two cases. We have
issued these decisions, and this statement of principles, unanimously.

In determining whether or not to impose penalties against the
corporations in these cases, we carefully considered our statutory
authority, and the legislative history surrounding that statutory
authority.

In 1990, Congress passed the Securities Enforcement Remedies and Penny
Stock Reform Act (Remedies Act), which gave the Commission authority
generally to seek civil money penalties in enforcement cases. The
penalty provisions added by the Remedies Act expressly authorize the
Commission to obtain money penalties from entities, including
corporate issuers. These provisions also enhanced the Commission's
authority to fine individuals. Today, we limit our discussion to
penalties against corporations, although we view penalties against
individual offenders as a critical component in punishing and
deterring violative conduct.

The Remedies Act legislative history contains express references to
penalty assessments against corporate issuers of securities. In its
Report on the legislation, the Senate Committee on Banking, Housing,
and Urban Affairs expressly noted both that the civil money penalty
provisions would be applicable to corporate issuers, and that
shareholders ultimately may bear the cost of penalties imposed on
corporate issuers. According to the Report, such penalties should be
assessed when the securities law violation that is the basis of the
penalty has resulted in an improper benefit to the shareholders. It
also cautioned that the Commission and courts should, in considering
corporate issuer penalties, take into account whether the penalty
would be paid by shareholders who had been the principal victims of
the violation:

The Committee believes that the civil money penalty provisions should
be applicable to corporate issuers, and the legislation permits
penalties against issuers. However, because the costs of such
penalties may be passed on to shareholders, the Committee intends that
a penalty be sought when the violation results in an improper benefit
to shareholders. In cases in which shareholders are the principal
victims of the violations, the Committee expects that the SEC, when
appropriate, will seek penalties from the individual offenders acting
for a corporate issuer. Moreover, in deciding whether and to what
extent to assess a penalty against the issuer, the court may properly
take into account whether civil penalties assessed against corporate
issuers will ultimately be paid by shareholders who were themselves
victimized by the violations. The court also may consider the extent
to which the passage of time has resulted in shareholder turnover.

As this discussion indicates, a key question for the Commission is
whether the issuer's violation has provided an improper benefit to the
shareholders, or conversely whether the violation has resulted in harm
to the shareholders. Where shareholders have been victimized by the
violative conduct, or by the resulting negative effect on the entity
following its discovery, the Commission is expected to seek penalties
from culpable individual offenders acting for a corporation. This same
point was made in the SEC's memorandum in support of the Remedies Act,
which the then Chairman of the SEC, David Ruder, transmitted to the
Senate in a January 18, 1989 letter.

In addition to the benefit or harm to shareholders, the statute and
its legislative history suggest several other factors that may be
pertinent to the analysis of corporate issuer penalties. For example,
the need for effective deterrence is discussed throughout the
legislative history of the Remedies Act. The Senate Report also notes
the importance of good compliance programs and observes that the
availability of penalties may encourage development of such programs.
The Senate Report also observes that penalties may serve to decrease
the temptation to violate the law in areas where the perceived risk of
detection of wrongdoing is small. Other factors discussed in the
legislative history include whether there was fraudulent intent, harm
to innocent third parties, and the possibility of unjust enrichment to
the wrongdoer.

The Sarbanes-Oxley Act of 2002 changed the ultimate disposition of
penalties. Section 308 of Sarbanes-Oxley (the Fair Funds provision)
allows the Commission to take penalties paid by individuals and
entities in enforcement actions and add them to disgorgement funds for
the benefit of victims. Penalty moneys no longer always go to the
Treasury. Under Fair Funds, penalty moneys instead can be used to
compensate the victims for the losses they experienced from the
wrongdoing. If the victims are shareholders of the corporation being
penalized, they will still bear the cost of issuer penalty payments
(which is the case with any penalty against a corporate entity). When
penalty moneys are ultimately returned to all or some of the investors
who were victims of the violation, the amounts returned are less the
administrative costs of the distribution. While the legislative
history of the Fair Funds provision is scant, there are two general
points that can be discerned. First, the purpose of the provision is
to provide an additional source of compensation to victims of
securities law violations. Second, the provision applies to all
penalties and makes no distinction between penalties against
individuals or entities.

We have considered the legislative histories of both the Remedies Act
and the Fair Funds provisions of the Sarbanes-Oxley Act in reaching
the decisions we announce today.

We proceed from the fundamental principle that corporate penalties are
an essential part of an aggressive and comprehensive program to
enforce the federal securities laws, and that the availability of a
corporate penalty, as one of a range of remedies, contributes to the
Commission's ability to achieve an appropriate level of deterrence
through its decision in a particular case.

With this principle in mind, our view of the appropriateness of a
penalty on the corporation in a particular case, as distinct from the
individuals who commit a securities law violation, turns principally
on two considerations:

The presence or absence of a direct benefit to the corporation as a
result of the violation. The fact that a corporation itself has
received a direct and material benefit from the offense, for example
through reduced expenses or increased revenues, weighs in support of
the imposition of a corporate penalty. If the corporation is in any
other way unjustly enriched, this similarly weighs in support of the
imposition of a corporate penalty. Within this parameter, the
strongest case for the imposition of a corporate penalty is one in
which the shareholders of the corporation have received an improper
benefit as a result of the violation; the weakest case is one in which
the current shareholders of the corporation are the principal victims
of the securities law violation.

The degree to which the penalty will recompense or further harm the
injured shareholders. Because the protection of innocent investors is
a principal objective of the securities laws, the imposition of a
penalty on the corporation itself carries with it the risk that
shareholders who are innocent of the violation will nonetheless bear
the burden of the penalty. In some cases, however, the penalty itself
may be used as a source of funds to recompense the injury suffered by
victims of the securities law violations. The presence of an
opportunity to use the penalty as a meaningful source of compensation
to injured shareholders is a factor in support of its imposition. The
likelihood a corporate penalty will unfairly injure investors, the
corporation, or third parties weighs against its use as a sanction.

In addition to these two principal considerations, there are several
additional factors that are properly considered in determining whether
to impose a penalty on the corporation. These are:

The need to deter the particular type of offense. The likelihood that
a corporate penalty will serve as a strong deterrent to others
similarly situated weighs in favor of the imposition of a corporate
penalty. Conversely, the prevalence of unique circumstances that
render the particular offense unlikely to be repeated in other
contexts is a factor weighing against the need for a penalty on the
corporation rather than on the responsible individuals.

The extent of the injury to innocent parties. The egregiousness of the
harm done, the number of investors injured, and the extent of societal
harm if the corporation's infliction of such injury on innocent
parties goes unpunished, are significant determinants of the propriety
of a corporate penalty.

Whether complicity in the violation is widespread throughout the
corporation. The more pervasive the participation in the offense by
responsible persons within the corporation, the more appropriate is
the use of a corporate penalty. Conversely, within this parameter,
isolated conduct by only a few individuals would tend not to support
the imposition of a corporate penalty. Whether the corporation has
replaced those persons responsible for the violation will also be
considered in weighing this factor.

The level of intent on the part of the perpetrators. Within this
parameter, the imposition of a corporate penalty is most appropriate
in egregious circumstances, where the culpability and fraudulent
intent of the perpetrators are manifest. A corporate penalty is less
likely to be imposed if the violation is not the result of deliberate,
intentionally fraudulent conduct.

The degree of difficulty in detecting the particular type of offense.
Because offenses that are particularly difficult to detect call for an
especially high level of deterrence, this factor weighs in support of
the imposition of a corporate penalty.

Presence or lack of remedial steps by the corporation. Because the aim
of the securities laws is to protect investors, the prevention of
future harm, as well as the punishment of past offenses, is a high
priority. The Commission's decisions in particular cases are intended
to encourage the management of corporations accused of securities law
violations to do everything within their power to take remedial steps,
from the first moment that the violation is brought to their
attention. Exemplary conduct by management in this respect weighs
against the use of a corporate penalty; failure of management to take
remedial steps is a factor supporting the imposition of a corporate
penalty.

Extent of cooperation with Commission and other law enforcement.
Effective compliance with the securities laws depends upon vigilant
supervision, monitoring, and reporting of violations. When securities
law violations are discovered, it is incumbent upon management to
report them to the Commission and to other appropriate law enforcement
authorities. The degree to which a corporation has self reported an
offense, or otherwise cooperated with the investigation and
remediation of the offense, is a factor that the Commission will
consider in determining the propriety of a corporate penalty.

This framework for the consideration of the propriety of corporate
penalties is grounded in the Commission's statutory authority and
supported by the legislative history underlying that authority. It is
the Commission's intent that the elucidation of these principles will
provide a high degree of transparency to our decisions in these and
future cases, and will be of assistance to the Commission's
professional staff, to corporate issuers and their counsel, and to the
public. (Press Rel. 2006-4)