Mr. MEZVINSKY. In your testimony you talked about illegal corporate payments. Do you think it is possible to devise any laws or regulations making it impossible to have such payments from foreign bank accounts? Is that possible by law or by rule or regulation? Mr. HILLS. No, I think we have testified earlier that we are not going to change the behavior or patterns of centuries by passing a law or two. But we can make institutions more accountable for what they do. At least with respect to the institutions that are within our jurisdiction, the publicly owned American corporations, I do believe that requiring greater internal controls, imposing greater professional responsibility on the auditors, and a greater responsibility on the outside director of the publicly held corporation, that it will have a dramatic impact upon practice. No, I do not think that any law is going to change the possibility of people making illegal payments out of bank accounts abroad. Greater accountability can get the problem under far greater control. Mr. MEZVINSKY. There has been some comment regarding some feeling that there may be between you and the Department of Commerce. There is a proposal, supposedly, that the State Department and the Commerce Department would have authority similar to that of the SEC to stop the illegal corporate payments. Some of these proposals, as I understand it, could possibly reduce the authority of the SEC. Would you care to comment on that? Mr. HILLS. Let me say two or three things. I have had for a long time a great respect for Secretary Richardson. I think the comments by Secretary Richardson that you are referring to were unintended. I have accepted his response entirely. I do not believe they were intended to have the impact they did have. Mr. MEZVINSKY. What about the proposals? Mr. HILLS. We have not seen the legislation, but the proposals, to my knowledge, would not in any way limit the SEC's capacity to get at this information. Obviously, if the proposals did in some fashion limit our existing authority to require disclosures, then we would object to them. But as far as we know, they will not. Until we see the legislation, I do not think we could comment further. Obviously, there could be possibilities of conflicting investigations, but the Department of Commerce seems to be directing its attention to a different problem and it seems to believe that it will have some beneficial effect upon the foreign payment matters. I do not know enough about what the proposed legislation will be in order to comment further. I do think, however-and we have made this plea a number of times that there are certain things that can be done. It is terribly important to understand what we found in these 100odd cases that we have investigated. There may be many other cases in behavioral patterns that we do not know about. We believe we have the measure of the problem. If we do, then the suggestions that we have made for changing the responsibility of the internal auditing procedure and the request that we have made of the New York Stock Exchange to require a greater responsibility for outside directors will meet the problems that we have found. Mr. MEZVINSKY. I have one last point. With regard to Gulf Oil, what has happened? What kind of penalties and what kind of enforcement has there been in relation to their improper corporate payments? No names are mentioned here, but it pretty much falls into the category of subsidiaries, foreign efforts. Mr. HILLS. There are 17 enforcement actions which have been instituted and concluded. Mr. Sporkin can testify in great detail on all of them if you wish. The Gulf Oil case is a good example of what the SEC's enforcement capability can accomplish. Foremost, of course, was our capacity to get an injunction enforced by the Federal court. The enforcement action of that injunction was to secure a new corporate governance of Gulf Oil internally for purposes of trying to find out what happened. We forced the creation of a committee of outside directors, not tainted by the allegations of the past, who conducted an investigation of everything that happened at Gulf Oil in relation to questionable and improper payments and activities. They produced what is, in our judgment, a truly remarkable report by a committee chaired by John McCloy. That report, and we will be happy to supply copies to the subcommittee, is a document that goes back over the years and to a very large extent documents as to what happened at Gulf Oil. I might say it also points out in that document our problems in tracing what happened to some funds. Mr. MEZVINSKY. What about prosecution? Have there been prosecutions? Mr. HILLS. There has been a grand jury indictment of Mr. Wilde. I do not know of any other grand jury actions. Mr. MEZVINSKY. What other actions have been taken with regard to individuals, corporations, penalties, criminal acts? What has the SEC done in terms of strong enforcement? Mr. HILLS. The important thing is that the company is under new -control. The stockholders have been protected. To the extent that the stockholders have been robbed of money, the mechanism is still in place for litigation to get the money back. There have been two grand jury indictments. Mr. SPORKIN. First of all, part of the case is still pending. The case against Mr. Wilde has been settled. I think if you look at the Gulf Oil case, the information we have obtained through depositions, I think, has been devastating information. I think if we have done no more than just spell out what happened in that case, I think a great service has been done for this country. I think we went way beyond that. You have to realize that we are limited to only civil actions. We do not have criminal sanction. That has to be taken by somebody else. In the civil area, I do not know of any case that our agency could be more proud of over what has happened in that case. Mr. MEZVINSKY. Did you recommend criminal prosecutions? Mr. HILLS. Our practice is to Mr. MEZVINSKY. Do you? Mr. SPORKIN. The files are over in the Department of Justice at their request. We have given them full access to every bit of information we have. Mr. MEZVINSKY. As a policy matter, do you say, "From our investigation we would recommend criminal sanctions"? Mr. HILLS. As a policy matter, we often recommend that a criminal investigation follow one of our civil cases. We are very careful not to comment on any particular case publicly, but we often do refer cases to the Justice Department for criminal investigation. We provide our people to help with that investigation. Mr. SPORKIN. The policy is to do that when they have requested. We usually do not make a further reference. Mr. MEZVINSKY. Thank you. Mr. ROSENTHAL. Could you send us a memorandum for the subcommittee's use of the precise analysis of what legislative recommendations you have and the need for them, so that we can clearly have no question about it? It would be an amplification of your statement, perhaps in greater detail, so that we can carry the ball, if the subcommittee feels they should? Mr. HILLS. We will do that. We appreciate the invitation. SECURITIES AND EXCHANGE COMMISSION, Hon. BENJAMIN S. ROSENTHAL, DEAR CHAIRMAN ROSENTHAL: During my testimony on June 28, 1976, before the Subcommittee on Commerce, Consumer and Monetary Affairs, concerning the activities of foreign financial institutions in the United States securities markets, you invited me to submit a more detailed description of the suggested legislation I referred to in my statement. The Commission believes its ability to investigate the securities activities of both foreign and domestic financial institutions would be significantly enhanced if Congress were to enact legislation to spell out the power of the federal courts to grant ancillary relief in cases of refusal to comply with a Commission subpoena or to provide information in a Commission investigation. Although the courts undoubtedly have broad power to afford appropriate additional relief in subpoena enforcement actions under existing law, I believe that express provisions of the type we transmitted to the staff of the Senate Committee on Banking, Housing and Urban Affairs in April of this year, would be of substantial assistance to the Commission. This proposal would amend Section 21(c) of the Securities Exchange Act of 1934, 15 U.S.C. 78u (c), and would expressly authorize district courts to issue orders requiring, among other things: (1) the impoundment or withholding of dividends or interest otherwise due persons who have failed to supply information to the Commission; (2) the revocation or suspension of the right of such persons to vote the securities involved; (3) the corporation involved to suspend temporarily particular persons having an interest in its securities from acting as an officer or director until the Commission receives the information sought; (4) the corporation or its transfer agent to refrain from effectuating any purchase or sale of securities for particular persons until the information sought is furnished; and (5) such other relief as the Court may deem necessary or appropriate under the circumstances. Enactment of legislation of this nature would, in my view, serve both to deter those considering the consequences of disregarding a Commission subpoena and to insure uniform and effective judicial action against those who elect to ignore such a subpoena. For example, one frequently encountered area in which this kind of ancillary relief provision would be helpful involves the acquisition by foreign investors of an interest exceeding 5% in an American corporation without filing the report required under Section 13 (d) of the Securities Exchange Act. Where the staff is investigating the possibility of such a secret acquisition, and the subjects have refused to respond to formal requests for information, the Commission could apply to the appropriate federal court for an order barring the voting or sale of, or payment of dividends on, the securities involved until the Commission had received a response to its inquiries. At present, the only sanctions which Section 21 (c) expressly provides for failure to comply with orders enforcing Commission subpoenas are the imposition of a $1,000 fine or imprisonment for up to one year-sanctions which individuals and institutions located outside the United States may consider meaningless. Our proposal, on the other hand, would, I believe, provide the courts with subpoena enforcement tools rooted in economic factors which such persons would find difficult to ignore. I am enclosing a copy of the proposal we have furnished to the staff of the Senate Committee on Banking, Housing and Urban Affairs. In a recent discussion with Senator Williams, he indicated that he and his staff would seriously consider our suggestion. If I can provide any further information, please feel free to call on me. Sincerely, RODERICK M. HILLS, Chairman. SECURITIES AND EXCHANGE COMMISSION, STEPHEN J. PARADISE, ESQ., Assistant Counsel, U.S. Senate Committee on Banking, Housing and Urban Affairs, 5300 New Senate Office Building, Washington, D.C. DEAR STEVE: On November 28, 1975, I wrote a letter of transmittal to Howard Menell, enclosing, pursuant to his request, a draft revision of Title II of the proposed Senate Draft Bill to Amend the Export Administration Act of 1969 and the Securities Exchange Act of 1934. In that letter, I stated the Commission's belief that there is a need for a more clear specification of the remedies available to it when the Commission applies to a Federal district court for assistance in the conduct of an investigation. I also included language in the draft proposal I sent to you which would amend Section 21(c) of the Securities Exchange Act to provide such remedies in cases where the Commission is unable to obtain information from persons in furtherance of a particular investigation. Although the Senate Committee on Banking, Housing and Urban Affairs adopted the proposals we mutually agreed to with respect to additional reporting requirements applicable to beneficial owners and holders of record of equity securities registered with the Commission, and reported those provisions as part of S. 953, the Committee did not take any affirmative action concerning the proposed revision of Section 21 (c). As you know, the Commission has encountered difficulties in obtaining information in certain investigations recently, particularly where the securities involved in the investigation were held of record by foreign nominees who were able to avoid or delay response to Commission subpoenas. For this reason, the Commission has, upon further consideration of this matter, asked me to transmit the enclosed draft to you for your consideration as a separate legislative proposal. The proposed language would amend Section 21 (c) of the Securities Exchange Act by expressly authorizing the appropriate district courts to issue orders in cases where persons refuse to disclose information that is necessary for the Commission to complete its investigation expeditiously, including, but not limited to, orders requiring: (a) persons to produce records or to give testimony; (b) the issuer of the securities involved in an investigation to temporarily suspend any person having an interest in the securities as an officer or director of the issuer until the Commission receives the information it sought; (c) the issuer of the securities or a transfer agent to refrain from effecting any purchase or sale of securities for persons having an interest in such securities until the information sought is furnished to the Commission; (d) the impoundment or withholding of any dividends or interest otherwise due to persons who have failed to supply information in the course of an investigation; (e) the revocation or suspension of the right of such persons to vote or to control the vote of securities involved in a Commission investigation; and (f) such other relief as the Court may deem necessary or appropriate under the circumstances. I hope that this proposed revision of Section 21 (c) of the Securities Exchange Act will meet with your favorable consideration. Please let me know if we can be of assistance to you in your consideration of this matter. Sincerely, Enclosure. HARVEY L. PITT, General Counsel. PROPOSED REVISION OF SECTION 21(c) OF THE SECURITIES AND EXCHANGE ACT Section 21 (c) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78u (c)), is amended to read as follows: "(c) (1) In case of contumacy by, or refusal to obey a subpoena issued to, any person, or in cases in which the Commission is unsuccessful in obtaining, or is otherwise unable to obtain, information sought in furtherance of its investigation, the Commission may invoke the aid of any court of the United States, within the jurisdiction of which: "(A) such investigation or proceeding is carried on; "(B) the person from whom the information or records are sought resides or carries on business; "(C) the issuer of the securities involved in the Commission's investigation, if any, has its principal place of business, place of incorporation or books and records evidencing record ownership of or other interest in its securities; or "(D) the transfer agent for, or other person charged with disbursing dividends or interest payments on the securities of any issuer involved in the investigation or effecting transfers of ownership of such securities, resides, has its principal place of business, place of incorporation, or books and records evidencing ownership of or other interest in the securities of such issuer in requiring the attendance and testimony of witnesses, the production of books, papers, correspondence, memoranda, records or other information. "(2) In a proceeding pursuant to paragraph (1) of this subsection, the court may issue an order to ensure that the Commission may complete its investigation expeditiously, including, but not limited to, orders requiring: "(A) any person to appear before the Commission or member or officer designated by the Commission, there to produce records or information, if so ordered, or to give testimony touching the matter under investigation or in question; 66 "(B) the issuer of the securities involved in the Commission's investigation to suspend any person having an interest in the securities as an officer or director of the issuer until the Commission receives the information it sought in connection with its investigation about (or from) or the records of, such person. "(C) the issuer of the securities involved in the Commission's investigation or a transfer agent for such securities to refrain from effecting any purchase or sale by any person having an interest in such securities until information sought from such person is furnished to the Commission; "(D) the impoundment or withholding of any dividends or interest other-wise due any person from whom the Commission has failed to receive information in the course of its investigation; and "(E) the revocation or suspension of the right to vote or to control the vote. of any securities of any issuer involved in the Commission's investigation by any person from whom the Commission has been unable to obtain information in connection with its investigation; and "(F) such other relief as the court may deem necessary or appropriate under the circumstances. Any failure to obey such order of the court may be punished by such court as a contempt thereof. All process in any such case may be served in the judicial district whereof such person is an inhabitant or wherever he may be found. Nothing in this paragraph shall be construed as limiting the authority of the court to enter orders directly against the individual from whom the Commission has been unable to obtain information pursuant to this section. "(3) Any person who shall, without just cause, fail or refuse to attend and testify or to answer any lawful inquiry or to produce books, papers, correspondence, memoranda, records or other information, if in his power so to do, in obedience to the subpoena of the Commission, shall be guilty of a misdemeanorand, upon conviction, shall be subject to a fine of not more than $1,000 or to. imprisonment for a term of not more than one year, or both." |