A dozen years ago, lawyer Chris Cutler was among a small group of Securities and Exchange Commission staffers examining the books of relatively unknown Texas energy company Enron Corp.
"When the SEC opened its investigation, three of us started going at it and then we realized it would take a lot more people," Cutler said. "It grew to eight people (at the SEC). Then criminal authorities got interested and soon you had all these U.S. attorney offices vying for who was going to take (the lead) on this."
Enron wound up disintegrating in what was at the time the largest bankruptcy in U.S. history, bringing down with it the then-largest public accounting firm, Arthur Andersen.
Cutler went on to carve a career centered in the world of investigating financial fraud, public accounting irregularities and other white-collar crimes. More recently, he shifted from the government to private practice.
He now works for the Foley & Lardner law firm in Tampa advising a range of corporate clients, some of whom are under investigation by two of his former employers: the SEC and the Public Company Accounting Oversight Board in Washington, D.C.
The Tampa Bay Times recently caught up with Cutler, 41, to talk about the new regime at the SEC, the cyclical nature of accounting fraud and why the federal government increasingly relies on corporate whistleblowers.
Where did you begin your career?
The SEC division of enforcement was my first legal job 14 years ago. I was a University of Florida law grad, which was my connection to the state. I ended up going to D.C. and it was a great time to be at the SEC. You had a lot of major financial crises and restatement cases. I was lucky enough to do the Enron investigation with my group there. I was there from 1999 to 2003 … and most of my time was spent doing that case.
Former Enron CEO Jeff Skilling is back in the news. Any thoughts on Skilling trimming 10 years off his 24-year prison sentence?
It may not be the most popular belief … but I actually don't have much of a problem with it.
I took Jeff Skilling's testimony for a few days in D.C. early on in November 2001. He was a very sharp guy, a smart guy. My view is the whole Enron debacle went well beyond Jeff Skilling and Ken Lay and Andy Fastow. Twenty-four years for Jeff Skilling was more a function of the time period in which those issues occurred. It seemed kind of harsh at the time.
What trends are you seeing in white-collar fraud?
I'm not sure there are any real identifiable trends. We had all those financial fraud cases in the early part of the last decade and since then we've had the (tighter regulations with) Sarbanes-Oxley, the public accounting oversight board and SEC rule changes. You've seen the number of company restatements (of their finances) going down. I think this has had a positive impact.
Like everything in this realm, it's all cyclical, though, and it wouldn't surprise me if financial fraud comes back in the next two or three years. It will probably never be the same as it was in the early part of the last decade, but I see a little bit more in terms of restatements with (some) leading to criminal prosecutions.
With Mary Jo White recently sworn in as the new chairwoman of the SEC, do you foresee any change in direction or priorities?
That's always a question with a new division director or new chairperson. Generally, the SEC, like most government agencies, is run by the staff. It will be more or less the same. There may be some varied focus. I think what she'll try to do is see what are the important areas for using staff resources … to allocate them appropriately.
A lot of public companies still complain that complying with stricter federal regulations is too costly and time-consuming. Is Sarbanes-Oxley working?
It does serve an important function with respect to financial reporting. It's proved to be a benefit overall. There have been some growing pains, but overall it's had a positive impact.
There were concerns with Section 404 and the increased work it caused early on … I think it was causing the right balance of what accounting firms needed to do to properly ascertain management's internal controls.
When it first came out, everyone was (talking about) how much costs were being sunk in internal controls. The lack of (new companies going public) was more a view of the marketplace that it was not a good time to go public than (the new regulations).
From Art Nadel to Lou Pearlman to Scott Rothstein, Florida seems to be an epicenter for Ponzi schemes. Why is that? And do you see it changing?
I don't know that I necessarily see it changing. You have a concentration of wealth here in Florida. And you have a large population of retirees. There's always been a perception that's not necessarily reality that people would think just because you're a retiree, you're not a sophisticated investor. And that's not true.
But even with that misperception, there's a level of wealth here that makes it a fertile ground for folks to go ahead and implement a Ponzi scheme. (Victims) are chasing yield and you can't get that through a financial institution.
What's the better way to improve enforcement? More aggressive SEC investigations or more aggressive state regulators?
That's tough to say. I don't think it's one or the other. What typically happens is there is a confluence of a couple newsworthy items that really impact shareholders and that drives the regulators.
Once you get to that point, it becomes the purview of the SEC or criminal investigations (become) more state-oriented, depending on the location. That's the nature of the playbook we had with Enron and WorldCom and Global Crossing and Adelphia.
It was a reaction of criminal and civil regulators building off pressures that had been growing for a number of years.
So regulators are more reactive than proactive?
Regulators can be proactive, but the nature of civil and criminal prosecutions is typically reactive, often because they just don't know about it. (Sarbanes-Oxley) tried to be a little forward thinking about how we get a leg up.
But it's very difficult for the SEC or anybody to find fraud before it actually occurs or early on.
One recent accounting fraud case here in St. Petersburg was the meltdown of insurer Universal Health Care, which allegedly filed phony reports with the state but wasn't caught for many, many months. Isn't it difficult to keep fraudulent accounting going that long and not get noticed?
I can't talk specifically about Universal Health Care at all. But your fact pattern applies equally to almost any financial fraud. There's always a question if regulators can catch something a little sooner.
With Enron, one of the biggest criticisms was regulators weren't reviewing public company filings timely enough, even though Enron was reviewed every three years. They added (requirements) that every public restatement filing be reviewed every year in some fashion. It's tough, but it's one of the only mechanisms you have.
The whistleblower program is geared exactly toward that issue because it is so difficult to learn about things sooner rather than later. Now you have the ability to have some kind of bounty award.
Since the whistleblower program has been implemented, the SEC has paid a couple of bounties already based on information it has received from a viable source that has led to an enforcement case.
The program was established because of that very fear we're not getting the timely information we need. There are pitfalls — a rash of bad reports from (would-be whistleblowers) wanting to be paid.
We'll know in the next two or three years how successful it's been.
Jeff Harrington can be reached at email@example.com or (727) 893-8242.