I have long suspected that the SEC was carried away by the post- Enron fallout, in which it was widely criticized for being asleep at the wheel, while rampaging NY AG Elliot Spitzer was getting lots of good press from the MSM for suing people left and right. In response, the SEC significantly ramped up its enforcement efforts, but one had to wonder whether all this new activity would lead to shaky cases being brought on weak facts. In at least one instance, it appears that that was precisely what happened:
GARY D. KENNEDY, a 52-year-old former chief executive of a software company, was sitting on a black leather chair in his home office here in Sandy, an affluent suburb of Salt Lake City, beneath a painted portrait of his family. It was 1:15 p.m. on Dec. 15, 2005: he remembers it vividly. His wife, Jane, was standing over the fax machine when she noticed a strange expression on her husband's face. "What is it?" she asked. Mr. Kennedy hung up the phone, looked up, and told her that the government, which had pursued a securities fraud case against him for more than five years, had decided to drop the charges.
The government's case was based on an anonymous tip and turned out to be remarkably weak:
At the heart of its lawsuit was a tension common to software companies: development projects, and their notoriety for delays. Customers change what they want, designers take longer than they anticipate and some projects just die. If a project is delayed, should the chief executive disclose it? What if the company discloses the delay, a shareholder sells, and the project is then resumed?
Two things happened to derail the government's case: a forensic accountant hired by the S.E.C. as an expert witness suggested the accounting looked legitimate, said a person familiar with the case. And TenFold, which had refused to release privileged information, was forced by the courts in the spring of 2005 to hand over documents that revealed Mr. Kennedy had sought internal and external legal advice as to what was proper to disclose and what was not. The advice from legal counsel was clear: Unless you know a project will be terminated, don't disclose it.
Meanwhile, Kennedy's career and reputation were trashed and he's incurred huge expenses.
Mrs. Kennedy, citing the costs of the fight, including lawyers' fees and other costs covered by insurance, adds: "Five years, $30 million and a ruined company. It's just sad."
Where does Kennedy to go to get his reputation back? SEC Chairman Chris Cox ought to make a public apology to Kennedy, at the very least.
The big picture, of course, is that this is what happens when prosecutorial decisions are driven by the need to satisfy a press and public clamoring for blood rather than the merits of the cases, as one suspects has been all too common post-Enron.
