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Mr. Nix. It is not necessarily-it doesn't necessarily follow. That is the point.

Mr. LOOMIS. I understand. It doesn't necessarily follow. It is difficult to prove, but something, as you pointed out, will shift the burden of proof.

Mr. Nix. I see. Mr. Solarz.

Mr. SOLARZ. Thank you, Mr. Chairman. I want to pursue one other matter here. I suppose it is related to this. You make the point that your disclosure requirements are designed to protect the interest of the stockholders of these corporations.

Isn't it conceivable you can have situations abroad where the executive officers of an American corporation in effect are put in a position by the officials of a foreign government where the interests of the corporation, and thereby the interests of the stockholders, become perhaps dependent upon the willingness of the officials of that corporation to engage in what we would know and term as bribery?

Conceivably, the United Brands situation is a case in point, although I don't pretend to be excessively familiar

Mr. LOOMIS. That is a very good point.

Mr. SOLARZ [continuing]. With the details, but I would like your view of what happens. For instance, what do you think the officials of an American corporation should do if they are doing business abroad and an individual in a position of authority in that country says to them in effect: "Unless you are prepared to pay me such-andsuch, your installations will be nationalized or they will be taxed excessively," or what-have-you, and where the officer of the American corporation comes to a reasonable conclusion that in the absence of his willingness to make such a payment that his corporation will suffer significant and substantial financial losses?

I don't know that that is inconceivable.

Mr. LOOMIS. It is certainly not inconceivable.

Mr. SOLARZ. It has probably happened. Now, we are concerned about the interests of American stockholders, and one way to secure that interest is through disclosure. Is there another way to secure their interest through paying these bribes, or do you think that regardless of those considerations there are countervailing considerations which militate against it?

Mr. LOOMIS. It is because of that kind of problem which you very carefully described and which we have been wrestling with that this is a difficult area for us.

In that type of situation, do you say to the company that they have got to disclose that they made this payment, when, if they do disclose it, that may cause all these adverse consequences to occur?

It is not easy.

Mr. SOLARZ. Sort of defensive bribery.

Mr. LOOMIS. Yes. Extortion, we call it. [Laughter.]


Mr. BARREAUX. It is conceivable too, Mr. Solarz, that in some cases bribes might be paid to keep competition out for exclusivity.

Mr. SOLARZ. Affirmative bribery, but let us talk about defensive bribery for a minute. What do you think someone ought to do under those circumstances?

Mr. LOOMIS. Well, I don't think it is our business to say what a corporate executive should do under that circumstance. It is not our function to substitute our business judgment for his.

Rather, our problem is: Should we require in that kind of a situation once it is identified to our satisfaction that the whole transaction be disclosed? That is a very difficult problem.

From the viewpoint of the existing stockholders, the ready answer is "no." The stockholder, existing stockholders, are better off if it is not disclosed probably in that situation of extortion. On the other hand, if you have a business which is founded on that kind of thing, a business abroad, in that you have to pay somebody in order to be allowed to stay there, and you probably last only so long as he is in power, isn't that a business problem and the shareholders should at least be aware that it exists?

Mr. SOLARZ. Given those alternatives, I come out in favor of disclosure, but I am trying to bring it a step beyond that, as to whether or not we ought to try to make these bribes and payments illegal, however we try to effectuate that objective.

This is where I would like your judgment. You say you cannot substitute your own view for that of the person

Mr. LOOMIS. I may have misunderstood your question. I thought you were asking what I think that person should do.

Mr. SOLARZ. Given the dilemma which I have described, where the interest of a corporation and its stockholders could be at stake, do you think that, nonetheless, as a matter of law, we ought to prohibit such payments, leaving aside for a second how we would go about effectively prohibiting it? Do you think we ought to or do you think perhaps we ought to defer to what may be the bitter realities of commercial dealings in so many other countries around the world?

Mr. LOOMIS. Speaking just for myself-this is not a matter on which the Commission has a policy

Mr. SOLARZ. I understand that.

Mr. LOOMIS. I think that, if you could devise a workable mechanism for making these payments illegal, you could then give the American executive a degree of bargaining power. He could say: "No. I would like to do it, but I can't because it is illegal," so that I would be disposed to think that might be a good idea.

On the other hand, the problem is to define what kinds of payments you are prohibiting, assuming they are not illegal under the laws of a foreign country and it is just American law. In connection with this suggestion, I understood from some testimony I read that the State Department is troubled by that kind of legislation on the theory that foreign governments might regard as intruding into their affairs if we attempted to adopt laws saying what could be done in their countries.

Mr. SOLARZ. One final question. I am a little bit unclear as to what the status of your regulations are with respect to the disclosure of substantial and significant bribes.

You say on the one hand you are presently considering regulations to deal with it. On the other, I get the feeling from other testimony you have made that, on the one hand, they have got to disclose any

kind of substantial payment, and then, if they disclose it under what is in effect a false heading, that they have violated your disclosure regulations, which would appear to indicate that for all intents and purposes, if a corporation does make a major payment for the purposes of bribing someone, that they have got to disclose it, not necessarily under the heading of "Bribes," but they have got to disclose it somewhere in their statement in such a fashion that anyone reading that can reasonably infer that-what the payment was for.

Mr. LOOMIS. Well, if I gave that impression, I again oversimplified a complicated problem. Basically, our regulations require companies to file financial statements, balance sheets, profit and loss statements. I am sure you may have seen those. And, in general, items are classified rather generally under those headings of cost of materials, selling expense, salesmen's compensation, general and administrative expenses, and so on.

So it is sometimes difficult in the case of these payments to be certain that it has been misclassified. In the cases we have brought so far, we have been able to avoid that problem in most instances because the company had created a slush fund, and in that process had falsified numerous of its accounting statements. Money that went in there wasn't accounted for accurately, and the money that went out of it wasn't accounted for accurately or was not accounted for at all, and that constituted a violation of our requirements that companies present their financial statements on the basis of sound accounting.

Mr. TIMMENY. If I might supplement what the Commissioner is saying, I think the point is that the forms that we now have and the regulations that we now have clearly require the disclosure of these matters under the general heading of material information.

I think what we intend to do-and there are instructions in the forms that require disclosure of anything that is material, but what we intend to do is to sharpen up our guidance to those who may be in doubt. that they should disclose that their business may go down the drain if they pay bribes, to give them this material assistance, if you will, by specifically requiring such disclosure.

In other words, what we might attempt to do is just give guidance in an area where we think the law is clear and where we have brought cases, and I think where we will successfully obtain injunctions and so forth in order to enforce the law.

But it would be helpful and we see no harm in adding additional guidance in the way of specific items that would require specific disclosure, but the point is that the rules that we administer now clearly require disclosure of material facts, and the problems that we are dealing with generally are material.

Mr. SOLARZ. And the basic remedy for misleading or false statements is an injunction which requires them to clean up the statements, as it were, in the future?

Mr. TIMMENY. Our approach is really twofold. A mandatory injunction, if you will, to come forth with full facts and file it with the Commission for the public. And, in addition, prohibitory injunction against violating the law in the future.

Now, if there is a violation of an injunction, there would be the question of criminal contempt to which they would be subject.

Mr. SOLARZ. Clearly, under your existing regulations then, supposing a chief executive officer of a corportion deems it in his interest

and the interest of the corporation to make a substantial payment to a foreign official and he feels he would be understandably embarrassed if he disclosed it.

I don't see what incentive he has to disclose it because, if it should turn out that, in spite of the fact he tried to cover it up, it comes to the attention of the SEC, the worst that can happen is he will get an injunction requiring him to disclose it, which is what he would have done in the first place if he had wanted to, and then not to hide it again, so it seems to me that there is literally no incentive whatsoever, unless I misunderstand what you are saying, for them to disclose these payments to the extent they think it will embarrass them if they do so.

Mr. TIMMENY. Well, if I might answer, Commissioner, I think there is really a twofold answer to that question. In the first place, I think that many businessmen do not take the subject of injunction lightly. They don't like to be branded as publicly having violated very important provisions of the Federal securities laws that relates to the stewardship of their company.

I think a lot of people, by far the vast majority of American businessmen, are most concerned with their fiduciary obligation to their shareholders, and I am sure they would be uncomfortable being branded with violations.

It is quite important, I think, to realize that an injunction is just not taken lightly.

Mr. SOLARZ. The proof is in the pudding though. Do you know of any corporation which has voluntarily disclosed a substantial illegal payment in such a fashion that it was clear to anybody who read the statement that they had made an illegal payment?

Mr. TIMMENY. I think my answer to your question would have to be "no." I don't think that the proof is in the pudding. I

Mr. SOLARZ. Let me just pursue that for a minute. We know obviously, from the investigations that are going on, that quite a few corporations have made illegal payments or payments that were bribes or what-have-you, and theoretically they should have been disclosed. They weren't disclosed. By not disclosing them, they are now subject to injunctions.

Consequently, that was not a sufficient incentive.

Mr. TIMMENY. In addition, I think there is another very substantial prohibition, and that is simply that violations of the Federal securities laws may well result in suits by shareholders who have been injured or by investors who bought on the basis of misinformation.

And these lawsuits have been known to result in some very substantial financial penalties to the individuals who violated, so that there


Mr. SOLARZ. But they are not working because, if they were then people who had paid these bribes would have disclosed them. Mr. LOOMIS. I believe

Mr. SOLARZ. But they are not disclosing them.

Mr. LOOMIS. I believe in many of these cases in the past the companies were proceeding on one of two theories, either that there was no specific requirement that this be disclosed and, therefore, they didn't have to disclose it, which is a mistaken thought that I think was widespread, or else they thought the thing would never come out. Mr. SOLARZ. Yes. Well, I think that what this indicates is that the inducements for


Mr. LOOMIS. I don't think-I don't mean to interrupt you, but I don't think they made a conscious decision: "I will make this payment even though I know it violates the securities laws because I would rather violate those laws than do this."

I don't think that is the way they reason.

Mr. SOLARZ. But violation of the securities laws was not reporting. It wasn't making the payment. And it seems to me that it is quite clear that the inducements and incentives they have to make a disclosure of payments which would embarrass them to disclose are not very effective. If they were effective, we would be able to cite all sorts of examples of companies that made dubious payments, but reported them because they felt under a legal obligation to do so, for fear of the legal consequences of not doing so.

Mr. BARREAUX. The question is: How many of these payments were made before prosecution started developing?

Mr. Loomis. I think, as I said earlier-I think the answer to that is that before we brought these very recent cases, they were under the impression that the securities laws didn't require disclosure, or else they were under the impression that it would never come out and they would never have to disclose them.

Mr. SOLARZ. One final question. How would you feel about legislation which would require corporations to disclose significant and substantial payments which, if made in our own country, would be illegal, and providing further that there would be criminal penalties involved if they failed to make such disclosures?

Mr. LOOMIS. As I say, that is a general policy question which is only indirectly related to the Commission's responsibilities. As I tried to say earlier, I look favorably on that idea personally if it can be made to work.

Mr. SOLARZ. Thank you very much, Mr. Chairman.

Mr. Nix. Just one last thing I want to say. I would find it extremely difficult to accept the concept that one must be given incentives in order to persuade him to comply with the law. I just cannot accept that.

Now, I want to, on behalf of the subcommittee-to thank you, Commissioner Loomis, and your associates for appearing here today. I am deeply appreciative of the contribution you have made, and I look forward to the pleasure of having you back again.

Mr. LOOMIS. Thank you very much, Mr. Chairman.
Mr. Nix. The subcommittee will stand adjourned.
[Whereupon, at 5:25 p.m., the subcommittee adjourned.]

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