The Bernstein Perspective: Public Defense

The SEC needs to demand compliance but also needs to simplify the process.

By Charles Bernstein, Editor-at-Large -- Chain Leader, 5/1/2005

Corporate scandals are threatening big and small companies alike. This is dangerous for everyone, and there must be zero tolerance in these situations. Wall Street is facing a rise of regulatory scrutiny after the collapse of Enron and WorldCom’s huge problems, just to name a few. In an effort to ensure fair practices, the Securities and Exchange Commission is making companies practically jump through hoops that may be creating more harm than good.

Too Close to Home
In our own industry, Minneapolis-based Buca Inc. is facing tough challenges. The SEC began investigating the company in February to determine whether federal securities laws have been violated. Buca says the investigation was launched by the resignation of former chairman and CEO Joe Micatrotto.

Buca’s audit committee alleged that Micatrotto used company funds for “purposes that were either personal in nature, not properly authorized or not sufficiently documented as proper business expenditures.” In May 2004 Buca asked Micatrotto to resign, make certain cash payments to the company and waive his rights to receive payments under Buca’s employee share plan. As a result of these agreements, Micatrotto had to return about $900,000.

The company also ousted interim Chief Financial Officer Daniel Skrypek and Chief Information Officer John Motschenbacher in March.

While it appears to be taking care of its internal issues, Buca faces a tough road ahead under the watchful eye of the SEC.

In another situation, Winston-Salem, N.C.-based Krispy Kreme has received $225 million in debt financing from Credit Suisse First Boston and Silver Point Finance, giving the chain a chance to recover. It has been at risk of defaulting on past loans. The company said it used proceeds from the financing to pay back some $90 million owed to Krispy Kreme’s existing credit facility.

“With more liquidity and no near-term payment deadlines, we look forward to getting back to the business of selling doughnuts,” said President and COO Steve Panagos in a press release. Krispy Kreme has a long way to rebound, and the SEC will be watching it carefully, too.

Restatement of Ownership
The SEC has been keeping a close watch on annual reports as well. It wants to ensure that the reports follow the correct guidelines and that the CFO and CEO of each public company signs them.

The Cheesecake Factory filed its 2004 annual report in April after receiving a notice from Nasdaq threatening a delisting of its shares if it took longer to file the report. In the process, the Calabasas Hills, Calif.-based company restated some results because of new lease accounting.

Cheesecake CFO Mike Dixon says the SEC staff tried to help at times but also tended to make things somewhat difficult. He cites numerous restaurant companies including Outback, Darden, California Pizza Kitchen, Ruby Tuesday, P.F. Chang’s and others that had filed their reports late or had to restate results.

The SEC is trying to clarify the rules, as it should. But adjustments are needed to make it easier to comply and avoid costly and potentially scandalous mistakes.