[Infowarrior] - Intelligence Czar Can Waive SEC Rules

[Richard Forno]

http://www.businessweek.com/bwdaily/dnflash/may2006/nf20060523_2210.htm?camp
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MAY 23, 2006

By Dawn Kopecki

Intelligence Czar Can Waive SEC Rules

Now, the White House's top spymaster can cite national security to exempt
businesses from reporting requirements


President George W. Bush has bestowed on his intelligence czar, John
Negroponte, broad authority, in the name of national security, to excuse
publicly traded companies from their usual accounting and
securities-disclosure obligations. Notice of the development came in a brief
entry in the Federal Register, dated May 5, 2006, that was opaque to the
untrained eye.
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Unbeknownst to almost all of Washington and the financial world, Bush and
every other President since Jimmy Carter have had the authority to exempt
companies working on certain top-secret defense projects from portions of
the 1934 Securities Exchange Act. Administration officials told BusinessWeek
that they believe this is the first time a President has ever delegated the
authority to someone outside the Oval Office. It couldn't be immediately
determined whether any company has received a waiver under this provision.

The timing of Bush's move is intriguing. On the same day the President
signed the memo, Porter Goss resigned as director of the Central
Intelligence Agency amid criticism of ineffectiveness and poor morale at the
agency. Only six days later, on May 11, USA Today reported that the National
Security Agency had obtained millions of calling records of ordinary
citizens provided by three major U.S. phone companies. Negroponte oversees
both the CIA and NSA in his role as the administration's top intelligence
official.

FEW ANSWERS.  White House spokeswoman Dana M. Perino said the timing of the
May 5 Presidential memo had no significance. "There was nothing specific
that prompted this memo," Perino said.

In addition to refusing to explain why Bush decided to delegate this
authority to Negroponte, the White House declined to say whether Bush or any
other President has ever exercised the authority and allowed a company to
avoid standard securities disclosure and accounting requirements. The White
House wouldn't comment on whether Negroponte has granted such a waiver, and
BusinessWeek so far hasn't identified any companies affected by the
provision. Negroponte's office did not respond to requests for comment.

Securities-law experts said they were unfamiliar with the May 5 memo and the
underlying Presidential authority at issue. John C. Coffee, a securities-law
professor at Columbia University, speculated that defense contractors might
want to use such an exemption to mask secret assignments for the Pentagon or
CIA. "What you might hide is investments: You've spent umpteen million
dollars that comes out of your working capital to build a plant in Iraq,"
which the government wants to keep secret. "That's the kind of scenario that
would be plausible," Coffee said.

AUTHORITY GRANTED.  William McLucas, the Securities & Exchange Commission's
former enforcement chief, suggested that the ability to conceal financial
information in the name of national security could lead some companies "to
play fast and loose with their numbers." McLucas, a partner at the law firm
Wilmer Cutler Pickering Hale & Dorr in Washington, added: "It could be that
you have a bunch of books and records out there that no one knows about."

The memo Bush signed on May 5, which was published seven days later in the
Federal Register, had the unrevealing title "Assignment of Function Relating
to Granting of Authority for Issuance of Certain Directives: Memorandum for
the Director of National Intelligence." In the document, Bush addressed
Negroponte, saying: "I hereby assign to you the function of the President
under section 13(b)(3)(A) of the Securities Exchange Act of 1934, as
amended."

A trip to the statute books showed that the amended version of the 1934 act
states that "with respect to matters concerning the national security of the
United States," the President or the head of an Executive Branch agency may
exempt companies from certain critical legal obligations. These obligations
include keeping accurate "books, records, and accounts" and maintaining "a
system of internal accounting controls sufficient" to ensure the propriety
of financial transactions and the preparation of financial statements in
compliance with "generally accepted accounting principles."