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Why big companies are rarely prosecuted by ASIC

In an article last week, I wrote that Woolworths (ASX: WOW) and Wesfarmers’ (ASX: WES) Coles had nothing to fear from an investigation by the Australian Securities and Investment Commission (ASIC). Large companies are almost never substantially penalised by ASIC, which has been repeatedly described as a ‘toothless tiger’ and ‘having a glass jaw’. As a result of a number of ineffective dealings over the years, ASIC itself is now under investigation by a Senate committee.

ASIC’s problems are compounded by terrible public relations issues and a poor track record of settling with rather than prosecuting big companies. Part of the issue is legal; as mentioned in my earlier article some instances such as ‘unconscionable conduct’ are simply very difficult to prove and prosecute. Big companies retain skilled legal teams with strong financial backing which can cause cases to drag out for years and become very expensive; in these situations ASIC generally settles the case for a comparatively small penalty.

Anyone who’s ever read Jordan Belfort’s The Wolf of Wall Street books will be familiar with the uphill struggle faced by the American SEC to prosecute him. Novice lawyers looking to gain a track record in the public service in order to move into better paid private service are not motivated to take on tough, complicated cases that will last several years.

Often, such cases could outlast the tenure of the prosecuting lawyer, meaning an incoming lawyer has to master the nuances of the case, including thousands of pages of evidence, conversations, public statements, et cetera, usually in a smaller amount of time than it took to gather the evidence in the first place.

ASIC also faces the accusation of ruthlessly targeting ‘small fry’ to build up its scorecard while big companies escape with a slap on the wrist. If true, such a stance ties in well with a perception that ASIC is either understaffed or mismanaged – individuals looking for their own career advancement would select cases that are likely to achieve a successful court outcome for the prosecutor.

Or if ASIC lacks the resources to meet big companies in court, it would naturally focus on the cases it can win – by default this is likely to be smaller, simpler companies or incidents. Alternatively, a manager concerned with improving the ‘hit rate’ of ASIC’s legal interactions could do the same.

Further evidence of under-resourcing is the fact that ASIC took two years to investigate a case against Leighton Holdings (ASX: LEI), and a similar amount of time to begin investigating Commonwealth Bank’s (ASX: CBA) Financial Planning arm.

Combined with this sluggishness and an apparent bias against small companies is a damning statement by former executive Niall Coburn, who told the Senate inquiry that: “ASIC is in the position of having a wide enforcement portfolio that is trying to investigate and prosecute 21st century economic and investment crime with 19th century legislative tools that are outmoded, slow and incapable of protecting the interests of Australian and international investors.”

Foolish takeaway

I wouldn’t have ASIC’s problems for all the money in the ASX (however if you told me how much that was, my answer might change). Ultimately a slow or under-resourced corporate regulator means that potentially shady conduct goes unscrutinised for longer, or is not punished appropriately when caught. This is bad news for investors who put their trust in company directors and in truth have little insight into the nuts and bolts of a company’s day-to-day activities.

Thankfully most directors – like most people – do the right thing most of the time. Without a vigilant ‘big brother’ in the room however, investors should scrutinise company dealings with a critical eye – something they ought to already be doing anyway. ASIC now has investigations underway into a number of large companies (Woolworths, Wesfarmers, Leighton Holdings and several directors of David Jones (ASX: DJS)), so time will tell if the regulator continues in its timid approach.

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Motley Fool contributor Sean O’Neill does not own shares in any of the companies mentioned in this article.