Criminal Exposure Under Sarbanes-Oxley

Posted by Bill Bockwoldt on December 9, 2010

Great article from the Criminal Defense Lawyers Los Angeles.  Here is a snippet:

According to qualified Dallas criminal attorneys and well experienced Los Angeles criminal defense attorneys, certifying periodic reports can be a source of extreme exposure under Sarbanes. Specifically, Sections 906 and 302 of the Sarbanes-Oxley Act enacted twin provisions of the United States Code requiring certification by the CEOs and CFOs of corporate documents. Each section gives two levels of criminal penalties, depending upon whether the violation was knowing or willful.

Under 18 U.S.C., all CEOs and CFOs certify, in writing, that every periodic report filed by their public company under §13(a) or §15(d) of the Exchange Act, fairly represents the financial condition of the company. 18 U.S.C. §1350 also provides criminal penalties of up to 20 years for willful violations and up to 10 years imprisonment for violations where the executive knowingly signed a false certification.

Under 15 U.S.C. §7241, a “principal executive officer of officers and principal financial officer of officers ¼ or persons performing similar functions,” of a public company must certify each quarterly and annual report filed by the company under the new Exchange Act Rules §13(a) or §15(d). Furthermore, “a separate certification must be provided for each certifying officer, and the language of the certification cannot be varied from the language contained in” the statute.

As a general rule, certification is made based on the knowledge of the certifying officer, and ignorance will not be a defense to a charge of falsely certifying a quarterly or annual report if the certifying officer should have known that the certification was false. Therefore, the implementation of §302 of the Sarbanes-Oxley Act “creates a heavy burden on the CEO and CFO to become personally aware of material information on a timely basis, and also makes it difficult to argue in any investigation that the CEO or CFO in fact had no knowledge of material information that was available.”

Unlike §906 of the Sarbanes-Oxley Act, most cases of false certifications under §302 will be pursued civilly through SEC proceedings, however the DOJ may seek to prosecute §302 violations under criminal statutes that prohibit the use of mail, telephones or Internet to commit fraud under 18 U.S.C. § 1341 (mail fraud) or 18 U.S.C. § 1343 (wire fraud). Furthermore, an officer who “willfully” makes a false Sarbanes-Oxley Act §302 certification may be liable for criminal violation of the Exchange Act, which results in a maximum of up to 20 years imprisonment and up to $5 million in fines, under §1106.

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Tags: Sarbanes-Oxley Articles & Information, 404, 404 audit, compliance, Sarbanes-Oxley, audit scope