THE SARBANES-OXLEY ACT: AVOIDING JAIL TIME

THE SARBANES-OXLEY ACT: AVOIDING JAIL TIME Presented to: Society of International Business Fellows Atlanta, Georgia January 28, 2004 Presented by: Robert F Dow, Esq (404) 873-8706 Robert.Dow@agg.com Arnall Golden Gregory LLP 2800 One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309 Ways to Get in Deep Trouble under SOX • Enhanced criminal liability for document destruction • Liability for retaliation against informants • Liability for signing false certifications (public co.’s) • Notice of defined contribution plan blackout periods • Enhanced penalties for securities fraud • Enhanced liability for white-collar crime • Improper influence on auditors (public co.’s) DOCUMENT DESTRUCTION Document Destruction SOX Section 802 expands criminal liability for document destruction: • Knowingly destroy • Any records/documents • With intent to impede • Any investigation or case - or in contemplation of a case Document Destruction (cont’d) Destruction, alteration, or falsification of records in Federal investigations and bankruptcy Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11 [bankruptcy], or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both Tampering with Evidence Section 802 amends 18 U.S.C §1102 – titled “Tampering with a Record or Otherwise Impeding an Official Proceeding” – to provide that whoever corruptly alters, destroys, mutilates or conceals a record, document or other object, or attempts to so, with the intent to impair the object’s integrity or availability for use in an official [federal agency or judicial] proceeding, or who otherwise obstructs any official proceeding, or attempts to so, shall be fined under Title 18 or imprisoned not more than 20 years, or both Tampering with Evidence (cont’d) SOX 802 also creates another new statute, 18 U.S.C § 1520, entitled “Destruction of corporate audit records,” which provides that: Any accountant who conducts an audit of an issuer of securities to which section 10A(a) of the Securities Exchange Act of 1934 applies, shall maintain all audit or review workpapers for a period of years from the end of the fiscal period in which the audit or review was concluded Recent Enforcement Actions – Ernst & Young/Next Card • NextCard under examination by banking regulators • Ernst & Young partner orders altering of workpapers to show more support for accounting • Also destroyed emails and documents from hard drive • Two Ernst & Young managers barred from practicing before SEC • Partner faces criminal charges with up to 20 years and $250,000 in fines SECURITIES FRAUD SOX 807 creates a new general securities fraud statute, 18 U.S.C § 1348, entitled “Securities fraud,” which provides that: Whoever knowingly executes, or attempts to execute, a scheme or artifice To defraud any person in connection with any security of an issuer with a class of securities registered under section 12 of the Exchange Act or that is required to file reports under section 15(d) of the Exchange Act; or Statute of Limitations for Securities Fraud • Section 804 amends 28 U.S.C 1658 by adding subsection (b), which extends the statute of limitations for private rights of action involving claims of fraud, deceit, manipulation or contrivance in contravention of a regulatory requirement concerning the securities laws, to the earlier of (i) years [formerly year] after discovery of the facts constituting the violation or (ii) years after such violation [formerly years] Penalty Enhancements • Section 902 creates new Section 1349, Attempt and Conspiracy, to Title 18 of the U.S Code, providing that those persons who attempt or conspire to commit certain fraud offenses will be subject to the same penalties as those prescribed for the offense • Section 903 increases the maximum penalties for mail and wire fraud from five years to 20 years’ imprisonment Penalty Enhancements (cont’ d) • Section 904 increases the criminal penalties for ERISA violations from one year to 10 years imprisonment and up to $500,000 in fines • Section 1106 amends Section 32(a) of the Exchange Act to raise the maximum individual penalties from $1 million and 10 years’ imprisonment to $5 million and 20 years’ imprisonment, and to raise the maximum corporate fine from $2.5 million to $25 million Improper Influence On Auditors Improper Influence on Auditors New SEC rules say that officers may not fraudulently influence, coerce, manipulate or mislead an independent auditor: • To issue a report that is not warranted in the circumstances • Not to perform procedures required by GAAS • Not to withdraw a report • Not to communicate with AC What is Improper Influence? SEC says the following may be improper influence: • Offering or paying bribes or other financial incentives, including offering future employment • Providing an auditor with inaccurate or misleading legal analysis • Threatening to cancel existing non-audit or audit engagements if the auditor objects to the issuer’s accounting • Seeking to have a partner removed from the audit engagement because the partner objects to the issuer’s accounting • Blackmailing, and • Making physical threats Section 306 ERISA BLACKOUT PROVISIONS Blackout Notices • Administrative Information  Final regulations issued by DOL on January 24, 2003  Regulations are effective for Blackout Periods beginning on or after January 26, 2003 Blackout Notices (cont’d) • “Blackout Period” Defined Any period of more than three consecutive business days during which the ability of participants or beneficiaries in an individual account plan to direct or diversify assets credited to their accounts or to obtain loans or distributions from the plan is temporarily suspended, limited, or restricted Blackout Notices (cont’d) • Typical Blackout Period Scenarios  Change in service providers (e.g., third-party recordkeepers)  Change in payroll systems, vendors, or software  Changing investment options Blackout Notices (cont’d) • Content of Notice  Reason(s) for the Blackout Period  Identification of the investments and/or rights affected by the Blackout Period  Expected beginning and ending dates for the Blackout Period (specific dates or calendar weeks)  If investments are affected, a statement advising evaluation of appropriateness of current investment decisions in light of inability to direct or diversify during Blackout Period Blackout Notices (cont’d) • Content of Notice  If Notice is not provided 30 days in advance of a Blackout Period, a statement that 30-day advance notice is generally required and an explanation as to why notice was not given  Name, address, and phone number of contact person/department for questions  Notice must be written so that it can be understood by the average participant  DOL has provided a model notice • Not required, but its use satisfies certain safe harbors Blackout Notices (cont’d) • Form and Distribution of Notice  In writing  Distributed to affected participants and beneficiaries in any manner permitted under ERISA (including electronic media)  Must be mailed (or sent electronically) by the distribution deadline (need not be received by the deadline)  Must be sent to the participants’ or beneficiaries’ last known addresses Blackout Notices (cont’d) • Timing of Notice  At least 30 calendar days, but not more than 60 calendar days, prior to the last day on which the participants or beneficiaries may exercise the affected rights  Example: Trading permitted x per month on last day of month; Blackout Period = 6/20 – 7/15 (i.e., no trades on 6/30); last day to exercise rights is 5/31; thus, Notice must be provided 30-60 days prior to 5/31 (i.e., no later than 5/1) Blackout Notices (cont’d) • Civil Penalties  Civil penalty for administrators’ failure to provide timely Blackout Notices  DOL may assess up to $100 per day, per participant or beneficiary  Penalty period begins on the last date the Notice could have been properly filed and ends on the date the Blackout Period ends  Personal, joint and several liability of plan administrator