The SEC entered into a settlement with four defendants, including a former outside director and member of the audit committee, who failed to exercise oversight when he "recklessly signed a number of financial statements that were materially misleading and took no care to ensure their accuracy." Nevertheless, the government's focus on individual liability creates additional risks.Ī review of recent SEC enforcement allegations against directors provides insight into what this risk means in practice:
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The Yates Memo has the potential to affect many aspects of corporate investigations and prosecutions, but it does not change the standards for proving criminal conduct beyond a reasonable doubt, which is a serious hurdle to proving individual liability. The so-called "Yates Memo" directs prosecutors to "focus on individual wrongdoing from the very beginning of any investigation" and directs companies seeking to cooperate to "identify all individuals involved or responsible for the misconduct at issue, regardless of their position, status, or seniority." The clear goal is to force line prosecutors and companies seeking cooperation to more aggressively gather and produce evidence of individual wrongdoing. So, the DOJ recently announced six changes to its policies governing investigations of corporate misconduct that are aimed at increasing prosecutions against individuals. And while the DOJ has sued individuals for securities fraud, it hasn't been enough to appease critics of the department. These numbers include a small number of directors, although it is a relatively rare event relative to the hundreds of cases the SEC brings each year.Ī criminal prosecution against a director, on the other hand, is an almost unheard-of event in the securities context. And since 2000, the SEC has charged individuals in 93 percent of its fraud and financial reporting cases. Since the beginning of the 2011 fiscal year, the SEC charged individuals in 83 percent of its actions. The SEC's enforcement statistics bear this out. Corporations act only through the individuals who run them, and thus any investigations of corporate misconduct necessarily require an investigation of individual conduct. The current chairman of the SEC noted in her confirmation hearing that enforcement would be a top priority, emphasizing an intent to pursue "all wrongdoers-individual and institutional, of whatever position or size." But the SEC's focus on individuals has actually been quite commonplace over the years. This Commentary will discuss the landscape of director liability in the SEC context and provide some suggestions that may help directors minimize the risks of regulatory scrutiny. As a former SEC chairman put it: "It is not an adequate ethical standard to aspire to get through the day without being indicted." Of course, most directors aspire to more than staying out of trouble. What does the government's heated rhetoric and renewed focus on individual liability mean for corporate directors? As the chairman of the Securities and Exchange Commission ("SEC") recently noted, "ervice as a director is not for the faint of heart…." But the good news is that directors who perform their role with even a modicum of reasonableness are highly unlikely to be held personally liable in carrying out their responsibilities. Senior government officials have responded by speaking forcefully about their desires to sue or prosecute more individuals. Following the 2008 financial crisis, government regulators and prosecutors have been under tremendous public pressure to prosecute individuals.