SOX Does Not Expand Liability for Directors

It has become increasing popular to complain that SOX expanded the liability of corporate directors and federalized portions of what was previously state law.  In a recent speech SEC Commissioner Roel C. Campos disputed this point in comments that should be welcomed by corporate directors.  In a speech entitled “How to be an Effective Board Member” delivered to the HACR Program on Corporate Responsibility in Boston, Commissioner Campos stated that “[t]his concern [that SOX increased legal duties and responsibilities of directors] is unwarranted.  There have not been any new or different theories or standards of liability imposed on directors in the aftermath of Sarbanes Oxley by Commission or SRO rules.  The bottom line is – if directors act reasonably and in good faith, they will be protected from liability.”  Commissioner Campos went on to note that “[t]he situations where directors have to be worried about an SEC action against them are where they act very unreasonably and in bad faith.” (emphasis added). See Speech by SEC Commissioner: How to be an Effective Board Member, Commissioner Roel C. Campos, August 15, 2006, http://sec.gov/news/speech/2006/spch081506rcc.htm

ABA Resolutions to Preserve Rights in Prosecutorial Process Are A Beginning, Not An End

Last week the ABA adopted two statements to preserve the attorney-client privilege. First, it adopted in modified form, the recommendations of its Task Force on Attorney-Client Privilege. http://www.abanet.org/media/releases/news080806_1.html The ABA Task Force made recommendations that, in part, seem to echo the findings of Judge Kaplan in U. S v. Stein. (see blog entry dated July 3, 2006). The Task Force recommended that the ABA oppose any government policies that have the effect of eroding the constitutional and other legal rights of current or former employees by encouraging prosecutors to consider the following factors in assessing cooperation: 1) payment of legal fees to employees or former employees; 2) continuation of joint defense agreements between the company and an employee; 3) the sharing of records by the company with the employee; and 4) the fact that the company retained or declined to sanction an employee for invoking the Fifth Amendment in response to government requests for information. http://www.abanet.org/media/docs/302Brevised.pdf

At the same time, the ABA adopted a resolution calling on the SEC, PCAOB, and the AICPA to “take appropriate steps” to ensure that the attorney-client privilege and work product protections are preserved in the audit process. http://www.abanet.org/media/docs/302Arevised.pdf

Clearly these are good first steps by the ABA. Neither goes nearly far enough, however. The erosion of rights discussed in the ABA reports has come primarily through government pressure by DOJ and SEC prosecutors under the guise of evaluating whether an organization is cooperative and if it should be prosecuted or perhaps receive a lesser penalty. The Justice Department seems to be leading the charge in this regard as evidenced by the Thompson Memorandum and the Stein case. The SEC unfortunately is not far behind as demonstrated by the positions of the staff in the Lucent case. http://www.sec.gov/news/press/2004-67.htm (See also the comments of a senior enforcement official at the time of that settlement noting that “[a]nyone who settles with us is going to agree not to be indemnified.” http://www.abanet.org/media/docs/302Brevised.pdf at n. 36).

In view of the continued actions by the government that are eroding fundamental rights in the name of effective law enforcement, the ABA positions represent a good start, yet more is necessary. What is needed here is a recognition by the government – both DOJ and the SEC – that it cannot effectively enforce the law by eroding it. In fact, eroding fundamental rights disrespects the law. Rather, both DOJ and the SEC need to reform their standards for evaluating cooperation to focus on what they need: the basic facts involved and reasonable assurances that the questionable activity has been halted and will not reoccur. If good prosecutors are satisfied on these points they should have what they need in most cases to evaluate cooperation and make whatever prosecutorial decisions are necessary without eroding fundamental rights of the company and its employees. (For further discussion, see blog entry of July 27, 2006 ).