Suing the Suits–Derivative Shareholder Actions to Bring Home the Message of Antitrust (original) (raw)

Enforcement and corporate governance : three views

2005

All queries on rights and licenses including subsidiary rights should be addressed to: need for effective enforcement in the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley gave the SEC enhanced powers with respect to civil penalties, disgorgement, officer and director bars, and equitable remedies. In addition, more powerful substantive criminal provisions and sanctions were provided to the Department of Justice. What Congress recognized in Sarbanes-Oxley is that if our securities regulatory system is to work, corporations and other entities, the individuals who comprise them, and the various "gatekeepers" in v Enforcement and Corporate Governance: Three Views 1 The views expressed here are Commissioner Goldschmid's and do not necessarily represent the views of the Commission, his fellow Commissioners, or the Commission Staff. vi Enforcement and Corporate Governance: Three Views our system, must know that they are likely to be held accountable for wrongdoing. Effective deterrence requires a strong, credible threat. It is that "threat" that creates powerful incentives to avoid wrongful acts and to bring about the cultural, procedural, and process changes necessary to restore integrity and protect investors. Accountability and deterrence are the key words in the Commission's enforcement approach today. And let me provide a quantitative sense of the rigor and seriousness of the Commission's current enforcement efforts. When I went back to Columbia Law School after having served as the SEC's General Counsel in 1998-1999, I would indicate to a class that the SEC could bring roughly 350 to 450 cases a year. These covered a broad landscape, including cases involving brokerdealers, investment advisers, insider traders, and disclosure failures. In fiscal year (FY) 2001 (the government's fiscal year ends on September 30), the SEC had already become more active. The number of enforcement cases that year had risen to 484. In FY 2003, the SEC brought 679 cases. In general, these cases were more important, larger, and more complex than those brought in earlier years. With respect to financial fraud, in FY 2001, which was a big year, the SEC brought 112 cases. In FY 2003, the number was 199. Officer and director bars are a powerful deterrence tool. Such a bar precludes individual from serving as an officer or director in a public corporation again, or for a specified time frame. In FY 2001, there were 51 of these bars. In FY 2003, the number had reached 170. In terms of civil money penalties and disgorgements, the numbers are off the page. In FY 2002, the SEC exacted its first 10millioncivilmoneypenaltyfromapubliccorporation.Thereweretwentypenaltiesof10 million civil money penalty from a public corporation. There were twenty penalties of 10millioncivilmoneypenaltyfromapubliccorporation.Thereweretwentypenaltiesof10 million or higher in FY 2003, and the number will be even higher in 2004. In terms of the dollars involved: in FY 2003, the SEC collected more in civil penalties than during the prior fifteen years combined. Also, in terms of deterrence and accountability values, SEC policy now prevents civil money penalties from being insured, indemnified, or used for a tax deduction. If you-an individual or an entity-are a serious wrongdoer, you will be hit personally,-in your own pocket, and will be unable to pass the penalty on. The criminal laws should be used carefully, but there is no more powerful deterrent than the criminal laws when appropriately used. Throughout most of the last century-and, indeed, until early in the 21 st century-very few U.S. Attorneys were willing to bring criminal securities cases, even in the most willful, hard-core areas. In a dramatic change in FY 2003, there were 246 defendants indicted for SEC-related criminal activity. But the fascinating figure for me is that there were forty-eight different criminal authorities bringing those cases. The large number of criminal authorities willing to prosecute hard-core wrongdoers, and the high profile of the cases today, brings something very important to mind. There is a basic need for care, so that we make sure that the criminal law is used only for willful, venal activity. The SEC works with U.S. Attorneys (who carry out the work of the Department of Justice) to help ensure appropriate balance in the use of the criminal laws. And I hasten to add that fairness, proportionality, and concern about culpability continue to be essential elements of the SEC's enforcement process. The U.S. economic system will not work unless good people continue to serve our public corporations. We must not unfairly frighten officers, directors, and others away from serving. I must also emphasize that nobody at the SEC wants to diminish or interfere with risk-taking, corporate entrepreneurial activity, or appropriate corporate autonomy. From corporate risk-taking can come new products, innovation, efficiency, and healthy change. No recent case to my knowledge (and I think I know of each and every one) has been brought that second-guesses honest business decisions of directors or officers. A fair number of business decisions to develop new plants or products-or otherwise innovateare not going to work out. No one is second-guessing those decisions. The message from the SEC is: if a business decision goes well, report it accurately in your financials; normally, that is easy to get people to do. If it goes badly, report that accurately as well. In general, the SEC fully recognizes the critical importance of not inhibiting-indeed, of encouraging-prudent risk-taking, innovation and change.

Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the PCAOB Rulemaking Docket Matter No. 31: PCAOB Release No. 2010-005, Application of the “Failure to Supervise” Provision of the Sarbanes-Oxley Act of 2002 and Solicitation of Comment o...

Current Issues in Auditing, 2011

Recently, the Public Company Accounting Oversight Board (''PCAOB'' or ''Board'') issued a release to address, in two ways, issues relating to the responsibilities of a registered public accounting firm and its supervisory personnel with respect to supervision. First, the release reminds registered firms and associated persons of, and highlights the scope of, Section 105(c)(6) of the Sarbanes-Oxley Act of 2002 (''the Act''), which authorizes the Board to impose sanctions on registered public accounting firms and their supervisory personnel for failing to supervise reasonably an associated person who has violated certain laws, rules, or standards. Second, the release discusses and seeks comment on conceptual approaches to rulemaking that might complement the application of Section 105(c)(6) and, through increased accountability, lead to improved supervision practices and, consequently, improved audit quality. The PCAOB provided for a 91-day exposure period (from August 5, 2010, to November 3, 2010) for interested parties to examine and provide comments on the conceptual approaches to rulemaking that might complement the application of Section 105(c)(6). The Auditing Standards Committee of the Auditing Section of the American Accounting Association provided the comments in the letter below to the PCAOB on the PCAOB Release No. 2010-005, Application of the ''Failure to Supervise'' Provision of the Sarbanes-Oxley Act of 2002 and Solicitation of Comment on Rulemaking Concepts.

Corporate Law Through an Antitrust Lens

Columbia Law Review, 1992

The Shareholders' Dilemma primarily characterizes large, publicly held corporations in which ownership is separated from control. Close corporations, in which shareholders are also managers, pose distinct problems. 1992] 499 HeinOnline-92 Colum. L. Rev. 499 1992 By contrast, much of corporate law can be read as providing mechanisms to facilitate escape from the equivalent Shareholders' Dilemma.' 8 Boards of directors, proxy regulations, attorneys' fee provisions, and derivative suits can all be viewed as attempts to spread the costs of monitoring and disciplining managers among shareholders pro rata, thereby overcoming their collective action dilemma. In corporate law, the law takes the side of the prisoners, moving quickly from the identification of a collective action dilemma to strategies facilitating escape.' 9

Stopping Corporate wrongs

The corporate meltdowns of this and the previous decade in the US - WorldCom, Enron, Tyco, and in Australia - FAI, HIH and AWB being among the many examples - have resulted in the governments of those two countries introducing legislation and policy guidelines aimed at minimising future corporate misbehaviour. The US has introduced the Sarbanes Oxley Act, with requirements on corporate accountants and auditors, as well as its whistleblowing provisions. It has revised the Federal Sentencing Guidelines for Organizations. New rules for the NYSE and NASDAQ have also been introduced. In addition, the U.S. Securities and Exchange Commission and U.S. Department of Justice have further strengthened the Foreign Corrupt Practices Act 1977, last revised in 1997. Australia has revised the Corporations Act to include whistleblower protection clauses as well as adopted the ASX Corporate Governance guidelines. Standards Australia has issued its handbook on corporate governance. Although not a busi...

Potential Litigation Against Auditors for Negligence

The Brooklyn Journal of Corporate, Financial and Commercial Law, 2011

This Article addresses potential litigation against auditors for negligence, an especially important topic because such litigation is likely to increase in future years. Several reasons exist for more litigation on negligence. First, in the 2010 Supreme Court case reviewing the status of the Public Company Accounting Oversight Board (PCAOB), both sides accepted the PCAOB as a government regulatory agency, at least for some purposes. This implies that the auditing standards as approved by the Securities and Exchange Commission (SEC) should have some legal status. Second, three major reforms of relevant professional standards are occurring. Because the new standards leave more room for judgment, they are likely to increase litigation against auditors. Third, the auditing industry's fundamental duties of care to avoid negligence are extensive and illustrated primarily by inspection reports and enforcement cases presented by the PCAOB. Fourth, recent attempts to limit auditors' liability have failed. Thus, real steps by the auditing profession are needed primarily to raise the quality within the profession to help limit potential future litigation against auditors. 1. The U.S. Supreme Court has even summarized the important role of auditing. See United States v.