Doing Business After Sarbanes-Oxley

Hypothetical Case Revisited

A publicly traded network of long-term nursing facilities received grand jury subpoenas to produce financial information, billing information, and various health care records in connection with a probe of possible billing fraud activities over the past few years. Because the affidavits to the subpoenas were sealed, the extent of the probe was initially unclear, particularly as to whether the company's officers or directors were targets of the investigation. These officers and directors, mindful of the gravity of the situation, coordinated their response to the subpoenas and to later government requests. Before long, as a result of an internal investigation launched after the subpoenas were received, it became apparent that key officers of the company were targets of the government's probe. After news of the probe became known, the value of the company's stock dropped sharply, spawning several lawsuits (including class actions and a shareholder's derivative suit) against the company, as well as its key officers and directors. Not long afterward, the Securities and Exchange Commission (SEC) subpoenaed the company's chief executive officer (CEO), chief operating officer (COO), and chief financial officer (CFO) to testify and produce documents. Because directors of the company's board wanted to stem the hemorrhaging from these events, and believing that its survival depended on keeping its right to participate in federal programs, the board decided there was no choice but to fully cooperate with investigators (in hopes that this would prevent, or at least minimize, any subsequent penalties). Not wanting to provide ammunition for the civil suits against the company, the board accepted a negotiated consent decree in which the company didn't admit to any wrongdoing, but under which it had to pay a large penalty and revise its compliance program to prevent any future reporting activities that may mislead investors. How the targets of the investigation may fare was even less certain. They were put on a paid leave of absence, and offered the right to retain independent counsel and have the payment of their attorneys' fees forwarded under an indemnity agreement.