Doing Business After Sarbanes-Oxley

Key Features of Sarbanes-Oxley

Background Events Explaining the Legislative Action

The various reform measures contained in Sarbanes-Oxley reflect Congressional [over]reaction to concerns about accounting and financial reporting irregularities believed to be responsible for Enron's stunning collapse and at the heart of other recent corporate scandals. A few of the widely reported scandals in 2002 that led to the overwhelming passage of Sarbanes-Oxley were:

• 
  
• Arthur Andersen's indictment (and conviction) for obstructing justice by shredding accounting documents after the start of the government's probe into Enron's implosion;
  
• WorldCom's June 25, 2002 announcement that during the past five quarters its earnings had been overstated by over $3.8 billion;
  
• Adelphia's announcement on the same day that it was seeking Chapter 11 Bankruptcy protection ' only 3 months after guarantees of $2.3 billion for personal loans made to family members of the company's founder (John Rigas) were revealed;
  
• Tyco's stock capitalization dropping by $100 billion after its CEO was indicted; and
  
• News that Global Crossing's former head (Gary Winnick) had sold over $700 million in stock soon before it filed for bankruptcy protection.
  
  

Further details about these scandals and the reaction to them are widely reported. One prominent class action lawyer, in emphasizing the public's growing distrust of corporate America and explaining the increase in securities fraud lawsuits being filed against publicly traded companies, offered the following text from an article published in a popular magazine when the House bill that became Sarbanes-Oxley (H.R. 3763, the 'Corporate And Auditing Accountability, Responsibility, and Transparency Act of 2002') was introduced:

'In ' [the] classic children's book 'Charlotte's Web,' there is a scene in which Templeton the rat has just stuffed himself with the garbage left behind after a fair. 'What a night,' he says. 'What feasting and carousing. Never have I seen such leavings, and everything well ripened and seasoned with passage of time and the heat of the day. Oh it was rich, my friends, rich.' ”

And so it is with the 1990s bull market. The tech-stock hawkers, mindless speculators, and clueless dot-commers have pulled up their stakes, and what we are left with is a bunch of smelly debris. The problem is, our digestive tracts aren't like Templeton's. ' There's something terribly rotten with American business right now, and it's making a lot of us sick. All the new-economy lying and cheating that went on back in the 90s has come back to bite us ' Arthur Levitt, former head of the SEC, is even blunter: 'America's investors have been ripped off as massively as a bank being held up by a guy with a gun and mask.' '

William S. Lerach, Plundering America: How American Investors Got Taken for Trillions by Corporate Insiders (The Rise of the New Corporate Kleptocracy) 8 Stan. J.L. Bus. & Fin. 69, 126 n. 14 (2002), citing to Andy Serwer, Dirty Rotten Numbers, Fortune, Feb. 18, 2002, at 74 [emphasis added].

What It Contains

Sarbanes-Oxley contains the most sweeping financial market reform measures enacted since the Securities and Exchange Commission (SEC) was established following the 1929 stock market crash. The earlier regulatory framework (now modified by Sarbanes-Oxley) was ably described in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375 (1976), a landmark securities fraud case:

'Federal regulation of transactions in securities emerged ' [in] the aftermath of the market crash in 1929. The Securities Act of 1933 ' ['Securities Act'], 48 Stat. 74, as amended, 15 U.S.C. ' 77a et seq., was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing. ' The 1934 Act [The Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. ' 78a et seq., as amended] ['Exchange Act'] was intended ' to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the-counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges. ' As part of the 1934 Act Congress created the Commission, which is provided with an arsenal of flexible enforcement powers.'

Ernst & Ernst v. Hochfelder, 425 U.S. at 194-95, 96 S.Ct. at 1381-82 (holding that absent an allegation of intent to deceive, manipulate, or defraud, a private damage action in a securities fraud suit by customers of a brokerage firm would not satisfy the requirements of Section 10b of the Exchange Act and SEC Rule 10b-5, codified at 17 C.F.R. ' 240.10b-5).

While several of Sarbanes-Oxley's provisions took effect upon the Act's enactment, others required SEC rulemaking, and only took effect this year. See, e.g., Broc Romanek, et al., New Compliance Challenges under the Sarbanes-Oxley Act of 2002, 20 No. 10 ACCA Docket 23 (Nov./Dec. 2002) (providing a printable chart of dates when various provisions were scheduled to take effect and the status of any SEC regulatory measures needed to implement the statutory directives).

'The key provisions of the Act can be grouped into five areas: 1) auditor oversight and independence; 2) corporate responsibility; 3) financial disclosures; 4) analyst conflicts of interest; and 5) criminal and civil penalties.' Thomas O. Gorman, The Sarbanes-Oxley Act of 2002: New Regulations on Executives & Their Professional Advisors, at 4, an article prepared for the ABA Administrative Law Section's Annual Meeting (Oct. 17-18, 2002) <AVAILABLE href="http://www.abanet.org/adminlaw/fall02/sarbanes.doc" www.abanet.org/adminlaw/fall02/sarbanes.doc. The next part of this article examines some of these reform measures in more detail, before returning to the hypothetical case to see how these provisions may apply.

No Shredding of Corporate Records / Accountants to Keep Audit Papers for 5 Fiscal Years

Section 802 of Sarbanes Oxley added newly codified 18 U.S.C. ' 1519, to stop corporate documents from being destroyed to thwart investigations, by making it an offense punishable by up to 20 years' imprisonment:

'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, or in relation to or contemplation of any such matter or case ' [commits an offense].'

A related measure, newly codified in Congress, 18 U.S.C. ' 1520, requires auditors of publicly traded entities to retain their work papers at the risk of 10 years' imprisonment. The SEC was ordered to promulgate regulations instructing how key documents, including auditors' work papers, should be retained ' and made the knowing or willful failure to follow the SEC's directives a criminal offense:

'(a)(l) Any accountant who ' audit[s] ' an issuer of securities to which [Exchange Act] section 10A(a) ' applies, shall maintain all audit or review workpapers for ' 5 years from the end of the fiscal period in which the audit or review was concluded.

(2) The ' [SEC] shall promulgate ' rules and regulations ' relating to the retention of relevant records ' created, sent, or received in connection with an audit or review and [which] contain conclusions, opinions, analyses, or financial data relating to such an audit or review ' conducted by any accountant who ' audit[s] ' an issuer of securities to which [Exchange Act] section l0A(a) '. applies. …

(b) Whoever knowingly and willfully violates subsection (a)(l), or any rule or regulation promulgated by the ' [SEC] under subsection (a)(2) ' [commits an offense]

Financial Reports Must Be Certified by the CEO and CFO

Who said that cost reports were impossible to certify as to accuracy? Section 906 of Sarbanes-Oxley (codified at 18 U.S.C. ' 1350) requires CEO and CFO of publicly traded entities to certify the accuracy of all filed financial reports that contain a company's financial statements. Depending upon the mental state of the person making these certifications (ie, whether he or she acted 'knowingly' or 'willfully'), a statutory violations carrying penalties of incarceration for up to 10 or 20 years, and fines up to $1 million to $5 million:

• 
  
• Certification of periodic financial reports. ' Each periodic report containing financial statements filed by an issuer with the ' [SEC] pursuant to section 13(a) or 15(d) of the ' Exchange Act ' shall be accompanied by a written statement by the chief executive officer and chief financial officer (or equivalent ') of the issuer.
  
• Content. ' The statement required ' shall certify that the ' report ' fully complies with the requirements of section 13(a) or 15(d) of the ' Exchange Act ' and that information contained in ' [it] fairly presents, in all material respects, the financial condition and results of operations of the issuer.
  
• Criminal Penalties ' Whoever 1) certifies any statement as set forth ' [above] knowing that the periodic report accompanying the statement does not comport with all the requirements ' [commits an offense punishable by a maximum fine of $1 million or 10 years' imprisonment]. 2) willfully certifies any statement as set forth ' [above] knowing that the periodic report accompanying the statement does not comport with all the requirements [commits an offense punishable by a maximum fine of $5 million or 20 years' imprisonment].'
  
  

The legislative history does not reveal why the possible punishment was tied to the person's mental state at the time the certification was made. Interestingly, a defendant may actually benefit if charged under the 20-year, willful provision (as opposed to being charged under the 10-year, knowingly provision) because defendants charged with specific intent crimes can introduce evidence that they lacked that intent ' which can be established by reliance upon an attorney's advice (made after a full and complete disclosure of relevant facts); that defense, however, isn't ordinarily available to defendants charged with general intent crimes. See, e.g., United States v. Gross, 961 F.2d 1097, 1102 (3rd Cir. 1992) (collecting cases and affirming convictions of CEO for conspiring to violate securities laws and making false statements, and convictions of vice president for insider trading and mail fraud), and Pickholz, Marvin G., 21 Sec.Crimes ' 5:38 ('good-faith defense') (West Group 1993) (collecting cases) ('[T]he majority of circuits hold that where a jury instruction sets forth all of the elements of a 'knowledge' crime, the court does not abuse its discretion in failing to instruct that good faith is a defense to the crime.).

Retaliation Against Qui Tam Relators May Now Also Result in Felony Charges

Section 1107 of Sarbanes-Oxley (codified at new subsection 18 U.S.C. ' 1513(e)), which makes it a crime punishable by imprisonment for up to 10 years to knowingly retaliate against whistleblowers, will be a very dangerous provision for executives and board members of publicly traded companies (and their employment law counsel), and particularly those who do business with the federal government (such as health care entities):

'(e) Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall ' [commit an offense].' [Emphasis added.]

New Securities Fraud Statute Added, Punishment Increased

Section 1106 of Sarbanes-Oxley ('Increased Penalties under Securities Exchange Act of 1934') raised the punishment for violations under Section 32(a) of the Exchange Act (15 U.S.C. ' 78ff). The punishment for individuals was increased, from a maximum of $1 million and 10 years' imprisonment to $5 million and 20 years; the maximum punishment for corporate defendants was also raised, from $2.5 million to $25 million.

Section 807 of Sarbanes-Oxley created a new 'securities fraud' offense (codified at 18 U.S.C. ' 1348), which is patterned after the mail, wire, healthcare, and bank fraud statutes under which individuals may be sentenced to a maximum $5 million fine and 25 years' imprisonment, while corporations may be fined $25 million.

'[W]hoever knowingly executes, or attempts to execute, a scheme or artifice to defraud any person in connection with any security of a public issuer, or to obtain, by ' false or fraudulent pretenses, any money or property in connection with the purchase or sale of any security of a public issuer … [commits an offense].'

Section 903 of Sarbanes-Oxley also raised the maximum statutory punishment for wire fraud and mail fraud (18 U.S.C. ” 1341 and 1343) from 5 years to 20 years.

The Sentencing Commission Gets Tougher (as instructed) on White Collar Crime

Sections 805, 905, and 1104(a)(3) of Sarbanes-Oxley directed the U.S. Sentencing Commission ('Sentencing Commission') to act within 180 days (by January 25, 2003) to increase the punishment for fraud and obstruction crimes involving publicly traded companies:

'Section 1104(a)(3) of ' Sarbanes-Oxley … requires the … Sentencing Commission … to submit to Congress: A. An explanation of actions taken ' pursuant to section 1104(a)(2) ' to 'expeditiously consider the promulgation of new sentencing guidelines or amendments ' to provide an enhancement for officers or directors of publicly traded corporations who commit fraud and related offenses.' United States Sentencing Commission, Report to the Congress: Increased Penalties under the Sarbanes-Oxley Act of 2002 (Jan. 2003).

The Commission worked diligently in the abbreviated 180-day period to implement these emergency directives and significantly increased guideline penalties as directed. The impact of these victim related enhancements is substantial. ' [O]ffenders can be subjected to an increase of ten offense levels ' approximately tripling the guideline sentence in many cases ' based solely on these victim related harms. The emergency amendment also targets offenses committed by officers or directors of publicly traded companies for especially severe penalties because of statutory fiduciary duties imposed upon such individuals. The amendment adds a new four level enhancement for officers or directors of publicly traded companies who commit securities violations. Based solely on this enhancement, such officers or directors will receive an approximate 50% increase in sentence length.

In addition to the impact these modifications will have on individual defendants, the modifications to '2B1.1 will significantly increase fines for many organizations sentenced under Chapter Eight of the guidelines. … For example, a publicly traded company convicted of securities fraud which caused $1.2 million in loss to more than 250 victims will receive a minimum base fine of $17.5 million under '8C2.4 (Base Fine), compared to $3.7 million previously required by the guidelines. Id.

Do Not Pass Go and Collect $200

Returning now to the hypothetical case of the publicly traded health care entity, assuming that any of the conduct described continued past the effective dates of Sarbanes-Oxley, it is fairly evident that the CEO, COO, and CFO have great reasons to be concerned. Sarbanes-Oxley appears to have been written with them in mind. Unless they made Herculean efforts to ensure that no one retaliated against anyone suspected of being a qui tam whistleblower, they could face charges under that new felony (particularly if the relator made such allegations of retaliation in the whistleblower suit against them under the authority of 31 U.S.C. ' 3730(h) 'which allows the recovery of double damages, attorneys' fees, and reinstatement).

One more reason is that the Department of Justice and other federal agencies have taken steps to tighten up on financial crimes involving publicly traded companies. Recently, Deputy Attorney General Larry Thompson issued a memorandum instructing federal prosecutors about revisions made by the Corporate Fraud Task Force to the Principles of Federal Prosecution of Business Organizations. See, January 20, 2003 Memorandum from Larry D. Thompson, Deputy Attorney General, to Heads of Department Components and United States Attorneys, explaining and attaching the revised Principles <AVAILABLE href="http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm" www.usdoj.gov/dag/cftf/corporate_guidelines.htm. Part I. of the Principles instructs federal prosecutors, inter alia, that '[c]harging a corporation ' does not mean that individual directors, officers, employees, or shareholders should not also be charged. ' Only rarely should provable individual culpability not be pursued, even in the face of offers of corporate guilty pleas.'

Still another reason for concern is that the new offenses created by Sarbanes-Oxley may be used to charge any ongoing violations or any violations that ended after the effective date of these provisions (July 30, 2002). See DOJ 'Field Guidance on New Criminal Authorities Enacted in the Sarbanes-Oxley Act of 2002 (H.R. 3763) Concerning Corporate Fraud and Accountability' (explaining that such allegations won't offend the Ex Post Facto Clause of the Constitution because the violations would 'straddle' the effective date of the Act). <AVAILABLE href="http://www.usdoj.gov" http://www.usdoj.gov/.

This article hopefully has illustrated why a publicly traded company that operates in such as heavily regulated industry as healthcare must redouble its compliance measures.

In a recent article in this newsletter, we described a hypothetical situation about a publicly traded health care entity that was under attack by government regulators, disgruntled shareholders, and likely a qui tam relator. See, Michael E. Clark, Proffer Agreements May Be a Viable Strategy for Negotiating with Government, (Health Care Fraud & Abuse Newsletter, October 2002). This hypothetical situation continues in this article, as we illustrate some of the heightened compliance risks facing officers, directors, and attorneys who represent publicly traded entities as a result of The Sarbanes-Oxley Act of 2002 ('Sarbanes-Oxley'), Pub. L. 107-204, 116 Stat. 745 (2002), which ushered in major reform measures when signed into law on July 30, 2002 (and also in light of other proposals for strengthening corporate accountability from the major self regulatory organizations and exchanges: the National Association of Securities Dealers (NASD) (see NASDAQ Corporate Governance Proposals, September 13, 2002) and The New York Stock Exchange (NYSE) (see Corporate Governance Rules Proposals Reflecting Recommendations from the NYSE Corporate Accountability and Listings Standards Committee As Approved by the NYSE Board of Directors, August 1, 2002).

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.

Key Features of Sarbanes-Oxley

Background Events Explaining the Legislative Action

The various reform measures contained in Sarbanes-Oxley reflect Congressional [over]reaction to concerns about accounting and financial reporting irregularities believed to be responsible for Enron's stunning collapse and at the heart of other recent corporate scandals. A few of the widely reported scandals in 2002 that led to the overwhelming passage of Sarbanes-Oxley were:

• 
  
• Arthur Andersen's indictment (and conviction) for obstructing justice by shredding accounting documents after the start of the government's probe into Enron's implosion;
  
• WorldCom's June 25, 2002 announcement that during the past five quarters its earnings had been overstated by over $3.8 billion;
  
• Adelphia's announcement on the same day that it was seeking Chapter 11 Bankruptcy protection ' only 3 months after guarantees of $2.3 billion for personal loans made to family members of the company's founder (John Rigas) were revealed;
  
• Tyco's stock capitalization dropping by $100 billion after its CEO was indicted; and
  
• News that Global Crossing's former head (Gary Winnick) had sold over $700 million in stock soon before it filed for bankruptcy protection.
  
  

Further details about these scandals and the reaction to them are widely reported. One prominent class action lawyer, in emphasizing the public's growing distrust of corporate America and explaining the increase in securities fraud lawsuits being filed against publicly traded companies, offered the following text from an article published in a popular magazine when the House bill that became Sarbanes-Oxley (H.R. 3763, the 'Corporate And Auditing Accountability, Responsibility, and Transparency Act of 2002') was introduced:

'In ' [the] classic children's book 'Charlotte's Web,' there is a scene in which Templeton the rat has just stuffed himself with the garbage left behind after a fair. 'What a night,' he says. 'What feasting and carousing. Never have I seen such leavings, and everything well ripened and seasoned with passage of time and the heat of the day. Oh it was rich, my friends, rich.' ”

And so it is with the 1990s bull market. The tech-stock hawkers, mindless speculators, and clueless dot-commers have pulled up their stakes, and what we are left with is a bunch of smelly debris. The problem is, our digestive tracts aren't like Templeton's. ' There's something terribly rotten with American business right now, and it's making a lot of us sick. All the new-economy lying and cheating that went on back in the 90s has come back to bite us ' Arthur Levitt, former head of the SEC, is even blunter: 'America's investors have been ripped off as massively as a bank being held up by a guy with a gun and mask.' '

William S. Lerach, Plundering America: How American Investors Got Taken for Trillions by Corporate Insiders (The Rise of the New Corporate Kleptocracy) 8 Stan. J.L. Bus. & Fin. 69, 126 n. 14 (2002), citing to Andy Serwer, Dirty Rotten Numbers, Fortune, Feb. 18, 2002, at 74 [emphasis added].

What It Contains

Sarbanes-Oxley contains the most sweeping financial market reform measures enacted since the Securities and Exchange Commission (SEC) was established following the 1929 stock market crash. The earlier regulatory framework (now modified by Sarbanes-Oxley) was ably described in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375 (1976), a landmark securities fraud case:

'Federal regulation of transactions in securities emerged ' [in] the aftermath of the market crash in 1929. The Securities Act of 1933 ' ['Securities Act'], 48 Stat. 74, as amended, 15 U.S.C. ' 77a et seq., was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing. ' The 1934 Act [The Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. ' 78a et seq., as amended] ['Exchange Act'] was intended ' to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the-counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges. ' As part of the 1934 Act Congress created the Commission, which is provided with an arsenal of flexible enforcement powers.'

Ernst & Ernst v. Hochfelder, 425 U.S. at 194-95, 96 S.Ct. at 1381-82 (holding that absent an allegation of intent to deceive, manipulate, or defraud, a private damage action in a securities fraud suit by customers of a brokerage firm would not satisfy the requirements of Section 10b of the Exchange Act and SEC Rule 10b-5, codified at 17 C.F.R. ' 240.10b-5).

While several of Sarbanes-Oxley's provisions took effect upon the Act's enactment, others required SEC rulemaking, and only took effect this year. See, e.g., Broc Romanek, et al., New Compliance Challenges under the Sarbanes-Oxley Act of 2002, 20 No. 10 ACCA Docket 23 (Nov./Dec. 2002) (providing a printable chart of dates when various provisions were scheduled to take effect and the status of any SEC regulatory measures needed to implement the statutory directives).

'The key provisions of the Act can be grouped into five areas: 1) auditor oversight and independence; 2) corporate responsibility; 3) financial disclosures; 4) analyst conflicts of interest; and 5) criminal and civil penalties.' Thomas O. Gorman, The Sarbanes-Oxley Act of 2002: New Regulations on Executives & Their Professional Advisors, at 4, an article prepared for the ABA Administrative Law Section's Annual Meeting (Oct. 17-18, 2002) <AVAILABLE href="http://www.abanet.org/adminlaw/fall02/sarbanes.doc" www.abanet.org/adminlaw/fall02/sarbanes.doc. The next part of this article examines some of these reform measures in more detail, before returning to the hypothetical case to see how these provisions may apply.

No Shredding of Corporate Records / Accountants to Keep Audit Papers for 5 Fiscal Years

Section 802 of Sarbanes Oxley added newly codified 18 U.S.C. ' 1519, to stop corporate documents from being destroyed to thwart investigations, by making it an offense punishable by up to 20 years' imprisonment:

'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, or in relation to or contemplation of any such matter or case ' [commits an offense].'

A related measure, newly codified in Congress, 18 U.S.C. ' 1520, requires auditors of publicly traded entities to retain their work papers at the risk of 10 years' imprisonment. The SEC was ordered to promulgate regulations instructing how key documents, including auditors' work papers, should be retained ' and made the knowing or willful failure to follow the SEC's directives a criminal offense:

'(a)(l) Any accountant who ' audit[s] ' an issuer of securities to which [Exchange Act] section 10A(a) ' applies, shall maintain all audit or review workpapers for ' 5 years from the end of the fiscal period in which the audit or review was concluded.

(2) The ' [SEC] shall promulgate ' rules and regulations ' relating to the retention of relevant records ' created, sent, or received in connection with an audit or review and [which] contain conclusions, opinions, analyses, or financial data relating to such an audit or review ' conducted by any accountant who ' audit[s] ' an issuer of securities to which [Exchange Act] section l0A(a) '. applies. …

(b) Whoever knowingly and willfully violates subsection (a)(l), or any rule or regulation promulgated by the ' [SEC] under subsection (a)(2) ' [commits an offense]

Financial Reports Must Be Certified by the CEO and CFO

Who said that cost reports were impossible to certify as to accuracy? Section 906 of Sarbanes-Oxley (codified at 18 U.S.C. ' 1350) requires CEO and CFO of publicly traded entities to certify the accuracy of all filed financial reports that contain a company's financial statements. Depending upon the mental state of the person making these certifications (ie, whether he or she acted 'knowingly' or 'willfully'), a statutory violations carrying penalties of incarceration for up to 10 or 20 years, and fines up to $1 million to $5 million:

• 
  
• Certification of periodic financial reports. ' Each periodic report containing financial statements filed by an issuer with the ' [SEC] pursuant to section 13(a) or 15(d) of the ' Exchange Act ' shall be accompanied by a written statement by the chief executive officer and chief financial officer (or equivalent ') of the issuer.
  
• Content. ' The statement required ' shall certify that the ' report ' fully complies with the requirements of section 13(a) or 15(d) of the ' Exchange Act ' and that information contained in ' [it] fairly presents, in all material respects, the financial condition and results of operations of the issuer.
  
• Criminal Penalties ' Whoever 1) certifies any statement as set forth ' [above] knowing that the periodic report accompanying the statement does not comport with all the requirements ' [commits an offense punishable by a maximum fine of $1 million or 10 years' imprisonment]. 2) willfully certifies any statement as set forth ' [above] knowing that the periodic report accompanying the statement does not comport with all the requirements [commits an offense punishable by a maximum fine of $5 million or 20 years' imprisonment].'
  
  

The legislative history does not reveal why the possible punishment was tied to the person's mental state at the time the certification was made. Interestingly, a defendant may actually benefit if charged under the 20-year, willful provision (as opposed to being charged under the 10-year, knowingly provision) because defendants charged with specific intent crimes can introduce evidence that they lacked that intent ' which can be established by reliance upon an attorney's advice (made after a full and complete disclosure of relevant facts); that defense, however, isn't ordinarily available to defendants charged with general intent crimes. See, e.g., United States v. Gross, 961 F.2d 1097, 1102 (3rd Cir. 1992) (collecting cases and affirming convictions of CEO for conspiring to violate securities laws and making false statements, and convictions of vice president for insider trading and mail fraud), and Pickholz, Marvin G., 21 Sec.Crimes ' 5:38 ('good-faith defense') (West Group 1993) (collecting cases) ('[T]he majority of circuits hold that where a jury instruction sets forth all of the elements of a 'knowledge' crime, the court does not abuse its discretion in failing to instruct that good faith is a defense to the crime.).

Retaliation Against Qui Tam Relators May Now Also Result in Felony Charges

Section 1107 of Sarbanes-Oxley (codified at new subsection 18 U.S.C. ' 1513(e)), which makes it a crime punishable by imprisonment for up to 10 years to knowingly retaliate against whistleblowers, will be a very dangerous provision for executives and board members of publicly traded companies (and their employment law counsel), and particularly those who do business with the federal government (such as health care entities):

'(e) Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall ' [commit an offense].' [Emphasis added.]

New Securities Fraud Statute Added, Punishment Increased

Section 1106 of Sarbanes-Oxley ('Increased Penalties under Securities Exchange Act of 1934') raised the punishment for violations under Section 32(a) of the Exchange Act (15 U.S.C. ' 78ff). The punishment for individuals was increased, from a maximum of $1 million and 10 years' imprisonment to $5 million and 20 years; the maximum punishment for corporate defendants was also raised, from $2.5 million to $25 million.

Section 807 of Sarbanes-Oxley created a new 'securities fraud' offense (codified at 18 U.S.C. ' 1348), which is patterned after the mail, wire, healthcare, and bank fraud statutes under which individuals may be sentenced to a maximum $5 million fine and 25 years' imprisonment, while corporations may be fined $25 million.

'[W]hoever knowingly executes, or attempts to execute, a scheme or artifice to defraud any person in connection with any security of a public issuer, or to obtain, by ' false or fraudulent pretenses, any money or property in connection with the purchase or sale of any security of a public issuer … [commits an offense].'

Section 903 of Sarbanes-Oxley also raised the maximum statutory punishment for wire fraud and mail fraud (18 U.S.C. ” 1341 and 1343) from 5 years to 20 years.

The Sentencing Commission Gets Tougher (as instructed) on White Collar Crime

Sections 805, 905, and 1104(a)(3) of Sarbanes-Oxley directed the U.S. Sentencing Commission ('Sentencing Commission') to act within 180 days (by January 25, 2003) to increase the punishment for fraud and obstruction crimes involving publicly traded companies:

'Section 1104(a)(3) of ' Sarbanes-Oxley … requires the … Sentencing Commission … to submit to Congress: A. An explanation of actions taken ' pursuant to section 1104(a)(2) ' to 'expeditiously consider the promulgation of new sentencing guidelines or amendments ' to provide an enhancement for officers or directors of publicly traded corporations who commit fraud and related offenses.' United States Sentencing Commission, Report to the Congress: Increased Penalties under the Sarbanes-Oxley Act of 2002 (Jan. 2003).

The Commission worked diligently in the abbreviated 180-day period to implement these emergency directives and significantly increased guideline penalties as directed. The impact of these victim related enhancements is substantial. ' [O]ffenders can be subjected to an increase of ten offense levels ' approximately tripling the guideline sentence in many cases ' based solely on these victim related harms. The emergency amendment also targets offenses committed by officers or directors of publicly traded companies for especially severe penalties because of statutory fiduciary duties imposed upon such individuals. The amendment adds a new four level enhancement for officers or directors of publicly traded companies who commit securities violations. Based solely on this enhancement, such officers or directors will receive an approximate 50% increase in sentence length.

In addition to the impact these modifications will have on individual defendants, the modifications to '2B1.1 will significantly increase fines for many organizations sentenced under Chapter Eight of the guidelines. … For example, a publicly traded company convicted of securities fraud which caused $1.2 million in loss to more than 250 victims will receive a minimum base fine of $17.5 million under '8C2.4 (Base Fine), compared to $3.7 million previously required by the guidelines. Id.

Do Not Pass Go and Collect $200

Returning now to the hypothetical case of the publicly traded health care entity, assuming that any of the conduct described continued past the effective dates of Sarbanes-Oxley, it is fairly evident that the CEO, COO, and CFO have great reasons to be concerned. Sarbanes-Oxley appears to have been written with them in mind. Unless they made Herculean efforts to ensure that no one retaliated against anyone suspected of being a qui tam whistleblower, they could face charges under that new felony (particularly if the relator made such allegations of retaliation in the whistleblower suit against them under the authority of 31 U.S.C. ' 3730(h) 'which allows the recovery of double damages, attorneys' fees, and reinstatement).

One more reason is that the Department of Justice and other federal agencies have taken steps to tighten up on financial crimes involving publicly traded companies. Recently, Deputy Attorney General Larry Thompson issued a memorandum instructing federal prosecutors about revisions made by the Corporate Fraud Task Force to the Principles of Federal Prosecution of Business Organizations. See, January 20, 2003 Memorandum from Larry D. Thompson, Deputy Attorney General, to Heads of Department Components and United States Attorneys, explaining and attaching the revised Principles <AVAILABLE href="http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm" www.usdoj.gov/dag/cftf/corporate_guidelines.htm. Part I. of the Principles instructs federal prosecutors, inter alia, that '[c]harging a corporation ' does not mean that individual directors, officers, employees, or shareholders should not also be charged. ' Only rarely should provable individual culpability not be pursued, even in the face of offers of corporate guilty pleas.'

Still another reason for concern is that the new offenses created by Sarbanes-Oxley may be used to charge any ongoing violations or any violations that ended after the effective date of these provisions (July 30, 2002). See DOJ 'Field Guidance on New Criminal Authorities Enacted in the Sarbanes-Oxley Act of 2002 (H.R. 3763) Concerning Corporate Fraud and Accountability' (explaining that such allegations won't offend the Ex Post Facto Clause of the Constitution because the violations would 'straddle' the effective date of the Act). <AVAILABLE href="http://www.usdoj.gov" http://www.usdoj.gov/.

This article hopefully has illustrated why a publicly traded company that operates in such as heavily regulated industry as healthcare must redouble its compliance measures.