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Risky Business
“Third-party facilitators have played a critical role in allowing corporate misconduct to happen,” according to Deputy Attorney General James B. Comey, Jr., head of the Justice Department's Corporate Fraud Task Force. Stephen Cutler, Director of Enforcement for the SEC, has warned that financial institutions violate the federal securities laws by “contributing to fraudulent accounting and manipulated financial results” of public companies. In a recent report, the Enron bankruptcy examiner described a financial institution as an “enabler” of violations by Enron's officers. In the Sarbanes-Oxley era, the government is not only rounding up the direct violators, but has also brought aiding-and-abetting charges against companies that entered into certain business transactions with other companies accused of securities violations, even though the alleged abettors themselves filed honest reports with the SEC.
The government's trend of charges against secondary actors is not necessarily an attempt to expand the law of aiding and abetting. To date, the SEC complaints have carefully alleged the traditional elements. However, at least some of the recent cases raise issues regarding the level of knowledge and intent required for an aiding-and-abetting charge and the evidence necessary to support it. In announcing one case, the SEC contended that “if you know or have reason to know that you are helping a company mislead investors, you are in violation of the federal securities laws.”
The result is that honest companies may be forced to become their counter-parties' keepers whenever “normal” business transactions may affect public financial reports or otherwise enable the counter-party to violate the federal securities laws. Thus, in addition to analyzing the economic risks of a significant transaction, companies may need to examine the likelihood that their counter-party will fail to report the transaction properly and that the false reporting will materially impact the counter-party's financial statements. Unless the company can prove that it reasonably believed the counter-party would report the transaction honestly, prosecutors with 20-20 hindsight may charge the company as a “facilitator” of the counter-party's subsequent financial reporting fraud.
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