Sarbanes-Oxley Act // The Blanch Law Firm, P.C.
Sarbanes-Oxley Implications in White-Collar Crimes Cases
In the wake of the 2001-2002 Arthur Andersen accounting scandal and collapse of Enron and WorldCom, the government, the investors and the American public demanded corporate reforms to Congress to prevent similar future occurrences. Viewed to be largely a result of failed or poor governance, insufficient disclosure practices, and a lack of satisfactory internal controls, in 2002 Congress passed the Sarbanes-Oxley Act seeking to enhance criminal penalties for a broad array of white-collar crimes and a lengthening in the statute of limitations for securities fraud claims.
In general, Sarbanes-Oxley makes it a crime for an officer or director of a corporation to fraudulently influence, coerce, manipulate or mislead an independent auditor in its performance of an audit. Sarbanes-Oxley also imposes criminal penalties for the destruction, alteration or falsification of documents in federal investigations and bankruptcy proceedings, extends the maximum prison term to 25 years for securities fraud, enhances white-collar crime penalties and imposes corporate fraud accountability. Moreover, Sarbanes-Oxley provides for a temporary freeze on extraordinary payments to directors, officers and employees of companies under investigation by the SEC and makes it a crime to retaliate against corporate whistleblowers.
Specifically, parts VIII, IX, and XI of the Act are entitled the "Corporate and Criminal Fraud Accountability Act of 2002," the "White-Collar Crime Penalty Enhancement Act of 2002," and the "Corporate Fraud Accountability Act of 2002." The financial crimes created by these provisions of the Act are the following:
1. Fraud relating to a security of a company which is public or has any registered securities outstanding, with a penalty of fine and/or up to 25 years imprisonment, new 18 U.S.C. section 1348, added by Act section 807.
2. Any attempt or conspiracy to commit any offense under Chapter 63 of title 18 of the U.S. Code (including mail fraud, wire fraud, bank fraud, healthcare fraud, securities fraud, and false CEO and CFO certifications), 18 U.S.C. section 1349, added by Act section 902.
3. Tampering with or otherwise impeding an official proceeding, with a penalty of fine and/or up to 20 years imprisonment, new 18 U.S.C. section 1512(c), added by Act section 1102.
4. Knowingly altering, destroying, concealing, or falsifying any record, document, or tangible object with the intent of impeding, obstructing, or influencing any matter within the jurisdiction of any department or agency of the United States or any title 11 case, with a penalty of fine and/or up to 20 years imprisonment, new 18 USC section 1519, as added by Act section 802.
5. Knowingly and willfully failing to retain audit workpapers in violation of new 18 U.S.C. section 1520(a)(1) or SEC rules pertaining thereto, with a penalty of fine and/or up to 10 years imprisonment, 18 U.S.C. section 1520(b), added by Act section 802.
6. A CEO's or CFO's making a certification under new 18 U.S.C. section 1350 (that the periodic report filed with the SEC complies with section 13(a) or 15(d) of the 1934 Act and fairly presents the issuer's financial condition) known to be false, with penalty of up to a $ 1 million fine and/or 10 years imprisonment, or up to a $ 5 million fine and/or 20 years imprisonment if done willfully, new 18 U.S.C. section 1350(c), added by Act section 906.
7. Knowingly retaliating against an informant for providing to a law enforcement officer truthful information, with penalty of fine and/or up to 10 years imprisonment, new 18 U.S.C. section 1513(d), added by Act section 1107.
The Act contains a number of other provisions relating to penalties for wrongdoing, including increasing penalties for mail and wire fraud as well as ERISA-based crimes; making debts arising from securities fraud non-dischargeable in bankruptcy; extending the statute of limitations on private rights of action for securities fraud to the earlier of two years after discovery of or five years after such fraud; granting whistleblower protection on employees who provide evidence of securities fraud under certain circumstances; and directing the United States Sentencing Commission to review the Federal Sentencing Guidelines.
Sarbanes-Oxley's criminal provisions have not been particularly well-received. Critics complain that they are needlessly redundant, rely too heavily on enhanced criminal penalties to achieve their goals, and attach far too much importance to filling minor gaps in the coverage of existing laws.[1] As a result, some critics conclude that "the significance of the new crimes and higher penalties is vastly overstated" and that Sarbanes-Oxley's criminal provisions are "more an expression of symbolic political outrage than they are a reasoned response to a public policy question."[2]
Regardless of the dire sentiments by the critics toward the Sarbanes-Oxley's criminal provisions, the sentencing data from the Sentencing Commission's fiscal year 2007 reveal a rising trend of longer prison terms for white-collar offenders when compared to past years. Between 2003 and 2007, the average sentence imposed for an economic crime conviction increased from 22.4 months to 26.2 months and the median from 15 months to 18 months. For fraud crimes, the average sentence between 2003 and 2007 increased from 14.4 months to 19.0 months. Also, the 2007 data reveal that the number of fraud defendants who actually received prison time as opposed to probation or split sentences has progressively increased. From these facts, we may conclude that more defendants convicted of economic crimes are being sent to prison for longer periods of time.
Since most of the critical decisions in the strategy of a case are made during the pre-indictment stage, failure to read the early signals of an escalating criminal tax investigation or to detect the likelihood for criminal tax liability can result in compromising a client's chance of successfully defending a criminal tax prosecution. The Blanch Law Firm's expertise in understanding how the system works, allows counsel to closely monitor the government's activities to ensure that the taxpayer's constitutionally safeguarded rights are not violated.
[1] Michael A. Perino, Enron's Legislative Aftermath: Some Reflections on the Deterrence Aspects of the Sarbanes-Oxley Act of 2002, 76 ST. JOHN'S L. REV. 671, 676-89 (2002) (arguing that the Act's new obstruction of justice and securities fraud crimes largely extend to conduct that was already criminal and that its increased penalties will have little deterrent effect).
[2] Joseph F. Savage, Jr. & Stephanie R. Pratt, Sarbanes-Oxley: New Ways to Solve Old Crimes, 9 BUS. CRIMES BULL. No. 11, at 1 (Dec. 2002).
