As gatekeepers, independent directors of public companies face additional scrutiny and liability in the post-Enron/World
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Volume 3 Number 1
As gatekeepers, independent directors of public companies face additional scrutiny and liability in the post-Enron/WorldCom world Alexander M. Vasilescu* and Gerald J. Russello Received: 16th December, 2005 *United States Securities and Exchange Commission, 3 World Financial Center, Suite 4300, New York, NY 10281, USA; Tel: +1 (212) 3360178; E-mail: [email protected]
Alexander M. Vasilescu is Regional Trial Counsel and Chief of the Trial Unit, and Gerald J. Russello formerly a branch chief, both in the Enforcement Division of the United States Securities and Exchange Commission’s Northeast Regional Office. Mr Russello is now Managing Director of the Legal Department at Bear, Stearns & Co., Inc, New York. The Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the authors and do not necessarily reflect the views of the Commission or of the authors’ colleagues on the staff of the Commission.
ABSTRACT KEYWORDS: independent directors, governance, scrutiny, gatekeepers, watchdog, antifraud provisions The settlements in WorldCom and Enron, together with enforcement actions by the SEC and the new remedies under Sarbanes–Oxley, indicate that independent directors will face very real financial, regulatory and criminal liability if they fail to execute their duties properly. This paper, written by two attorneys with the SEC, reviews some of the recent cases concerning independent directors. In recent years, the SEC and the private plaintiffs’ bar have indicated a willingness to hold independent directors accountable for essentially negligent or reckless supervising by pursuing enforcement actions. In addition, the SEC has brought cases against
other public companies to enforce the public’s right to know any facts that might compromise the director’s independence, particularly when directors receive undisclosed compensation at the direction of management. The paper concludes by noting that early indications suggest that independent directors are taking action and exercising their powers in the face of government investigations of the public companies they serve.
INTRODUCTION The massive securities frauds of Enron and WorldCom, among others, have changed the landscape of potential and real liability for independent directors of public companies. The accounting-fraud meltdowns of public companies have led to additional scrutiny from the US Securities and Exchange Commission (SEC), other government regulators and the private sector, on those whom Stephen M. Cutler, the former Director of the SEC’s Division of Enforcement, has called ‘gatekeepers’. The most notable result perhaps has been that independent directors are now at an increased exposure both from private litigants as well as government actors such as the SEC and the US Justice Department (or DOJ), as well as prosecutors at the state level. The Enron and WorldCom scandals changed the landscape of corporate fraud
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