Results matching “sarb”

Fish-nancial Fraud - PointOfLaw Forum

Now that the Supreme Court's flurry of opinions for the last term is out, we can start thinking ahead to the new term. The Court will consider a case based on a provision of the Sarbanes-Oxley Act, which was the legislative response to the Enron-era accounting scandals. The law is now being used to pursue fish destruction--a type of fraud that most certainly was not within Sarbanes-Oxley's intended reach.

Bond v. U.S. - PointOfLaw Forum

Manhattan Institute Center for Legal Policy intern Meghan Herwig assisted in drafting this post.

Monday's Supreme Court decision in Bond v. United States, which we earlier profiled here, involved a case raising fundamental constitutional questions of federalism and separation of powers. Rather than grappling with these questions, the Court majority ruled on statutory grounds.

Case background
Carol Anne Bond, a Pennsylvania microbiologist, attempted to poison her husband after learning that he had impregnated her best friend. She was convicted of violating a U.S. federal statute enacted to implement the Convention on Chemical Weapons, a 1997 treaty intended to prevent the proliferation of chemical weapons. On appeal, Bond's lawyers argued that the law did not apply to Bond's conduct and second that even if it applied it was unconstitutional.

Key to Bond's constitutional claim was whether a treaty signed by the president and ratified by the Senate can expand Congress's legislative powers beyond those otherwise enumerated in the Constitution. A 1920 Court decision authored by Justice Holmes, Missouri v. Holland, had held that for a valid treaty "there can be no dispute about the validity of the statute under Article I, ยง 8, as a necessary and proper means to execute the powers of the Government" -- without further analysis or authority. A subsequent Court decision, Reid v. Covert, limited this holding such that a treaty obligation could not empower Congress to violate the Bill of Rights. More recent scholarship by Georgetown law professor Nicholas Quinn Rosenkranz has challenged Missouri v. Holland's holding in light of the constitution's text, history, and structure.

Decision
While the Supreme Court unanimously overturned Bond's conviction, Chief Justice Roberts's majority opinion, on behalf of six justices, avoided the constitutional question. Roberts reasoned that the Chemical Weapons Convention was not intended to cover minor, local poisoning incidents and determined that Congress could not have intended such a construction of the convention's implementing statute, which would upset the constitutional balance of power between Congress and the states. Roberts thus construed the law narrowly and concluded that the law could not apply to Bond's crime.

Justices Scalia, Thomas, and Alito each filed separate concurring opinions arguing that the case had to be decided on constitutional rather than statutory grounds. In their view the statute on its face clearly applied to any attempted use of a "toxic chemical" not used for a "peaceful purpose related to an industrial, agricultural, research, medical, or pharmaceutical activity." Justice Scalia's concurrence, joined by Justice Thomas, was particularly specific in its inquiry into the limits of the power given to the President and Senate to "make" treaties -- following significantly the line of argument of Professor Rosenkranz's article -- and called for Missouri v. Holland to be overturned.

SCOTUSblog's Amy Howe ably summarizes the decisions in more detail here.

Analysis
At Volokh, Jonathan Adler suggests that the concurring opinions may signal some discontent on the part of the more conservative justices with the Chief Justice's tendency to embrace strained statutory readings to avoid constitutional questions (the so-called doctrine of "constitutional avoidance"). His co-conspirator Ilya Somin reads the tea leaves and suggests that in a future case where the treaty issue is more explicit, the Court may be disposed to overturn Missouri v. Holland and limit the ability of a treaty to expand Congressional legislative authority, and offers further thoughts on the justices' various positions.

In its embrace of constitutional avoidance, the Court's decision is obviously reminiscent of the Chief Justice's lone opinion in NFIB v. Sebelius, in which he construed the individual mandate of the PPACA (Obamacare) to be an exercise of Congress's taxing power rather than its Commerce Clause power to uphold the law's core provision (though in that opinion, the Chief did observe that the mandate was clearly a penalty, and only reached the "tax" construction as an alternative functional ruling through which Congress could have reached the same end). The Bond decision also brings to mind Justice Ginsburg's opinion in Skilling v. U.S., which effectively rewrote the "honest services fraud" statute (construing the law's vague provision to apply only to bribes and kickbacks) to avoid deciding whether it was unconstitutionally vague.

The Bond and Skilling decisions may signal how the Court will rule in the upcoming Yates v. United States. Yates involves the prosecution of a commercial fisherman accused of violating the Sarbanes-Oxley financial reform law's prohibition on destroying, manipulating, or concealing any "record, document or tangible object" to hinder federal investigations -- in the context of throwing back fish that may have been smaller than the minimum size allowed by regulations. While a fish is certainly a "tangible object," the Sarbanes-Oxley law, passed in the wake of the Enron-era corporate scandals, was clearly contemplating document-shredding and similar destruction of corporate records such as that conducted by Enron's auditor, Arthur Andersen. It will be interesting to watch whether the justices in the Bond majority will continue the trend of narrowing criminal statutes beyond their clear terms when the government is applying a broad statutory provision in the criminal-law context.

Is the PCAOB Turning Back Towards AS2? - PointOfLaw Forum

One of the most controversial parts of the Sarbanes-Oxley Act was section 404(b), which required audits of internal controls over financial reporting. The 404 audits were conducted pursuant to the Public Company Accounting Oversight Board's Auditing Standard No. 2. Guided by this standard, auditors began a lucrative practice of auditing companies' internal controls with a bottom-up, check-the-box approach. Companies objected that the approach cost far more than regulators had anticipated--enough to make some public companies rethink their decision to go public. In 2007, a reluctant PCAOB issued Auditing Standard No. 5 to replace the earlier standard. Its approach allowed auditors to use their judgment to focus on critical areas, rather than requiring them to conduct procedures just to say that they had. Yesterday, the PCAOB staff issued a lengthy practice alert directing auditors to be more thorough. The alert's issuance was prompted by the problems that the PCAOB has identified in its inspections of internal control audits. The length and relative inflexibility of the guidance suggest that companies may want to brace themselves for another upsurge in audit costs as auditors seek to prove themselves to the PCAOB.

An irreplaceable loss: RIP Larry Ribstein - PointOfLaw Forum

I cannot begin to say how devastated I am at the sudden death of Larry Ribstein this morning, just two days shy of his fortieth wedding anniversary. Larry was so creative and innovative in so many fields (this is just how many times we cited to him since February, including just this week), I often found myself wishing that there were several Larrys because everything he wrote had such opportunity cost for other things he didn't have time to write. I was always begging him to write for me when I was at AEI, and the time he said yes, he (with Henry Butler) turned out the important The Sarbanes-Oxley Debacle, a devastating and persuasive takedown of the new law. I'd end up plagiarizing Professor Bainbridge's summary of the rest of Ribstein's body of work to discuss the rest of it, so I'll refer you to his thorough post. In area after area—overcriminalization, overregulation, popular-culture portrayal of business, the cartelization of legal practice and education—he was often close to alone in taking important contrarian positions. If I found myself disagreeing with Larry, I knew it meant I'd better put some soul-searching and analysis into my own position; if I hadn't already thought about an issue of corporate law or federalism, I knew I could scan Ribstein's work on the subject to have a good starting point. So not only do we not have the three or five Larry Ribsteins we needed, we now don't even have the one, and we're poorer for it.

But beyond the loss to legal scholarship is the loss of a good person. Larry was also a friend, but an intellectually honest one who wouldn't hesitate to tell you when he thought you were wrong (which happened several times a year to me). But that made it all the more flattering when he demonstrated support, and he was an early supporter of mine when it was far from clear that my hare-brained quixotic scheme would accomplish anything. I'm going to miss him a lot. Condolences to his family and friends.

More: Lipshaw; Manne; Wright; Henderson; Solum; Leiter; and a long list of others at TaxProf.

Update: also Kirkendall.

Around the web, September 2 - PointOfLaw Forum

  • If the antitrust laws are to protect competition, rather than competitors, why is Sprint's stock surging upon news of DOJ's suit to block the AT&T/T-Mobile merger? [Wright @ TOTM; more; Manne @ TOTM]

  • The need for FCPA reform; government prosecutions show overreach. [National Law Review and Gibson Dunn via Reuters via CJAC]
  • Jon Huntsman plan proposes repeal of Dodd-Frank and part of Sarbanes-Oxley. [Huntsman; WSJ]
  • Devil's bargain: Wall Street and the Martin Act. [Olson @ NY Post via OL]

  • Iowa Supreme Court rejects proposal to keep lawyer discipline secret. [Des Moines Register; earlier @ OL]
  • "Congress Resiscitating Honest Services Fraud" [Right on Crime]
  • This "article argues that a symbiotic relationship exists between plea bargaining and overcriminalization because these legal phenomena do not merely occupy the same space in our justice system, but also rely on each other for their very existence." [J L Econ & Policy @ SSRN]
  • Erwin Chemerinsky was kind enough to represent attorney Stephen Yagman without pay in his criminal trial and appeal; now Yagman is claiming ineffective assistance of counsel. [Patterico; earlier at POL and OL]

  • What media bias? A telling Freudian slip in a New York Times story. [Mac Donald]
  • Bluetooth decision a "small blow for common sense." The "Hearing Health Matters" summary is incorrect, though: the settlement was for class members who didn't suffer any hearing injury. That's how ridiculous it was. [TMCNet; Hearing Health Matters]

SEC adopting strict vicarious liability? - PointOfLaw Forum

CSK Auto CEO Maynard Jenkins discovered accounting shenanigans after an internal audit he ordered. The SEC acknowledges that he was a victim of the fraud, but still wants Sarbanes-Oxley clawback of bonuses he received. Jenkins was forced to settle, but now that the SEC has rejected the settlement, the case is going to trial. [WLF; WaPo]

SEC whistleblower rules - PointOfLaw Forum

Daniel Fisher notes that the new SEC whistleblower rules, which incentivize employees to dodge internal reporting (often at cross-purposes with that required by Sarbanes-Oxley) to instead seek windfalls, is going to overwhelm SEC staff with false leads, making real fraud detection less likely. Tonya Mitchem Grindon, writing for WLF, suggests internal whistleblower awards to compete with those the SEC offers, though one wonders about the astronomical compliance costs that that would create—especially given the threat of employment-law liability for retaliation against whistleblowers that already overincentivizes spurious reporting.

Supreme Court roundup, July 2 - PointOfLaw Forum

The end of the term produced fireworks and fizzles.

"Prognosticating Free Enterprise v. PCAOB" - PointOfLaw Forum

Tom Goldstein and Stephen Bainbridge have some thoughts about this morning's upcoming announcement of the decision of the critical case on Sarbanes-Oxley's constitutionality.

Public Choice 101: the Republican House sponsor of the bill is now working as a stock exchange lobbyist [John Carney]

Around the web, November 14 - PointOfLaw Forum

  • Prempro/Premarin plaintiffs' lawyers score big P.R. hit as NYT banners their case;
  • "Central Park Rotten Tree Branch Lawsuit Worth $120 Million" [Gothamist]
  • Consumer advocates, home builders united to push bad finance tool that's cost FHA dearly [Bank Lawyer's Blog]
  • Watch out, Akaka bill (native Hawaiian tribalization) is coming back in Congress and this time with a friendlier White House [Coffin, NRO; earlier] Update: WSJ editorial.
  • "North Dakota Democrats Want To Punish Insurance Company For Speaking Out Against Obamacare" [Say Anything, earlier here and here]
  • "A rare victory for small business: Sarbox Routed in House" [WSJ editorial]

Bloggers on PCAOB - PointOfLaw Forum

Jonathan Adler rounds up some links on the Supreme Court case raising a challenge to Sarbanes-Oxley and independent agency power (earlier).

Sarbanes-Oxley before the Supreme Court - PointOfLaw Forum

Today the U.S. Supreme Court takes up the constitutionality of the Public Company Accounting Oversight Board (PCAOB). Larry Ribstein: "I've been watching the SOX debacle play out for seven years. It will be interesting to see how this ends." More: Hans Bader, Examiner and earlier; WSJ Law Blog; our earlier coverage.

Small business Sarbanes-Oxley exemption - PointOfLaw Forum

Rahm Emanuel, for one, is said to be pressing for it [Bloomberg] The New York Times's Floyd Norris is predictably having a fit.

Greenberg's Settlement, Spitzer's Folly - PointOfLaw Columns

Corporate management decisions should be left to business leaders, not prosecutors.

James R. Copland

[Originally published in the Forbes.com, 8-26-09.]

On Aug. 6, 2009, the Securities and Exchange Commission announced that it had reached a $15 million civil settlement with former AIG chief executive Maurice "Hank" Greenberg. This story has gotten far less attention than it deserves, given that it occurred against the backdrop of the collapse of AIG, which is now mostly owned by the federal government. Both the SEC-Greenberg settlement and AIG collapse help us to understand, in retrospect, the real costs of the war that former New York attorney general Eliot Spitzer waged against the insurance giant and its leader.

The SEC's action was not a roar but a whimper: The agency not only failed to make a criminal case against Greenberg but also failed to charge him with civil fraud. Instead, Greenberg was merely accused of being a "control person," ultimately responsible for his company's alleged accounting improprieties (allegations that Greenberg, in reaching the settlement, did not admit).

Still, the SEC's complaint, if credited, is serious enough. AIG was accused of inflating earnings and insurance loss reserves while obscuring actual underwriting losses. The allegations that appear front and center in the SEC's complaint—alleged sham transactions entered into between AIG and General Re, a reinsurer owned by Warren Buffett's Berkshire Hathaway—are those, which Spitzer focused on when going after Greenberg.

But even if Spitzer ultimately zeroed in on a corporate impropriety—he had previously looked into alleged bid-rigging and even Greenberg's 1970s-era charitable endeavors—his obsessive pursuit of AIG's captain, in hindsight, looks foolish indeed. The General Re transactions upon which Spitzer and the SEC focused may have been fraudulent, but their total alleged size—$500 million—pales in comparison to AIG's $99 billion in 2008 losses and the consequent $182.5 billion taxpayer-funded bailout of the company, designed to keep the financial system afloat. And while the transactions at the heart of the SEC's complaint may have resulted in material accounting misstatements, they are immaterial to the company's costly implosion: They occurred from 2000 to 2002 and are wholly unconnected to AIG's massive bet in the credit default markets that precipitated its ultimate collapse.

The chain of events that led to its collapse followed swiftly in Spitzer's wake. Shortly after Spitzer issued subpoenas against AIG in February 2005 related to the General Re transactions, the market began discounting the company's debt. The next month, AIG's board, under intense pressure from Spitzer, ousted Greenberg from the company; the very next day, the Fitch rating agency downgraded AIG's credit rating from AAA to AA, and Standard & Poor's followed suit later that month. The credit downgrades dramatically increased the potential collateral calls that AIG faced on its credit-derivative products.

More critically, as control of AIG shifted hands, vital risk-oversight practices waned. Greenberg's successor, Martin Sullivan, admits that he had "focused on other priorities including repairing AIG's standing with customers and regulators [and] cooperating with several government probes." AIG's financial products group, which sold credit-default derivatives and other financial instruments, wrote as many credit-default swaps over the nine-month period after Greenberg departed as it had in the previous seven years combined.

It is impossible to know whether the large derivative position amassed by AIG would have been accumulated under Greenberg's watch, though Greenberg did have a long track record of closely monitoring the financial products group's risk. David Havens, a credit analyst with UBS, insists, "Had Hank Greenberg still been running the company, I think it's pretty safe to say the situation wouldn't even be close to what is now."

Thus, AIG's downfall powerfully demonstrates the problem with turning over the regulation of corporate governance to criminal prosecutors with political agendas. The SEC's civil-enforcement powers, in addition to private civil actions at the state and federal levels, are more than sufficient to police accounting shenanigans such as those underlying the agency's settlement with Greenberg. (The power of private civil actions, themselves often abused, was exemplified one week after the SEC settlement, when Greenberg and other executives announced a $115 million settlement with class-action plaintiffs.)

Clearly, on occasion, individual business leaders' malfeasance warrants criminal prosecution. But corporate management decisions should be left to business leaders, not prosecutors who cannot understand the businesses they are investigating.

Unfortunately, the government's vast powers in the criminal arena enable prosecutors to coerce corporate boards to do their bidding, and far too often, prosecutors succumb to this temptation. Such abuses extend beyond Spitzer's crusades; federal prosecutors' criminal powers over accounting practices were expanded radically in the Sarbanes-Oxley Act of 2002, and U.S. attorneys regularly use "deferred prosecution agreements" to control corporations in the government's cross hairs. State and federal legislators should rein in such abuses, before we get another AIG.

James R. Copland is the director of the Center for Legal Policy at the Manhattan Institute.

For the first time, the SEC is "[using] the Sarbanes-Oxley Act's 'clawback' provision to recover compensation from an individual not otherwise alleged to have violated the securities laws". Kevin LaCroix and Larry Ribstein explain.

"The Peculiar Problem of 'Peekaboo'" - PointOfLaw Forum

Jonathan Rauch on the anomalous, perhaps unconstitutional, status of the Sarbanes-Oxley law's Public Company Accounting Oversight Board.

Structural and separation-of-powers issues concerning the "unitary Executive" are the main topic of concern, but the question of whether Sarbanes-Oxley is itself a necessary or valuable bit of market intervention might enter into some Justices' thinking at least at the margins. [Bainbridge]

CPSIA, collateral and Sarbanes-Oxley - PointOfLaw Forum

What happens when a law like CPSIA suddenly renders valueless large stocks of inventory of children's products, amounting to tens of thousands or even millions of dollars at a given company? One result, notes manufacturer/activist Rick Woldenberg, will be to throw many businesses overnight into default on bank loans that are secured with inventory as collateral. Another will be to present publicly held companies with sudden issues of Sarbanes-Oxley exposure. Have their public disclosures of the losses prompt and comprehensive enough?

With yesterday's court decision making it unlawful to sell children's goods containing certain phthalates as well as lead after next Tuesday, the question for many retailers (and some manufacturers) will be what to do with inventories whose lead- or phthalate-containing status is unknown and that have not been tested to verify the substances' absence. A legislative bulletin from the Toy Industry Association says, "TIA has learned that some large national retailers - noting the stay on testing and certification and the difficulty in obtaining information on older inventory - are presuming that product already on shelves does not violate CPSIA requirements unless specifically advised otherwise by the Commission."

In other words, despite the $100,000-per-instance penalties on the books, they're going to hope they get lucky.

Jonathan Macey on corporate governance - PointOfLaw Forum

New book, entitled Corporate Governance: Promises Kept, Promises Broken, from a leading scholar of the subject (via Prawfsblawg):

In the wake of the Enron meltdown and other corporate scandals, the United States has increasingly relied on Securities and Exchange Commission oversight and the Sarbanes-Oxley Act, which set tougher rules for boards, management, and public accounting firms to protect the interests of shareholders. Such reliance is badly misplaced. In Corporate Governance, Jonathan Macey argues that less government regulation -- not more -- is what's needed to ensure that managers of public companies keep their promises to investors....

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