Sarbanes-Oxley Act

Supreme Court ruling extends SOX whistleblower protection to private contractors

On March 4, 2014, the Supreme Court in a split decision ruled that employees of private companies servicing public companies are covered by the whistleblower protections of Sarbanes Oxley Act of 2002 (“SOX”)

[U.S., No. 12-3, 3-4-14]. In this case, two employees of a private company contracted by a publicly-traded mutual fund alleged that they were terminated in retaliation for raising fraud issues about the fund. With this decision, the Supreme Court has expanded the universe of companies regulated by the SOX whistleblower provision from about 5,000 public companies to potentially millions of private ones, including the smallest of businesses. Employers of every size and type have to be prepared for potential SOX whistleblower retaliation claims if they are a contractor or subcontractor of a publicly traded company.

March 29th, 2014|Educational Series, Fraud, Judgment|

Spotlight on insider trading

Many people associate the term “insider trading” with illegal conduct. But the term refers to both legal and illegal activities. The SEC’s legal version is that corporate insiders, i.e., officers, directors, employees, or anyone with at least a 10% stake in a company, can buy and sell stock in the company providing they abide by the SEC’s restrictions and transactional requirements.

In 2002, the SEC tightened its rules by adopting the Regulation Fair Disclosure to curb the practice of company executives giving securities analysts an inside track; the rules mandate that anything disclosed to an outsider must be revealed to the general public. The SEC also includes in its definition of insiders those who have “temporary” or “constructive” access to the material information, such as business associates, friends, family members, brokers, attorneys and “other tipees.” The U.S. Supreme Court ruled recently that any individual, with or without ties to the particular company, who is in possession of material information, even if the information was stolen, is an insider.

Illegal insider trading, according to the SEC, refers to the buying or selling of a security in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information. Insider trading violations include “tipping” such information, trading in securities by the person “tipped” and trading by those who misappropriate the information.

The SEC considers the prosecution of insider trading violations a top priority. The exhaustive publicity of illegal insider trading cases sends a strong message that no one is outside its radar. A spokesperson for the Division of Enforcement said that the SEC is aggressively rooting out and identifying hard-to-detect insider trading by connecting patterns of trading to sources of material nonpublic information, whether those sources are law firms, banks or others with a duty to keep the information confidential. Prosecutors add that illegal trading is now easier to prove as direct evidence of fraudulent intent can be obtained through wiretaps, e-mails, text messages, social media contacts, etc. And that evidence also is useful to convince co-conspirators to turn on each other and provide even more substantial proof of fraud. Going after the violators is critical because their actions hurt individual investors and undermine public confidence that allows firms to raise money in the capital markets.

Individuals who are convicted of criminal insider trading face prison terms (the Sarbanes-Oxley Act extended the maximum length of sentences) and fines in addition to civil penalties, which can be triple the realized profit or the loss avoided. Violators also may be charged with mail and wire frauds and possibly with tax evasion and obstruction of justice. Further consequences include being barred from serving as executives or directors of public companies and being named as defendants in multi-million dollar lawsuits. Corporations are subject to penalties for failure to establish compliance programs and for failure to ensure reasonable efforts to prevent violations under the theory of “controlling person” liability. Even if an insider trading investigation does not result in formal charges, the company’s reputation may suffer from the stigma and adverse publicity.

May 24th, 2011|Educational Series|

Challenging the constitutionality of the Public Company Accounting Oversight Board (PCAOB)

The U.S. Supreme Court, on June 28, 2010, issued its decision in the constitutional lawsuit that challenged the PCAOB, affirming in part and reversing in part the judgment of the Court of Appeals in favor of the PCAOB. The case, Free Enterprise Fund vs. Public Company Accounting Oversight Board, was brought on behalf of a Nevada accounting firm, Beckstead & Watts, which challenged the constitutionality of the law after objecting to the PCAOB’s inspection findings. The Free Enterprise Fund, a group opposed to government regulation, has lost the case twice before, in district and appeals courts.

The PCAOB Web site ( posted the following: “The Supreme Court held that the Sarbanes-Oxley Act’s provisions making PCAOB Board members removable by the Securities and Exchange Commission (SEC) only for good cause were inconsistent with the Constitution’s separation of powers. Because the Court severed these provisions from the Act, however, no legislation is necessary to bring the Board’s structure within constitutional requirements. The consequence of the Court’s decision is that PCAOB Board members will be removable by the SEC at will, rather than only for good cause. All other aspects of the SEC’s oversight, the structure of the PCAOB and its programs are otherwise unaffected by the Court’s decision. Accordingly, all PCAOB programs will continue to operate as usual, including registration, inspection, enforcement, and standard-setting activities.”

July 18th, 2010|Educational Series, Judgment|

Disciplinary actions filed by the Public Company Accounting Oversight Board (PCAOB)

The PCAOB Web site now maintains records of disciplinary and settlement orders of registered firms and/or their associated persons for violations of any provisions of the Sarbanes-Oxley Act, professional standards, rules of the PCAOB or the SEC, or U.S. securities laws relating to the preparation and issuance of audit reports. These records date back to 2005 and can be found at

As required by the Sarbanes-Oxley Act, contested Board disciplinary proceedings are confidential and nonpublic, unless and until there is a final decision imposing sanctions. The PCAOB Web site also contains a section for orders granting petitions to terminate bars, at

June 28th, 2010|Educational Series|
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