Threat of Jail Time Has Not Yet Been Used to Give Sarbanes-Oxley Teeth

September 7, 2012
By Brady & Associates on September 7, 2012 3:36 PM |

It's an issue several news organizations have pointed out. Years after the financial crisis, there have still been no prosecutions of top executives at any of the major players in the financial crisis. The question is why has the Justice Department not been building criminal cases against companies for violating Sarbanes-Oxley - the landmark corporate reform law enacted after Enron?

The Sarbanes-Oxley Act imposed strict rules for corporate governance, requiring chief executive officers and chief financial officers to certify under oath that their financial statements are accurate and that they have established an effective set of internal controls to insure that all relevant information reaches investors. Knowingly signing a false statement is a criminal offense punishable with up to five years in prison. Yet despite the rules, as the Sarbanes-Oxley Act turns 10 years old, the law's biggest threat - the possibility of jail time for corporate executives who knowingly certify inaccurate financial reports - has gone totally unused.

So what's the reason, you may ask? According to one Department of Justice official who was in charge of such investigations, the DOJ has decided that holding top Wall Street executives criminally accountable would simply be too hard.

David Cardona, who recently left the FBI for a job at the Securities and Exchange Commission, told the Wall Street Journal that bringing financial wrongdoing to account is "better left to regulators," who can bring civil cases. The problem is that while civil cases can result in fines for the banks, they don't help to put any of the individuals responsible behind bars. The difference in success behind criminal agencies and regulatory bodies is stark: the FBI's probes have resulted in zero successful prosecutions of high-profile executives related to the financial crisis while the SEC has filed financial crisis-related civil-fraud lawsuits against 81 firms and individuals, racking up $2 billion in penalties from the cases that have been settled.

Cardona told the Journal that the failed first attempt to charge financial players with crisis-related fraud - the 2009 trial and eventual acquittal of two Bear Stearns Cos. hedge-fund managers - prompted a lot of rethinking when it came to criminal prosecutions. After that, he said, the federal government began to question its "ability to convince a jury that criminality has occurred" on complex and technical financial cases.

The problem is that false-certification charges are not often slam-dunk cases. However, this does not mean the government should not be trying. By not using the stick included in the Sarbanes-Oxley legislation, the government is only encouraging executives to ignore the other requirements of the law.

Sources:
In Financial Crisis, No Prosecutions of Top Figures by Gretchen Morgenson, published at NYTimes.com, April 14, 2011.

Law's Big Weapon Sits Idle, by Michael Rapoport, The Wall Street Journal, July 29, 2012

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