"Reliance on others" . . .
as a defense to corporate fraud under Sarbanes-Oxley Act
Intent to defraud is an element of proof in criminal prosecutions
and non-governmental civil actions for violations of Section 10b
and Rule 10b-5, the general anti-fraud provisions and regulations
under the Securities Exchange Act of 1934. The impact of the Sarbanes-Oxley
Act (SOA) on this defense may vary, depending upon the position
of the individual defendant with the company and the type of financial
issues underlying the alleged fraudulent misconduct. The defendant
claiming the "reliance on others" defense has the burden
of proving that he or she justifiably relied on someone else. However,
ignoring financial mis-reporting or failure to accurately disclose
financial information may not satisfy this burden.
The SOA requires that the CEO and CFO are responsible for establishing
and maintaining financial disclosure for the company. CEO and CFO
must disclose, based on their most recent evaluations to the company's
auditors and audit committee of the board of directors, all significant
deficiencies in the operation of internal controls which could
adversely affect the company's ability to record, process, summarize
and report financial data, and have identified for the company's
auditors any material weaknesses in audit controls and any fraud,
whether or not material that involves management or other employees
who have a significant role in the company's internal controls.
The CEO and CFO and other certifying officers have to indicate
in the report whether or not there were any significant changes
in the internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their most recent
evaluation. SOA may not affect the "reliance on others" defense.
What is important is the person's role as a participant or reviewer,
or knowledge of, any improper reporting of financial information.
The SOA, along with other recent pronouncements by the SEC, imposes
a duty on members of the audit committee to be more involved in
the audit and disclosure of financial information. As far as the "reliance
on others" defense for alleged improper financial disclosures,
the SOA emphasizes the need to implement, enforce and continually
evaluate internal controls.
This information is not intended to constitute legal advice,
nor a substitute for legal advice.
Reprinted with permission from Trade Vendor Monthly, 2/03