SEC Cracks Down On Fraud

The Security and Exchange Commission (SEC) is taking a different approach in litigating fraudulent conduct. Instead of focusing on outright fraud, the Wall Street Journal reports the SEC is shifting to a focus on negligence. This shift is intended to make securities litigation easier for the SEC.

A negligence charge does not require fraudulent intent. Instead it focuses on a failure to act with reasonable care. If found in violation, individual corporate leaders can be held accountable for wrongdoing connected with the financial crisis.

Reasons behind SEC's Crackdown

Top government officials, including senior member of the House Financial Services Subcommittee on Investigations Rep. Michael Capuana of Massachusetts, have called on the SEC to hold those behind irresponsible corporate decisions accountable.

Rep. Capuana is not alone. Many bankers, mortgage employees and former prosecutors are calling for senior executives to be charged and potentially imprisoned for reckless lending practices and excessive risk taking.

This outpouring of criticism has fueled the SEC's focus on the executive's duty of care. This standard requires directors to exercise a level of care that a reasonably prudent person would apply in a similar situation. If violated, a charge of negligence may apply.

Implications for Business Owners and Shareholders

Negligence allegations attach to individuals such as CEOs, CFOs and members of the board. As a result, those certifying the accuracy of the company's SEC filings should practice a high level of diligence and ensure the following:

  • The internal audit system is properly functioning
  • Auditors have unrestricted access to the company's operations
  • CEO, CFO or other member certifying SEC filing meets regularly with audit committee to discuss results

Incorporation of these strategies can help avoid allegations of security violations. If a violation is alleged, it is important to seek the counsel of an experienced securities litigation attorney.