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Learn More »The surge of corporate scandals that emerged a few years ago remains in recent memory. The actions by misguided individuals in several formerly well respected companies (such as Enron, Adelphia, and WorldCom, to name just a few) caused other businesses to suffer as investors lost faith in reported earnings and the economic downturn deepened. As has happened before, the revelation of these scandals coincided with a major economic downturn (attributable in large part to the implosion of the long hot "technology" or "new economy" markets). Many pundits and government officials considered these scandals to be evidence of a widespread failure in our nation's complex system of corporate governance controls and began calling for more regulatory oversight and harsher penalties. In short order, sweeping reform legislation was enacted in a popular law now commonly called “Sarbanes-Oxley.”
After the various provisions of the Sarbanes-Oxley Act of 2002 began to take effect, federal and state regulators (including, among others, the Department of Justice (DOJ), the Securities & Exchange Commission (SEC), and the New York Attorney General's Office) along with self-regulatory organizations (such as the NASDAQ and the New York Stock Exchange) began to ratchet up the minimum compliance standards for publicly-traded entities, and they demanded greater cooperation from any entities hoping to avoid or minimize sanctions.
In 1999, before the economic downturn and scandals emerged, the DOJ had issued internal guidelines entitled the "Federal Prosecution of Corporations" (commonly called the "Holder Memorandum") that delineated factors for prosecutors to consider in deciding whether to seek criminal charges against business entities and their officers.6 In October 2001, the SEC issued a report (commonly known as the "Seaboard Report") that outlined similar factors for its staff to consider when determining whether and how to punish business entities.7 Then, on January 20, 2003, after Sarbanes-Oxley's provisions became effective, then Deputy Attorney General Larry Thompson issued another DOJ internal guidance8 that tightened the Holder Memorandum's standards:
The main focus of the revisions is increased emphasis on and scrutiny of the authenticity of a corporation's cooperation. Too often business organizations, while purporting to cooperate ..., in fact take steps to impede the quick and effective exposure of the complete scope of wrongdoing under investigation. The revisions also address the efficacy of the corporate governance mechanisms in place within a corporation, to ensure that these measures are ... [not] mere paper programs.
In the aftermath of the Seaboard Report and the Holder/Thompson Memorandum, so many businesses have tried to follow the limited pathway that the government regulators have provided to avoid or minimize sanctions10 that the level of "cooperation" has reached unprecedented levels. While cooperation in general is a valuable thing, the baseline for what regulators now consider to be adequate cooperation has gotten progressively stricter --which has not been a good thing for publicly-traded companies because it has made it harder for them to defend against securities class actions and other dangers. "Since only the Eighth Circuit has recognized ... selective privilege waivers, the value of sincere promises from ... [government] attorneys to try to maintain the confidentiality of information provided ... by corporate entities ... should be discounted."11
Now, after what has seemed to be an escalating contest among regulators about who can impose the largest fines and settlements,12 the SEC may have slowed down this spiral by means of expressing its concerns about the wisdom of indiscriminately imposing large fines under its administrative powers --since doing so runs the risk of penalizing innocent shareholders.
This article examines the SEC's announcement and what it portends for publicly-traded
entities, including large companies that operate within the healthcare sector.
But, before immediately moving into the details of the January 4, 2006, "Statement
of the Securities and Exchange Commission Concerning Financial Penalties,"13
more background information is helpful - beginning with a brief discussion
about analogous problems seen in class action securities fraud litigation
and how the courts and Congress have tried to provide relief.
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The Health Care Compliance Letter features news coverage and discussions on all the latest developments — in ALL the critical areas of compliance — in an easy-to-read resource. In addition to cutting-edge news and guidance on complex issues surrounding Medicare/Medicaid reimbursement, you can look forward to "at-a-glance" information on other compliance "hot spots". Learn more or talk to your Sales Representative.
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