SEC Increasingly Expects Boardroom Culls Following Discovery Of Corporate Misconduct

by Glen Shapiro, LawAndTax-News.com, New York

07 April 2004

Speaking to Reuters at the weekend, former SEC official and federal prosecutor, Jacob Frenkel suggested that the US securities regulator appears to have come to expect companies to dismiss executives suspected of wrongdoing almost immediately on the launch of an investigation.

Although explaining that "It's not an affirmative expectation," the Smith Gambrell & Russell partner observed that the Securities and Exchange Commission would view "a decision not to demand the resignation of an official as a failure to take corrective measures quickly".

According to the Reuters report, the benchmark for action in cases of corporate wrongdoing was set in October 2001, during an investigation into the Seaboard food and shipping group.

Following the discovery that an employee of the firm had cooked the books and then instituted a cover-up, Seaboard dismissed the employee and then quickly took steps to strengthen its financial reporting, moves which led the SEC to announce that it was taking no further action against the company.

Seaboard was also held up as a model for other companies which discover corporate misconduct, having displayed effective self-policing, self-reporting, timely information sharing with the proper authorities, rapid reforms, and the speedy dismissal of wrongdoers.

Frenkel told Reuters that since the Seaboard investigation:

"The DOJ and the SEC have included in their assessment of cooperation a look at how quickly boards toss out senior management suspected of financial fraud."

He went on to add:

"The judicial system still operates on the presumption of innocence until proven guilty. Unfortunately, where there are corporate fraud charges, boards are almost expected to act on a presumption of guilt."

The SEC declined to comment on the matter to the news service.

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