SEC Charges Corporate Officers with Fraud

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2014-08-17


Editor's Note: The following post comes to us from R. Daniel O’Connor, partner focusing on securities enforcement at Ropes & Gray LLP, and is based on a Ropes & Gray Alert authored by Mr. O'Connor, Marko S. Zatylny, Kait Michaud, and Michael J. Vito.

On July 30, 2014, the Securities and Exchange Commission (“SEC”) advanced a novel theory of fraud against the former CEO (Marc Sherman) and CFO (Edward Cummings) of Quality Services Group, Inc. (“QSGI”), a Florida-based computer equipment company that filed for bankruptcy in 2009. The SEC alleged that the CEO misrepresented the extent of his involvement in evaluating internal controls and that the CEO and CFO knew of significant internal controls issues with the company’s inventory practices that they failed to disclose to investors and internal auditors. This case did not involve any restatement of financial statements or allegations of accounting fraud, merely disclosure issues around internal controls and involvement in a review of the same by senior management. The SEC’s approach has the potential to broaden practical exposure to liability for corporate officers who sign financial statements and certifications required under Section 302 of the Sarbanes-Oxley Act (“SOX”). By advancing a theory of fraud premised on internal controls issues without establishing an actionable accounting misstatement, the SEC is continuing to demonstrate that it will extend the range of conduct for which it has historically pursued fraud claims against corporate officers.

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accounting & disclosure practitioner publications securities litigation & enforcement books and records disclosure internal control kait michaud management marko zatylny michael vito r. daniel o'connor ropes & gray sec sec enforcement section 10(b) securities fraud sox


Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation,

Date tagged:

08/17/2014, 10:00

Date published:

08/17/2014, 09:00