Academic journal article Suffolk University Law Review

Securities Law - Eighth Circuit Rejects Knowledge Requirement in Assessing Civil Liability for Corporate Executives Who Deceive Auditors - SEC V. Das

Academic journal article Suffolk University Law Review

Securities Law - Eighth Circuit Rejects Knowledge Requirement in Assessing Civil Liability for Corporate Executives Who Deceive Auditors - SEC V. Das

Article excerpt

Securities Law--Eighth Circuit Rejects Knowledge Requirement in Assessing Civil Liability for Corporate Executives Who Deceive Auditors--SEC v. Das, 723 F.3d 943 (8th Cir. 2013)

When the United States Congress passed the Foreign Corrupt Practices Act (FCPA) in 1977, its chief concern was deterring off-the-books bribes of foreign officials by domestic corporations. (1) The FCPA authorized the Securities and Exchange Commission (SEC) to issue new rules, including Rule 13b2-2, which imposes civil liability on corporate officers who mislead accountants concerning the corporation's finances. (2) In SEC v. Das, (3) the Eighth Circuit Court of Appeals addressed the issue of whether civil liability is present in cases where the corporate officer did not knowingly mislead. (4) Splitting from the Ninth Circuit--the only other circuit court that addressed this issue directly--the Eighth Circuit rejected the proposed "knowingly" requirement, holding that a reasonableness standard shall apply in such cases. (5)

Das concerned info USA, Inc., a publicly traded, Nebraska-based corporation that sold databases to businesses and consumers. (6) More specifically, the case concerned events involving three corporate officers: Vinod Gupta, who served as chief executive officer and chairman until 2008; Rajnish Das, chief financial officer from 2003 to 2006; and Stormy Dean, chief financial officer from 2000 to 2003 and then again from 2006 to 2008. (7) The SEC claimed, in a 2010 civil enforcement action, that Dean violated provisions of the Securities Exchange Act of 1934. (8) The agency claimed, among other things, that both former chief financial officers, Das and Dean, deceived auditors concerning payments info USA had made to Aspen Leasing Services LLC and Annapurna Corporation--two companies owned by Gupta--to pay for Gupta's homes, yacht, and cars. (9) The SEC's complaint further alleged that Dean and Das had signed the company's management letters to external auditors, falsely representing that all related-party transactions had been properly disclosed. (10) At trial, the judge instructed the jury to find that Dean violated the law if he did not act "reasonably" regarding the false statements made to auditors. (11)

After only a few hours of deliberation, a jury returned a verdict in favor of the SEC on each of the seven claims brought against Das and Dean. (12) In Dean's subsequent appeal, he argued that the trial court abused its discretion in instructing the jury to find that Dean violated Rule 13b2-2(a) if he did not act "reasonably." (13) Dean argued that civil liability for deceiving auditors required a finding that Dean acted "knowingly." (14) He relied upon SEC v. Todd, (15) a Ninth Circuit decision holding that "'one must 'knowingly' make false statements'" to be liable under the rule. (16) Rejecting the Ninth Circuit's reasoning, the Eighth Circuit Court of Appeals affirmed the trial court's jury instruction applying a reasonableness standard. (17)

In 1977, Congress contemplated enacting a statute to prohibit corporate officials from making false or misleading statements to accountants--but did not do so. (18) To avoid debating the legality of the proposed "knowingly" requirement in light of a recent decision of the United States Supreme Court, Congress deliberately omitted the prohibition against making false or misleading statements to an accountant from the FCPA. (19) Two years later, however, the SEC, acting under the authority of the FCPA and the Securities Exchange Act, promulgated a rule to prohibit making false or misleading statements to accountants. (20) The SEC considered imposing a scienter, or knowledge, requirement but decided to leave it out. (21) The accounting provisions of the FCPA, and the new rules promulgated thereunder, broadened the scope of the SEC's authority beyond its traditional role of merely monitoring disclosures into the realm of regulating a corporation's internal management. …

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