To Charities and Board Members: Beware and Be Aware of Collateral Damage that May Ensue from Unrelated Legal Proceedings – Part I

October 24, 2013Articles White Collar Defense & Compliance Blog

Background: The Current Heightened Regulatory Climate for Settling Proceedings

The increase in efforts by the Securities and Exchange Commission (“SEC”) in administrative proceedings to secure admissions of wrongdoing and/or consent orders from accountants highlights the need of charities and their board members to be vigilant as to how such types of actions may affect future disclosure requirements. It is often the case that individuals against whom such proceedings are brought are members of charitable boards that are unrelated to the proceedings.

The SEC is certainly not the only regulatory agency to be actively involved in seeking consent decrees and admissions of wrongdoing. As discussed below, many federal and state regulatory agencies and enforcement organizations are choosing this approach to avoid protracted and expensive proceedings and the risks of the potential result and to secure and publicize quickly sanctions against individuals alleged to be wrongdoers. The SEC has been chosen by this blog post as an example of an agency that has had recent publicity placing it at the forefront in such efforts.

As an example, on September 30, 2013, the SEC reported that it had settled administrative actions against two of three accountants “in a continuing crackdown on gatekeepers,” as a result of which each of the settling accountants will be prohibited from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC. In each of the settlements, the accountants settled without admitting or denying the SEC’s findings.

However, several days earlier, on September 19, 2013, Andrew Ceresney, Co-Director of the Division of Enforcement of the SEC, spoke on SEC efforts to combat accounting fraud. In the speech, Mr. Ceresney said the following

[O]ur settlement approach, much like numerous other federal regulators, had been to settle essentially all of our cases on a no-admit-no-deny basis. . . . We recently modified our traditional approach in cases where there has been a criminal or regulatory settlement with admissions. In such cases, we have eliminated the no admit/no deny language and referenced the admissions.

Again, the SEC is only one example of the many federal and state agencies engaged in securing consent decrees and admissions of wrongdoing to expedite resolution of cases. In many of the cases a defendant and his/her counsel may be eager to settle and enter into a consent order with or without admission of wrongdoing as the easiest, cheapest and fastest way to get a proceeding finished and out of the defendant’s life. As will be discussed below, careful analysis of such a decision should be done in light of unanticipated consequences that may flow from what seems to be a relatively benign or perfunctory resolution.

To use a less transparent example than an SEC sanction against a professional, suppose a consent order is entered into by a defendant (“ERISA Defendant”) with the Department of Labor that has the defendant in a civil case agree, among other things, not to serve in the future as a fiduciary of an ERISA-governed plan. To the ERISA Defendant and his/her counsel, the sanction may seem relatively innocuous if the ERISA Defendant is convinced that he/she well never serve in such a capacity in the future. However, there may be other subtle consequences to the ERISA Defendant that may flow from such a consent order that requires careful evaluation.

[To be continued in Part II]