Inspired by the Financial Crisis, SEC Pursues More Negligence Cases

June 14, 2012

In its pursuit of the executives accountable for the financial meltdown of 2008, the Securities and Exchange Commission (SEC) is pursuing more negligence cases. The Commission hopes that pursuing these types of cases will make it easier to hold executives accountable than if it focused on alternatives.

The Rationale

The SEC claims that building a negligence case is easier and less time-consuming than building a case for investment fraud. In a negligence case, the SEC only needs to provide evidence that an executive or team of executives failed to take action that another reasonable party would have taken under the same circumstances. In a fraud case, however, it needs to prove that the executives' actions were willful and intended to deceive the public for personal or financial gain.

The SEC believes that executives are not only accountable for the fraud they commit, but also for failing to monitor their company's filings and take appropriate action. In the past, the SEC has pursued negligence claims when it could not afford a prolonged court battle, which often occurs with fraud cases.

Protecting Your Business

Unfortunately, the SEC's decision to pursue more negligence cases may leave some companies not involved with the financial crisis exposed to prosecution. To avoid being held publicly accountable for mistakes in judgment, CEOs and CFOs should make a concerted effort to certify the accuracy of its SEC filings and step up due diligence efforts.

Business owners should start with their company's internal audit protocol. Assess the protocol to make sure it is focused on financial reporting and is run efficiently with the appropriate amount of staff. Focus on making all aspects of the company accessible to the internal auditing committee to create transparency, and make CEOs and CFOs accessible to the head of the audit team. More transparency and better communication will help executives avoid making mistakes that lead to negligence cases.

If your business needs help in assessing its internal audit protocol or if you are worried the new SEC decision to pursue more negligence cases may affect your business, please contact an experienced business attorney to explore your options.

Article provided by Schachter Harris LLP
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