Page 9 - Complex Litigation

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Complex Litigation | MONDAY, JUNE 2, 2014 | S9

tors to liability. Likewise, the presence or already sign public filings and find them-
The expanding role of the audit committee in matters that are fre-
absence of effective compliance policies selves routinely embroiled in litigation
and programs can have a great inluence on quently at the heart of litigation would seem to make it easier for when the accuracy of public filings is ques-
a corporation’s exposure to criminal sanc- plaintifs to articulate claims against audit committee members.
tioned. The expanding role of the audit
tions and even the prosecutor’s decision to committee in matters that are frequently
exercise discretion to indict a corporation. at the heart of litigation would, however,
Responsibility for internal controls and for seem to make it easier for plaintiffs to
compliance programs puts the audit com- articulate claims against audit commit- a report of whether their audit committee whether it was aware of any fact that would
mittee at the heart of corporate responsi- tee members.
has (a) reviewed the audited inancials and render the inancials untrue or misleading.
bility and potentially at the center of the discussed them with management; (b) dis- It is dificult to see, however, how the audit

cross hairs of liability.
Recent Actions Against Committee Members
cussed with the independent auditors the committee could afirmatively recommend
Finally, as if there were any need to up the matters required by Statement on Account- to the board the inclusion of the inancials in
ante, the audit committee frequently plays In February 2011, the SEC commenced ing Standards (SAS) No. 61 (including the the company’s Form 10-K without implicitly
a role in oversight of risk management. This an action against the members of the audit quality and acceptability of accounting prin- vouching for the accuracy of the inancials.
function is related to the functions described committee of a public company called DAB ciples used, unusual transactions, and issues The rule provides safe harbor protection
immediately above, since high risk areas may Industries, a manufacturer of body armor raised by management and auditors); and from the antifraud provisions of the proxy
implicate internal controls and/or corporate founded and controlled by David A. Brooks, (c) received certiication of independence rules, but the SEC speciically declined to
compliance policies and programs.
who was found criminally and civilly liable from the auditors. Id.
provide insulation from liability in private

In 2000, the SEC issued Release No. for accounting fraud, misappropriation of For some reason, the SEC, having grouped civil litigation as not being “necessary or
24-42266 (the Release), setting forth inal corporate funds, and insider trading. The together the three report topics set forth appropriate.” Id. at 11. The SEC concluded
rules regarding audit committee disclosure SEC claimed that the members of the audit above, separately stated a fourth report top- that since the new rules provide more speci-
effective Jan. 31, 2000. See 17 CFR 210, 228- committee, Jerome Krantz, Cary Chasin, ic: that the audit committee recommended icity for the audit committee function, the
229, 240. Citing advances in technology, and Gary Nadelman, were longtime friends to the board that the audited inancials be number of breach of iduciary duty claims
and increased pressure on companies to and neighbors of Brooks who depended included in the company’s annual report. might decrease (id.) and that by requiring
meet market expectations, the SEC leaned on Brooks for inancial support and were This fourth report might be trouble. In the audit committee members to review the
heavily on audit committees, which it says entirely dominated by him. Krantz was addressing concerns raised by commen- inancials with management, thereby mak-
“play a critical role in the inancial report- Brooks’ insurance agent. Chasin previously tators that the new report requirements ing the committee members more informed

ing system by overseeing and monitoring worked at DHB, which was his sole source will expose audit committee members to than they otherwise might have been, the
management’s and the independent audi- of income from 1997 to 2000. Nadelman is increased risk of liability, the SEC stated protection of state business judgment rules
tors’ participation in the inancial report- alleged to have been a “signiicant inves- explicitly that “[i]t is not our intention to sub- will be more available to committee members
ing process,” to ensure that the “inancial tor” in a private company largely owned ject audit committee members to increased (id. at 7). Unfortunately, the SEC provided
reporting process . remain[s] disciplined and later taken public by Brooks. The three liability.” Release at 4. The SEC pointed no authority for these propositions or any
and credible.” Release at 2.
were alleged to have received “lucrative out that it had considered, and rejected, examples or further explanation.
The then-new rule requires that com- warrants” in 2003, 2004, and 2005, as well
a requirement that the audit committee The SEC’s optimism might be misplaced.
panies include in their proxy statements
state, with language that tracks Rule 10b-5,
Of course, audit committee members
as other perquisites.
»
Page S11

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