Life After Enron and Worldcom: Preparing for the New Regulatory Environment

Orange County Business Journal, Apr 23-Apr 29, 2007 by Piazza, Mike

"Higher standard" for gatekeepers

Professionals also play a key role in helping their client achieve the levels of compliance demanded in the post-Sarbanes-Oxley era. The government certainly believes this. Look no further than the increasing numbers of SEC enforcement actions against in-house attorneys and outside auditors. In sec-speak, professionals advising corporations are "gatekeepers" that are expected to adhere to a higher standard of conduct because of their professional status, specialized training and expertise either in law or accounting. As one SEC staffer once explained the gatekeeper concept to me when I worked at the Commission, the SEC believes" professionals are the last, best line of defense against a rogue business executive. I doubt many in-house lawyers or auditors would come up with this description if asked their specific job duties. But this is the reality.

* Counsel under increased scrutiny

The General Counsel of a company also increasingly is the target of regulators and prosecutors. The recent SEC lawsuit filed against the former general counsel of a major health care company is but the latest in a string of cases in the past two years targeting in-house counsel. The cases include enforcement proceedings against the former generals counsel of J.B. Oxford, Gemstar, Comverse, McAfee, as well as two former in-house lawyers at Enron who just recently got their court papers. Several others are rumored to be on the SEC's radar for potential enforcement proceedings including those that work at companies that have restated earnings due to option grant issues. Outside counsel also may be coming under closer scrutiny. These are chilling times to be a professional giving advice on corporate governance. But again, that is the reality of the current circumstances under which we all work.

* Boards not exempt from government attention

And don't think that boards are exempt from this increased government attention. Boards, and the directors that serve on them, increasingly are viewed as gatekeepers. Recent questions about compensation decisions and option grants are just two areas of interest to regulators and prosecutors. Further, the role of the audit committee has evolved to the point that it, too, is viewed as an independent gatekeeper even separate and apart from its board of directors. Any individual that currently serves on an audit committee can attest to the increased role and time commitment required to effectively serve as an outside director on an audit committee.

* Enforcement of insider trading laws

Those involved in public company governance also should take notice of the stepped up enforcement of insider trading laws by the SEC, particularly in the last couple of years. Recent SEC cases include instances of trading options ahead of merger and acquisition news, misappropriating and trading on material non-public information obtained through financial printers' employees, and inquiries into trading surrounding PIPEs. Not to mention the increasing concern at the Commission over trading in collateralized debt swaps and the Commission's continuing efforts to wrap their regulatory arms around equity shorting (and particularly the practice of so-called "naked shorting").