Thursday, January 20, 2005
An article in Corporate Counsel (Jan. 20, available on Law.Com) sends out a wake-up call (in case one is necessary) to in-house lawyers who work at publicly-traded companies subject to the securities disclosure rules and, more pertinently, the up-the-ladder reporting requirement imposed by the Sarbanes-Oxley Act. The article discusses the SEC's settlement with John Isselmann, the former general counsel of Electro Scientific Industries Inc.:
The SEC doesn't claim that he participated in the scheme to fraudulently boost the quarterly financials at ESI, a semiconductor manufacturer based in Portland, Ore. The agency doesn't even allege that Isselmann knew about the fraud at the company, which reported revenues of $207 million in fiscal year 2004. The SEC says only that the ex-GC failed to communicate material information to ESI's audit committee and outside auditors -- information that would have stopped the accounting fraud. In his settlement with the SEC, Isselmann neither admitted nor denied the agency's allegations. The 37-year-old lawyer agreed to pay a $50,000 civil penalty, and consented to a cease-and-desist order. He left ESI in 2003 -- he says that the company asked him to stay on -- and currently does consulting work in Portland. (ESI officials did not respond to requests for comment for this article.).
The Commission's complaint does not allege that Isselmann participated in the fraud perpetrated by the company's former CFO, but for the failure to fulfill what it called his "gatekeeper role" by not reporting the transaction when he first became aware of it. According to the article, "The SEC faulted Isselmann for failing to stand up to then-CFO Dooley at the disclosure meeting, and for failing to provide the audit committee with Morrison & Foerster's advice. These failures allowed Dooley and Lorenz to conceal their fraud, the SEC says."
The SEC has announced that it plans to scrutinize the conduct of corporate counsel -- both in-house and outside lawyers -- more carefully regarding not only legal advice but also how they reported potential misconduct and respond to civil and criminal investigations. It is a world fraught with much more peril these days. (ph)