Wednesday, July 13, 2005

RenaissanceRe Executive Forced Out For Not Accepting an SEC Subpoena

The usual practice in corporations caught up in the investigation of "finite insurance" (i.e. earnings and reserve management products) is that if an executive asserts the Fifth Amendment, then the person is terminated.  This has happened to a number of (now former) AIG executives, and would have happened to former CEO Maurice Greenberg is he had not resigned first.  The pressure on corporations to demonstrate their cooperation moved a step higher -- or lower, depending on your point of view --- with RenaissanceRe Holdings' announcement that a senior executive was forced to resign because he refused to accept voluntary service of an SEC subpoena in the investigation.  The company, which is incorporated in Bermuda and its shares are traded on the NYSE, issued the following statement (here in its Form 8-K filing):

RenaissanceRe . . . announced today that it had received and accepted the resignation of Michael W. Cash, Senior Vice President - Specialty Reinsurance. The resignation follows the refusal of Mr. Cash, who is a Bermudian citizen, voluntarily to accept service of a subpoena from the Securities and Exchange Commission calling for his testimony in its investigation into the restatement of the Company's financial statements. As previously announced, the Company is cooperating with the government authorities in their investigations, and Mr. Cash's action was inconsistent with that policy of cooperation.

As a Bermudan citizen, stationed at the company's headquarters in Pembroke, Bermuda, Cash is outside the SEC's jurisdiction to enforce its subpoenas.  Under 15 U.S.C. Sec. 78u(c) (here), the Commission has the following compulsory authority (assuming a formal order of investigation has been issued) if a person refuses to comply with a subpoena:

In case of contumacy by, or refusal to obey a subpena issued to, any person, the Commission may invoke the aid of any court of the United States within the jurisdiction of which such investigation or proceeding is carried on, or where such person resides or carries on business, in requiring the attendance and testimony of witnesses and the production of books, papers, correspondence, memoranda, and other records. And such court may issue an order requiring such person to appear before the Commission or member or officer designated by the Commission, there to produce records, if so ordered, or to give testimony touching the matter under investigation or in question; and any failure to obey such order of the court may be punished by such court as a contempt thereof.

So long as Cash stays outside the United States, thereby avoiding the jurisdiction of a federal court, the SEC could not serve and enforce its subpoena.  The alternative method to compel a person to testify is to invoke the authority of the Bermuda Monetary Authority, but the SEC does not have a memorandum of understanding with that agency and Bermuda is not a signatory to any of the multilateral agreements on using compulsory authority to obtain records and testimony for a foreign securities regulator.  That's why the Commission sought to have Cash accept the subpoena voluntarily, and his refusal triggered (in effect) his termination from the company.  Note that Cash has not invoked the Fifth Amendment, but took the prior step of exercising his right to refuse to appear voluntarily (so to speak) before a foreign regulator to testify under oath.  The pressure on companies to cooperate is certainly building.

For those interested in the SEC's policy on corporate cooperation, there is an interesting post on the Corporate Compliance Blog (here) discussing the issue as it relates to the Seaboard Report, which is the Commission's equivalent to the Thompson Memorandum on charging business organizations. (ph)

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