Thursday, December 15, 2005
Three outside directors of Hollinger International, Inc., received Wells Notices from the SEC that the Commission's Enforcement Division intends to recommend a civil enforcement action against them. The three directors, former Illinois Governor James Thompson, Marie-Josee Kravis, and Richard Burt, comprised Hollinger's audit committee during the period when its former CEO and controlling shareholder, Lord Conrad Black, is alleged to have diverted funds from the company. Black and three other former Hollinger executives were indicted in November, and his former chief deputy, David Radler, has entered a guilty plea and is cooperating with the government. The SEC sued Black and Radler in November 2004 for securities fraud related to the alleged diversion of corporate funds (SEC Litigation Release here).
The SEC action would be different from most other cases against corporate officers and directors because the Commission may accuse outside directors who did not directly benefit from their decisions with permitting improper conduct by corporate management. In effect, the SEC would be accusing the directors of permitting a fraud by not being sufficiently vigilant, a particularly important role for audit committees, especially after Sarbanes-Oxley. An SEC action would come on top of shareholder suits against Hollinger and its directors. It will be interesting to see if the three directors try to work out a settlement with the Commission, or will fight any action. At a minimum, look for the SEC to seek a bar on serving as a director of other public companies. A Reuters story (here) discusses the SEC notices. (ph)
UPDATE: Bruce Carton has an interesting post (here) on the Securities Litigation Watch blog on the Wells Notices. (ph)