July/August 2009 / Cover Story
Unsuspecting Employees Can Be Snared
The authors address how fraudulent financial reports lead to government investigations, and how executives not directly responsible for filing false information can be drawn into those investigations.
If the SEC concludes that violations of law have occurred, it will file civil or administrative enforcement proceedings. Alternatively, DOJ prosecutors could commence a grand jury investigation. When this happens, the SEC often will suspend its investigation until any resulting prosecutions are completed. Meanwhile, the government is sorting through the evidence it gathers and categorizing individuals as witnesses, subjects and targets. Those labels often change as the investigation progresses. To be liable as a co-conspirator, the government need show only that an employee entered into an agreement to do something wrong, and that an overt act was taken by someone in furtherance of the act. Aiding and abetting requires the government to prove an individual knew of the underlying criminal act and intended to help the principal. These elements can be met by inferences drawn from indirect evidence. Avoiding people or meetings, or dodging or refraining from asking obvious questions can constitute evidence that someone ignored fraud.
Since the passage of Sarbanes-Oxley, a public company must have a system for internal reporting of violations of its code of ethics.