Could the former Qwest CEO have been spared jail time if Sarbanes-Oxley (SOX)
It looks that way. Ironically, certain provisions of SOX, passed by Congress in 2002, could have spared Joe Nacchio the fate of other high-profile CEOs convicted of their accounting misdeeds.
According to law
professor and former CEO counsel Jay Brown, current rules would have
prevented Nacchio from making misleading disclosures by forcing boards of
directors, CFOs and auditors to engage in greater
oversight over statements made by executives.
“One of the things he was convicted on was not disclosing that recurring
revenues wouldn’t meet their targets,” Brown told internetnews.com. “They didn’t disclose this because Nacchio controlled the disclosure process. SOX makes it clear that others have to be involved in the disclosure process.”
The lesson in all of this, Brown wrote in his blog today, is that “it didn’t have to happen and with stronger
oversight wouldn’t have.”
Suzanne Hanselman, a partner in the law firm of Baker Hostetler, concurred
that boards of directors and corporate counsel are “paying a lot more
attention to what insiders are doing as far as insiders’ trading.”
A federal jury found former Qwest CEO Joe Nacchio guilty of 19 counts of
insider trading on Thursday. Nacchio faces up to 10 years in prison and
$19,000,000 in fines, according to the U.S. Department of Justice.
According to the government, Nacchio sold Qwest stock from January to
September 2001 when he knew, but did not disclose publicly, that Qwest was
unlikely to continue to meet its announced earnings targets. The government
contended further that Nacchio knew that those earnings targets were overly
The jury agreed with the government on 19 of 42 counts, covering $52 million
in stock sales that were covered in a December 2005 indictment.
The government painted this conviction as a success in its crackdown on
white-collar crime. “Justice is served… No one is above the law,” said
U.S. Attorney Troy Eid of the District of Colorado in a statement.
Deputy Attorney General Paul McNulty, who heads up President Bush’s
Corporate Fraud Task Force, added that the government is committed to
holding executives accountable for their misdeeds. He said the conviction
shows the government is succeeding in its “effort to restore integrity to
America’s financial markets.”
Worldcom’s CEO Bernard Ebbers was convicted of corporate fraud in 2005, and former Enron officials Ken Lay and Jeffrey
Skilling were convicted in May 2006 for their roles in the collapse of
Worldcom was forced into bankruptcy in 2002. The government charged Ebbers
of cooking the books in order to continue getting positive reports from Wall
Street analysts, thus inflating his company’s share price and his
Former Enron CEOs Ken Lay and Jeffrey Skilling were each convicted of
multiple counts of conspiracy, wire fraud, securities fraud and making false
statements to auditors.
The Three Card Monte practiced by Enron at the expense of its shareholders
led not only to the collapse of that diversified company but the demise of
Arthur Andersen, the accounting firm that was also convicted of shredding
SOX has spawned a whole new series of industries, as public companies have
spent lavishly to establish internal controls over their financial reporting
and to improve their records management.
It has also, seemingly, brought an end to a certain kind of accounting
scandal. “There’s still going to be some fallout from backdating issues, but
the cute accounting-type cases — hopefully this is one of the last ones,”
Brown added that Nacchio could have acted within the bounds of the law and
still made out like a bandit. But sometimes, excessive compensation “skews
your perspective on things,” he said, adding a lesson.
“Err on the side of disclosure.”