Corporate Misconduct: Investigation Strategy and Executive Defense

Securities fraud occurs when a company or its officers make materially false or misleading statements in connection with the purchase or sale of securities, including misstatements in earnings releases or SEC filings. Breach of fiduciary duty is a core form of corporate misconduct, as directors owe a duty of care and a duty of loyalty, and violations of either can expose them to personal liability in derivative suits or SEC enforcement actions. Corporate officers and directors facing allegations should engage corporate fraud counsel immediately to assess individual and organizational exposure.

Insider trading occurs when a person trades securities while in possession of material, non-public information, and is prosecuted civilly by the SEC and criminally by the DOJ. The Foreign Corrupt Practices Act (FCPA) prohibits U.S. .ompanies from bribing foreign government officials to obtain or retain business, and enforcement has expanded to include third-party intermediaries and successor liability in acquisitions. Executives involved in or aware of potential insider trading violations should seek counsel immediately, as the statute of limitations runs from the date of the transaction.

SEC investigations begin as informal inquiries and can escalate to formal orders authorizing subpoenas and sworn testimony. The SEC's Division of Enforcement pursues corporate misconduct through administrative proceedings, civil injunctions, disgorgement, monetary penalties, officer and director bars, and DOJ criminal referrals. Companies receiving SEC document requests or Wells Notices should engage SEC enforcement counsel immediately to evaluate the scope of the investigation.

The DOJ pursues corporate misconduct under the Justice Manual's corporate prosecution factors, assessing the pervasiveness of the wrongdoing and the corporation's willingness to cooperate. Corporations that proactively disclose corporate misconduct, cooperate with DOJ investigators, and remediate the harm are more likely to receive a deferred prosecution agreement (DPA) or non-prosecution agreement (NPA). Organizations that receive a DOJ grand jury subpoena or target letter should immediately engage federal criminal defense counsel experienced in corporate government cooperation strategy.

Under the Securities Exchange Act, officers and directors who sign false financial statements or certify inaccurate SEC filings are personally liable for securities fraud, with exposure to disgorgement, civil penalties, and officer and director bars. The business judgment rule protects directors for good faith decisions made on an informed basis but provides no protection for self-dealing, conflicts of interest, or deliberate ignorance of red flags. Executives concerned about personal liability should consult breach of fiduciary duty counsel to evaluate their corporate misconduct exposure.

The Sarbanes-Oxley Act (SOX) requires CEOs and CFOs to certify the accuracy of financial statements in SEC filings and to maintain adequate internal controls. A false certification made with knowledge of material inaccuracies can support criminal charges carrying up to 20 years in prison under 18 U.S.C. Section 1350. Executives facing personal charges under SOX or named as SEC targets should immediately retain Sarbanes-Oxley Act counsel to understand the certification exposure and coordinate any required remediation.

When potential corporate misconduct is identified, the company's first obligation is to implement a litigation hold that suspends normal document retention and preserves all documents relevant to the conduct. The internal investigation should be directed by independent outside counsel to preserve attorney-client privilege, involve forensic accounting resources where appropriate, and produce a written report supporting the board's disclosure decisions. Companies that discover potential corporate misconduct should engage corporate crime counsel to structure the investigation and develop a government cooperation strategy.

The SEC's whistleblower program under Dodd-Frank provides awards of 10 to 30 percent of sanctions in enforcement actions above one million dollars, giving employees strong incentives to report corporate misconduct directly to the SEC. Public companies that receive an internal whistleblower complaint must assess whether it triggers disclosure obligations under Regulation FD, Item 103 of Regulation S-K, or SOX's material weakness requirements. Companies that receive a whistleblower complaint should engage whistleblower counsel to assess disclosure obligations and evaluate the complaint's merits.