[Congressional Record Volume 148, Number 27 (Tuesday, March 12, 2002)]
[Senate]
[Pages S1785-S1792]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEAHY (for himself, Mr. Daschle, Mr. Durbin, and Mr. 
        Harkin):
  S. 2010. a bill to provide for criminal prosecution of persons who 
alter or destroy evidence in certain Federal Investigations or defraud 
investors of publicly traded securities, to disallow debts incurred in 
violation of securities fraud laws from being discharged in bankruptcy, 
to protect whistleblowers against retaliation by their employers, and 
for other purposes; to the Committee on the Judiciary.
  Mr. LEAHY. Mr. President, I am pleased to introduce the ``Corporate 
and Criminal Fraud Accountability Act of 2002.'' I want to thank the 
majority leader, and Senators Durbin and Harkin for joining me as 
original cosponsors in this effort to prevent corporate and criminal 
fraud, protect shareholders and employees, and hold wrongdoers 
accountable for their actions.
  This bill is a crucial part of ensuring that the corporate fraud and 
greed that have been on display in the Enron debacle can be better 
detected, prevented and prosecuted. We cannot legislate against greed, 
but we can do our best to make sure that greed does not succeed.
  The fraud at Enron was not the work of novices. It was the work of 
highly educated professionals, spinning an intricate spider's web of 
deceit. They created sham partnerships with names like Jedi, Chewco, 
Rawhide, Ponderosa

[[Page S1786]]

and Sundance to cook the books and trick both the public and federal 
regulators. The actions of Enron's executives, accountants, and lawyers 
exhibits a ``Wild West'' attitude which valued profit over honesty.
  Nor is this web of corporate deceit the end of the Enron story. When 
they thought that investigators might be coming, what did these 
``professional'' men and women apparently do? First, they warmed up the 
shredders and began destroying evidence. Then, after they successfully 
shredded thousands of documents, they began the finger pointing. Now, 
the Enron executives are blaming their accountants at Arthur Andersen; 
the accountants are blaming the executives right back; and they are 
both blaming their lawyers.
  The truth is that just as there was enough greed to go around, there 
is now enough blame to go around. But the blame does not end with the 
people involved in this case. It extends to our courts, our regulators, 
and to Congress, whose actions in the past decade helped create the 
permissive atmosphere which allowed Enron to happen. No one in Congress 
intended for such outrageous conduct to happen, but now it is our job 
to stop it.
  We must restore accountability. Accountability is important because 
Enron is not alone. At a Judiciary Committee hearing which I recently 
chaired, experts gave the public markets grave warnings, it is likely 
that there are more ``Enrons'' lurking out there waiting to be 
discovered. Waiting to be discovered not only by investigators or the 
media but by the more than one in two Americans who depend on the 
transparency and integrity of our markets.
  The majority of Americans depend on our capital markets to invest in 
the future needs of themselves and their families, from their 
children's college fund to their retirement nest eggs. American 
investors are watching what we do here and want action. We must act now 
to restore confidence in the integrity of our markets and deter fraud 
artists who think that their crimes will go unpunished. Restoring such 
accountability is what this bill is all about.
  This bill has three major components that will enhance 
accountability. First, this bill provides prosecutors with new and 
better tools to effectively prosecute and punish those who defraud our 
Nation's investors, which means ensuring our criminal laws are flexible 
enough to keep pace with the most sophisticated and clever con artists. 
It also means providing criminal penalties which are tough enough to 
make them think twice about defrauding the public.
  Second, this bill provides tools that will improve the ability of 
investigators and regulators to collect and preserve evidence which 
proves fraud. That means ensuring that corporate whistleblowers are 
protected and that those who destroy evidence of fraud are punished. 
Third, the bill protects victims' rights to recover from those who have 
cheated them. In short, this bill is going to both save documents from 
the shredder and send wrongdoers to jail once they are caught.
  This bill is only one part of the response needed to solve the 
problems exposed by Enron's fall. Securities law experts, consumer 
protection groups, and others Members of Congress, both in the Senate 
and the House of Representatives, have made other proposals and 
introduced legislation that deserves careful consideration. Working 
with the majority leader, we have developed a comprehensive plan to 
attack this problem. Certainly, in light of recent events, we must 
carefully reexamine both the decisions of the Supreme Court and our 
current laws. Despite the best of intentions, our laws may have helped 
create an environment in which greed was inflated and integrity 
devalued. This bill is an important starting point in that process. Let 
me explain its provisions.
  Section 2 of the bill would create two new 5 year felonies to clarify 
and plug holes in the existing criminal laws relating to the 
destruction or fabrication of evidence, including the shredding of 
financial and audit records. Currently, those provisions are a 
patchwork which have been interpreted, often very narrowly, by Federal 
courts. For instance, certain of the current provisions in Title 18, 
such as Section 1512(b), make it a crime to persuade another person to 
destroy documents, but not a crime for a person to personally destroy 
the same documents. Other provisions, such as Section 1503, have been 
narrowly interpreted by courts, including the Supreme Court in United 
States v. Aguillar, 115 S. Ct. 593 (1995), and the First Circuit in 
United States v. Frankhauser, 80 F.3d 641 (1st Cir. 1996), to apply 
only to situations where the obstruction of justice may be closely tied 
to a judicial proceeding that is already pending. Still other 
provisions, such as sections 152(8), 1517 and 1518 apply to obstruction 
in certain limited types of cases, such as bankruptcy fraud, 
examinations of financial institutions, and healthcare fraud. In short, 
the current laws regarding destruction of evidence are full of 
ambiguities and limitations that should be corrected.
  Section 2 would create a new felony, 18 U.S.C. section 1519, for use 
in a wide array of cases in which a person destroys evidence with the 
specific intent to obstruct a Federal agency or a criminal 
investigation. There would be no technical requirement that a judicial 
proceeding was already underway or that the documents were formally 
under subpoena. The law would also be used to prosecute a person who 
actually destroys the records themself in addition to one who 
persuades another to do so. The law would apply to the intentional 
shredding of evidence in any matter within Federal regulatory or civil 
jurisdiction, such as an SEC or civil fraud matter, as well as criminal 
jurisdiction, eliminating another series of technical distinctions 
imposed by some courts under current law.

  Second, Section 2 creates a 5-year felony, 18 U.S.C. section 1520, to 
punish the willful failure to preserve financial audit papers of 
companies that issue securities as defined in the Securities Exchange 
Act. The new statute, in subsection (a), would require that accountants 
preserve audit records for 5 years from the conclusion of the audit. 
Subsection (b) would make it a felony to knowingly and willfully 
violate the 5-year audit retention period. This section both penalizes 
the willful failure to maintain specified audit records and sets a 
bright line rule that would require accountants to put strong 
safeguards in place to ensure that such records are, in fact, retained. 
Had such clear requirements been in place at the time that Arthur 
Andersen was considering what to do with its audit documents, countless 
documents might have been saved from the shredder.
  Section 3 of this bill proposes an amendment to the civil Racketeer 
Influenced and Corrupt Organizations, RICO, statute, enhance the 
abilities of Federal and State regulators to enforce existing law. It 
would give State Attorneys General and the Securities and Exchange 
Commission, ``SEC'', explicit authority to bring a suit under the civil 
RICO provisions. Currently, only the U.S. Attorney General has such 
authority under RICO. At a Judiciary Committee hearing on Enron's fall, 
Washington State Attorney General Christine Gregoire strongly supported 
this change, testifying that State and local law enforcers are on the 
front lines in protecting consumer's rights. Providing such authority 
to State Attorneys General and to the SEC would provide them a potent 
weapon in that battle and would allow us to take advantage of their 
significant expertise in protecting consumers.
  Others have suggested that we also consider repealing the one-of-a-
kind securities fraud exception to civil RICO, created in 1995 over the 
veto of President Clinton. Congressman Conyers, the distinguished 
ranking minority member of the House Judiciary Committee, has already 
introduced a bill to repeal this unique exemption. As someone who voted 
against the 1995 Private Securities Litigation Reform Act and voted to 
sustain President Clinton's veto, I did not support this one-of-a-kind 
exemption when it became law. Now, given what has happened in our 
markets, I think that we all need to consider whether or not the 
exemption for securities fraud makes sense. No one who voted for the 
1995 Private Securities Litigation Reform Act or voted to override 
President Clinton's veto meant for Enron to occur, but now that it has 
occurred, none of us can ignore it.
  In addition to giving the SEC the authority to sue under civil RICO, 
we have to ensure that the SEC has all the powers and resources that it 
needs to protect our Nation's shareholders. The

[[Page S1787]]

SEC needs to have sufficient attorneys, training, and investigative 
resources, and enough power to pursue the most complex of cases against 
the best funded defendants in our legal system. In particular, one idea 
that is worth serious consideration is amending the statutes related to 
the Federal Rules of Criminal Procedure to allow SEC attorneys in fraud 
investigations to seek search warrants from a Federal judge, the same 
way that Department of Justice attorneys currently may, when they can 
demonstrate probable cause to believe that a crime has been committed. 
Taking such a step might allow the SEC to act more quickly and to 
prevent the destruction of documents and evidence in the future, as 
they were not able to do in the Enron case. The SEC has to have the 
tools it needs to protect what has truly become a nation of 
shareholders.
  Section 4 of this bill would amend the Bankruptcy Code to make 
judgments and settlements based upon securities law violations non-
dischargeable, protecting victims' ability to recover their losses. 
Current bankruptcy law may permit such wrongdoers to discharge their 
obligations under court judgments or settlements based on securities 
fraud and other securities violations. This loophole in the law should 
be closed to help defrauded investors recoup their losses and to hold 
accountable those who perpetrate securities fraud after a government 
unit or private suit results in a judgment or settlement against the 
wrongdoer.
  State securities regulators have indicated their strong support for 
this change in the bankruptcy law, and I have received letters 
supporting the passage of this bill from the North American Securities 
Administrators Association, whose membership includes the securities 
administrators in all 50 States and Vermont's chief banking and 
securities regulator. Under current laws, State regulators are often 
forced to ``reprove'' their fraud cases in bankruptcy court to prevent 
discharge because remedial statutes often have different technical 
elements than the analogous common law causes of action. Moreover, 
settlements may not have the same collateral estoppel effect as 
judgments obtained through fully litigated legal proceedings. In short, 
with their resources already stretched to the breaking point, these 
State regulators have to plow the same ground twice in securities fraud 
cases. By ensuring securities fraud judgments and settlements in State 
cases are non-dischargeable, precious state enforcement resources will 
be preserved and directed at preventing fraud in the first place.
  Section 5 would protect victims by extending the statute of 
limitations in private securities fraud cases. This section would set 
the statute of limitations in private securities fraud cases to the 
earlier of 5 years after the date of the fraud or 3 years after the 
fraud was discovered. The current statute of limitations for such fraud 
cases is 3 years from the date of the fraud. This can unfairly limit 
recovery for defrauded investors in some cases. As Attorney General 
Gregoire testified at our recent hearing, in the Enron State pension 
fund litigation the current short statute of limitations has forced 
some States to forgo claims against Enron based on securities fraud in 
1997 and 1998. In Washington State alone, the short statute of 
limitations may cost hard working State employees, firefighters and 
police officers nearly $50 million, lost Enron investments which they 
can never recover under current law.
  Especially in complex securities fraud cases, the current short 
statute of limitations may insulate the worst offenders from 
accountability. As Justices O'Connor and Kennedy said in their dissent 
in Lampf, Pleva, Lipkind, Prupis, & Petigrow v. Gilbertson, 111 S. Ct. 
2773 (1991), the 5-4 decision upholding this short statute of 
limitations in most securities fraud cases, the current ``one and 
three'' limitations period makes securities fraud actions ``all but a 
dead letter for injured investors who by no conceivable standard of 
fairness or practicality can be expected to file suit within 3 years 
after the violation occurred.'' The Consumers Union also strongly 
supports the bill, and views this section in particular as a needed 
measure to protect investors.

  The experts agree with that view. In fact, the last two SEC Chairmen 
supported extending the statute of limitations in securities fraud 
cases. Then Chairman Arthur Levitt testified before a Senate 
Subcommittee in 1995 that ``extending the statute of limitations is 
warranted because many securities frauds are inherently complex, and 
the law should not reward the perpetrator of a fraud, who successfully 
conceals its existence for more than 3 years.'' Before Chairman Levitt, 
in the last Bush administration, then SEC Chairman Richard Breeden also 
testified before Congress in favor of extending the statute of 
limitations in securities fraud cases. Reacting to the Lampf opinion, 
Breeden stated in 1991 that ``[e]vents only come to light years after 
the original distribution of securities, and the Lampf cases could well 
mean that by the time investors discover they have a case, they are 
already barred from the courthouse.'' Both the FDIC and the State 
securities regulators joined the SEC in calling for a legislative 
reversal of the Lampf decisions at that time.
  In fraud cases the short limitations period under current law is an 
invitation to take sophisticated steps to conceal the deceit. The 
experts have long agreed on that point, but unfortunately they have 
been proven right again. As we know from recent experience, it only 
takes a few seconds to warm up the shredder, but unfortunately it will 
take years for victims to put this complex case back together again. It 
is time that the law be changed to give victims the time they need to 
prove their fraud cases.
  Section 6 of this bill ensures that those who destroy evidence or 
perpetrate fraud are appropriately punished. It would require the 
United States Sentencing Commission, ``Commission'', to consider 
enhancing criminal penalties in cases involving the actual destruction 
or fabrication of evidence or in serious fraud cases where a large 
number of victims are injured or when the victims face financial ruin.
  Currently, the United States Sentencing Guidelines recognize that a 
wide variety of conduct falls under the offense of ``obstruction of 
justice.'' For obstruction cases involving the murder of a witness or 
another crime, the guidelines allow, by cross reference, significant 
enhancements based on the underlying crimes, such as murder or 
attempted murder. For cases where obstruction is the only offense, 
however, they provide little guidance on differentiating between 
different types of obstruction. This provision requests that the 
Sentencing Commission consider a specific enhancement in cases where 
evidence and records are actually destroyed or fabricated in order to 
thwart investigators, a serious form of obstruction.
  This provision, in subsections 3 and 4, also requires the Commission 
to consider enhancing the penalties in fraud cases which are 
particularly extensive or serious. The current fraud guidelines require 
the sentencing judge to take the number of victims into account, but 
only to a very limited degree in small and medium-sized cases. 
Specifically, once there are more than 50 victims, the guidelines do 
not require any further enhancement of the sentence, so that a case 
with 51 victims may be treated the same as a case with 5,000 victims. 
As the Enron matter demonstrates, serious frauds, especially in cases 
where publicly traded securities are involved, can effect thousands of 
victims. The Commission may well have not foreseen such extensive 
cases, and subsection 3 requires it to reconsider whether they merit an 
additional enhancement.
  In addition, current guidelines allow only very limited consideration 
of the extent of devastation that a fraud offense causes its victims. 
Judges may only consider whether a fraud endangers the ``solvency or 
financial security'' of a victim to impose an upward departure from the 
recommended sentencing range. It is not a factor in establishing the 
range itself unless a bank is the victim. Subsection 4 requires the 
Commission to consider requiring judges to consider the extent of the 
fraud in setting the actual recommended sentencing range in cases such 
as the Enron matter, where many private victims have lost their life 
savings.
  Section 7 of the bill would provide whistleblower protection to 
employees of publicly traded companies who report acts of fraud to 
Federal officials

[[Page S1788]]

with the authority to remedy the wrongdoing or to supervisors or 
appropriate individuals within their company. Although current law 
protects many government employees who act in the public interest by 
reporting wrongdoing, there is no similar protection for employees of 
publicly traded companies who blow the whistle on fraud and protect 
investors. With an unprecedented portion of the American public 
investing in these companies and depending upon their honesty, this 
distinction does not serve the public good.
  In addition, corporate employees who report fraud are subject to the 
patchwork and vagaries of current State laws, even though most publicly 
traded companies do business nationwide. Thus, a whistleblowing 
employee in one State may be far more vulnerable to retaliation than a 
fellow employee in another State who takes the same actions. 
Unfortunately, one thing that often transcends State lines, as we all 
know from the State tobacco litigation, are certain companies with a 
corporate culture that punishes whistleblowers for being ``disloyal'' 
and ``litigation risks.''
  Most corporate employers, with help from their lawyers, know exactly 
what they can do to a whistleblowing employee under the law. 
Unfortunately, Enron has supplied us with another grievous example of 
corporate conduct as shown by a recently released email from one of 
Enron's lawyers. The email responds to a request for legal advice after 
an Enron employee tried to report accounting irregularities at the 
highest levels of the company in late August, 2001:

       You asked that I include in this communication a summary of 
     the possible risks associated with discharging (or 
     constructively discharging) employees who report allegations 
     of improper accounting practices: 1. Texas law does not 
     currently protect corporate whistleblowers. The supreme court 
     has twice declined to create a cause of action for 
     whistleblowers who are discharged . . .

  This legal advice lays bare the fact that employees who do the 
``right thing'' are vulnerable to retaliation. After this high level 
employee at Enron reported improper accounting practices, Enron is not 
thinking about firing Arthur Andersen, they are considering discharging 
the whistle blower. No wonder that so many employees are scared to come 
forward. Our laws need to encourage and protect those who report 
fraudulent activity that damages investors in publicly traded 
companies. That is why this bill is supported by groups such as the 
National Whistleblower Center, the Government Accountability Project, 
and Taxpayers Against Fraud, who have written a letter calling this 
bill ``the single most effective measure possible to prevent 
recurrences of the Enron debacle and similar threats to the nation's 
financial markets.''

  This bill would create a new provision protecting employees when they 
take lawful acts to disclose information or otherwise assist criminal 
investigators, Federal regulators, Congress, their supervisors, or 
other proper people within a corporation, or parties in a judicial 
proceeding in detecting and stopping actions which they reasonably 
believe to be fraudulent. Since the only acts protected are ``lawful'' 
ones, the bill would not protect illegal actions, such as the improper 
public disclosure of trade secret information. In addition, a 
reasonableness test is also provided under the subsection (a)(1), which 
is intended to impose the normal reasonable person standard used and 
interpreted in a wide variety of legal contexts. See generally Passaic 
Valley Sewerage Commissioners v. Department of Labor, 992 F. 2d 474, 
478. Certainly, although not exclusively, any type of corporate or 
agency action taken based on the information or the information 
constituting admissible evidence would be strong indicia that it could 
support of such a reasonable belief. Under this bill's new protections, 
if the employer does take illegal action in retaliation for such lawful 
and protected conduct, subsection b allows the employee to elect to 
file an administrative complaint at the Department of Labor, as is the 
case for employees who provide assistance in airplane safety, or to 
bring a case in Federal court, with a jury trial available for an 
action at law. See United States Constitution, Amendment VII; Title 42 
United States Code, Section 1983.
  Subsection (c) of this section would require both reinstatement of 
the whistleblower, double backpay, and compensatory damages to make a 
victim whole. In severe cases, where the finder of fact determines that 
underlying fraud posed a substantial risk to the shareholders' or the 
general public's health, safety or welfare, punitive damages would be 
allowed in the discretion of the finder of fact based on a number of 
enumerated factors. The bill does not supplant or replace State law, 
but sets a national floor for employee protections in the context of 
publicly traded companies.
  Section 8 of the bill would create a new ten year felony under Title 
18 for defrauding shareholders of publicly traded companies. Currently, 
unlike bank fraud or health care fraud, there is no generally 
accessible statute dealing with the specific problem of securities 
fraud. In these cases, Federal investigators and prosecutors are forced 
either to resort to a patchwork of technical Title 15 offenses, which 
may criminalize particular violations of securities law, or to treat 
the cases as generic mail or wire fraud cases and to meet the technical 
elements of those statutes, with their 5 year maximum penalties.
  This bill, then, would create a new ten year felony for securities 
fraud, a more general and less technical provision comparable to the 
bank fraud and health care fraud statutes in Title 18. Specifically, it 
would add a provision to Chapter 63 of Title 18 which would criminalize 
the execution or attempted execution of a scheme or artifice to defraud 
persons in connection with securities of publicly traded companies or 
obtain their money or property. The provision would provide needed 
enforcement flexibility in the context of publicly traded companies to 
protect shareholders and prospective shareholders against all the types 
of schemes and frauds which inventive criminals may devise in the 
future.
  This bill can only be part of the needed response to the problems 
exposed by the Enron debacle. It is clear that changes are needed to 
restore accountability in our markets. As a lawyer and a former 
prosecutor I am appalled at the role that lawyers and accountants 
played in the Enron case. Instead of acting as gatekeepers who detect 
and deter fraud, it appears that Enron's accountants and lawyers 
brought all their skills and knowledge to bear in assisting the fraud 
to succeed and then in covering it up. We need to reconsider the 
incentive system that has been set up that encourages accountants and 
lawyers who come across fraud in their work to remain silent.
  Others have suggested that we restore aider and abettor liability to 
the law as it existed for almost five decades before the Supreme Court, 
in another 5-4 decision, took away the ability of private parties to 
sue aiders and abettors for securities fraud. I hope that Senators on 
the Banking Committee will seriously consider this change, which 
restores the ability to hold liable accountants and lawyers who 
knowingly or recklessly provide substantial assistance in perpetrating 
a fraud. Others have also proposed to restore joint and several 
liability in securities fraud cases so that fraud victims are not left 
empty handed watching the accountants, lawyers, and executives point 
fingers at each other, until they can blame everything on the one 
company that files for bankruptcy protection, like Enron, another 
change worth careful consideration. In short, we have to ask ourselves 
whether, as a nation, we have unintentionally stacked the deck against 
fraud victims. I think that we have, and we need to have the courage to 
admit it and reshuffle the cards to restore basic fairness.
  For all of these reasons, I am pleased to introduce the ``Corporate 
and Criminal Fraud Accountability Act of 2002.'' I look forward to 
working with members on both sides of the aisle to enact its provisions 
into law.
  I ask unanimous consent for this bill to be printed in the Record 
along with the sectional analysis and a copy of the entire e-mail 
document to which I referred as well as the letters of support which I 
have referenced.
  There being no objection, the materials were ordered to be printed in 
the Record, as follows:

[[Page S1789]]

                                S. 2010

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Corporate and Criminal Fraud 
     Accountability Act of 2002''.

     SEC. 2. CRIMINAL PENALTIES FOR ALTERING DOCUMENTS.

       (a) In General.--Chapter 73 of title 18, United States 
     Code, is amended by adding at the end the following:

     ``Sec. 1519. Destruction, alteration, or falsification of 
       records in Federal investigations and bankruptcy

       ``Whoever knowingly alters, destroys, mutilates, conceals, 
     covers up, falsifies, or makes a false entry in any record, 
     document, or tangible object with the intent to impede, 
     obstruct, or influence the investigation or proper 
     administration of any matter within the jurisdiction of any 
     department or agency of the United States or any case filed 
     under title 11, or in relation to or contemplation of any 
     such matter or case, shall be fined under this title, 
     imprisoned not more than 5 years, or both.

     ``Sec. 1520. Destruction of corporate audit records

       ``(a) Any accountant who conducts an audit of an issuer of 
     securities to which section 10A(a) of the Securities Exchange 
     Act of 1934 (15 U.S.C. 78j-1(a)) applies, shall maintain all 
     documents (including electronic documents) sent, received, or 
     created in connection with any audit, review, or other 
     engagement for such issuer for a period of 5 years from the 
     end of the fiscal period in which the audit, review, or other 
     engagement was concluded.
       ``(b) Whoever knowingly and willfully violates subsection 
     (a) shall be fined under this title, imprisoned not more than 
     5 years, or both.
       ``(c) Nothing in this section shall be deemed to diminish 
     or relieve any person of any other duty or obligation, 
     imposed by Federal or State law or regulation, to maintain, 
     or refrain from destroying, any document.''.
       (b) Clerical Amendment.--The table of sections at the 
     beginning of chapter 73 of title 18, United States Code, is 
     amended by adding at the end the following new items:

``1519. Destruction, alteration, or falsification of records in Federal 
              investigations and bankruptcy.
``1520. Destruction of corporate audit records.''.

     SEC. 3. ENHANCED ENFORCEMENT OF LAWS AFFECTING RACKETEER-
                   INFLUENCED AND CORRUPT ORGANIZATIONS.

       Section 1964 of title 18, United States Code, is amended--
       (1) in subsection (b), by inserting after ``The Attorney 
     General'' the following: ``, the Attorney General of any 
     State, or the Securities and Exchange Commission''; and
       (2) in subsection (d), by inserting before the period the 
     following: ``or any State''.

     SEC. 4. DEBTS NONDISCHARGEABLE IF INCURRED IN VIOLATION OF 
                   SECURITIES FRAUD LAWS.

       Section 523(a) of title 11, United States Code, is 
     amended--
       (1) in paragraph (17), by striking ``or'' after the 
     semicolon;
       (2) in paragraph (18), by striking the period at the end 
     and inserting ``; or''; and
       (3) by adding at the end, the following:
       ``(19) that--
       ``(A) arises under a claim relating to--
       ``(i) the violation of any of the Federal securities laws 
     (as that term is defined in section 3(a)(47) of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), any 
     State securities laws, or any regulations or orders issued 
     under such Federal or State securities laws; or
       ``(ii) common law fraud, deceit, or manipulation in 
     connection with the purchase or sale of any security; and
       ``(B) results, in relation to any claim described in 
     subparagraph (A), from--
       ``(i) any judgment, order, consent order, or decree entered 
     in any Federal or State judicial or administrative 
     proceeding;
       ``(ii) any settlement agreement entered into by the debtor; 
     or
       ``(iii) any court or administrative order for any damages, 
     fine, penalty, citation, restitutionary payment, disgorgement 
     payment, attorney fee, cost, or other payment owed by the 
     debtor.''.

     SEC. 5. STATUTE OF LIMITATIONS FOR SECURITIES FRAUD.

       (a) In General.--Section 1658 of title 28, United States 
     Code, is amended--
       (1) by inserting ``(a)'' before ``Except''; and
       (2) by adding at the end the following:
       ``(b) Notwithstanding subsection (a), a private right of 
     action that involves a claim of fraud, deceit, manipulation, 
     or deliberate or reckless disregard of a regulatory 
     requirement concerning the securities laws, as defined in 
     section 3(a)(47) of the Securities Exchange Act of 1934 (15 
     U.S.C. 78c(a)(47)), may be brought not later than the earlier 
     of--
       ``(1) 5 years after the date on which the alleged violation 
     occurred; or
       ``(2) 3 years after the date on which the alleged violation 
     was discovered.''.
       (b) Effective Date.--The limitations period provided by 
     section 1658(b) of title 28, United States Code, as added by 
     this section, shall apply to all proceedings addressed by 
     this section that are commenced on or after the date of 
     enactment of this Act.

     SEC. 6. REVIEW OF FEDERAL SENTENCING GUIDELINES FOR 
                   OBSTRUCTION OF JUSTICE AND EXTENSIVE CRIMINAL 
                   FRAUD.

       Pursuant to section 994 of title 28, United States Code, 
     and in accordance with this section, the United States 
     Sentencing Commission shall review and amend, as appropriate, 
     the Federal Sentencing Guidelines and related policy 
     statements to ensure that--
       (1) the guideline offense levels and enhancements for an 
     obstruction of justice offense are adequate in cases where 
     documents or other physical evidence are actually destroyed 
     or fabricated;
       (2) the guideline offense levels and enhancements for 
     violations of section 1519 or 1520 of title 18, United States 
     Code, as added by this Act, are sufficient to deter and 
     punish that activity;
       (3) the guideline offense levels and enhancements under 
     United States Sentencing Guideline 2B1.1 (as in effect on the 
     date of enactment of this Act) are sufficient for a fraud 
     offense when the number of victims adversely involved is 
     significantly greater than 50; and
       (4) a specific offense characteristic enhancing sentencing 
     is provided under United States Sentencing Guideline 2B1.1 
     (as in effect on the date of enactment of this Act) for a 
     fraud offense that endangers the solvency or financial 
     security of 1 or more victims.

     SEC. 7. PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES 
                   WHO PROVIDE EVIDENCE OF FRAUD.

       (a) In General.--Chapter 73 of title 18, United States 
     Code, is amended by inserting after section 1514 the 
     following:

     ``Sec. 1514A. Civil action to protect against retaliation in 
       fraud cases

       ``(a) Whistleblower Protection for Employees of Publicly 
     Traded Companies.--No company with securities registered 
     under section 6 of the Securities Act of 1933 (15 U.S.C. 77f) 
     or section 12 or 15(d) of the Securities Exchange Act of 1934 
     (15 U.S.C. 78l, 78o(d)), or any officer, employee, 
     contractor, subcontractor, or agent of such company, may 
     discharge, demote, suspend, threaten, harass, or in any other 
     manner discriminate against an employee in the terms and 
     conditions of employment because of any lawful act done by 
     the employee--
       ``(1) to provide information, cause information to be 
     provided, or otherwise assist in an investigation regarding 
     any conduct which the employee reasonably believes 
     constitutes a violation of section 1341, 1343, 1344, or 1348, 
     any rule or regulation of the Securities and Exchange 
     Commission, or any provision of Federal law relating to fraud 
     against shareholders, when the information or assistance is 
     provided to or the investigation is conducted by--
       ``(A) a Federal regulatory or law enforcement agency;
       ``(B) any Member of Congress or any committee of Congress; 
     or
       ``(C) a person with supervisory authority over the employee 
     (or such other person working for the employer who has the 
     authority to investigate, discover, or terminate misconduct); 
     or
       ``(2) to file, cause to be filed, testify, participate in, 
     or otherwise assist in a proceeding filed or about to be 
     filed (with any knowledge of the employer) relating to an 
     alleged violation of section 1341, 1343, 1344, or 1348, any 
     rule or regulation of the Securities and Exchange Commission, 
     or any provision of Federal law relating to fraud against 
     shareholders.
       ``(b) Election of Action.--
       ``(1) In general.--A person who alleges discharge or other 
     discrimination by any person in violation of subsection (a) 
     may seek relief under subsection (c), by--
       ``(A) filing a complaint with the Secretary of Labor; or
       ``(B) bringing an action at law or equity in the 
     appropriate district court of the United States.
       ``(2) Procedure.--
       ``(A) In general.--An action under paragraph (1)(A) shall 
     be governed under the rules and procedures set forth in 
     section 42121(b) of title 49, United States Code.
       ``(B) Exception.--Notification made under section 
     42121(b)(1) of title 49, United States Code, shall be made to 
     the person named in the complaint and to the employer.
       ``(C) Burdens of proof.--An action brought under paragraph 
     (1)(B) shall be governed by the legal burdens of proof set 
     forth in section 42121(b) of title 49, United States Code.
       ``(D) Statute of limitations.--An action under paragraph 
     (1) shall be commenced not later than 180 days after the date 
     on which the violation occurs.
       ``(c) Remedies.--
       ``(1) In general.--An employee prevailing in any action 
     under subsection (b)(1) (A) or (B) shall be entitled to all 
     relief necessary to make the employee whole.
       ``(2) Compensatory damages.--Relief for any action under 
     paragraph (1) shall include--
       ``(A) reinstatement with the same seniority status that the 
     employee would have had, but for the discrimination;
       ``(B) 2 times the amount of back pay, with interest; and
       ``(C) compensation for any special damages sustained as a 
     result of the discrimination, including litigation costs, 
     expert witness fees, and reasonable attorney fees.
       ``(3) Punitive damages.--
       ``(A) In general.--In a case in which the finder of fact 
     determines that the protected conduct of the employee under 
     subsection (a)

[[Page S1790]]

     involved a substantial risk to the health, safety, or welfare 
     of shareholders of the employer or the public, the finder of 
     fact may award punitive damages to the employee.
       ``(B) Factors.--In determining the amount, if any, to be 
     awarded under this paragraph, the finder of fact shall take 
     into account--
       ``(i) the significance of the information or assistance 
     provided by the employee under subsection (a) and the role of 
     the employee in advancing any investigation, proceeding, 
     congressional inquiry or action, or internal remedial 
     process, or in protecting the health, safety, or welfare of 
     shareholders of the employer or of the public;
       ``(ii) the nature and extent of both the actual and 
     potential discrimination to which the employee was subjected 
     as a result of the protected conduct of the employee under 
     subsection (a); and
       ``(iii) the nature and extent of the risk to the health, 
     safety, or welfare of shareholders or the public under 
     subparagraph (A).
       ``(d) Rights Retained by Employee.--
       ``(1) Other remedies unaffected.--Nothing in this section 
     shall be deemed to diminish the rights, privilege, or 
     remedies of any employee under any Federal or State law, or 
     under any collective bargaining agreement.
       ``(2) Voluntary adjudication.--No employee may be compelled 
     to adjudicate his or her rights under this section pursuant 
     to an arbitration agreement.''.
       (b) Clerical Amendment.--The table of sections at the 
     beginning of chapter 73 of title 18, United States Code, is 
     amended by inserting after the item relating to section 1514 
     the following new item:

``1514A. Civil action to protect against retaliation in fraud cases.''.

     SEC. 8. CRIMINAL PENALTIES FOR DEFRAUDING SHAREHOLDERS OF 
                   PUBLICLY TRADED COMPANIES.

       (a) In General.--Chapter 63 of title 18, United States 
     Code, is amended by adding at the end the following:

     ``Sec. 1348. Securities fraud

       ``Whoever knowingly executes, or attempts to execute, a 
     scheme or artifice--
       ``(1) to defraud any person in connection with any security 
     registered under section 12 or 15(d) of the Securities 
     Exchange Act of 1934 (15 U.S.C. 78l, 78o(d)) or section 6 of 
     the Securities Act of 1933 (15 U.S.C. 77f); or
       ``(2) to obtain, by means of false or fraudulent pretenses, 
     representations, or promises, any money or property in 
     connection with the purchase or sale of any security 
     registered under section 12 or 15(d) of the Securities 
     Exchange Act of 1934 (15 U.S.C. 78l, 78o(d)) or section 6 of 
     the Securities Act of 1933 (15 U.S.C. 77f),

     shall be fined under this title, or imprisoned not more than 
     10 years, or both.''.
       (b) Clerical Amendment.--The table of sections at the 
     beginning of chapter 63 of title 18, United States Code, is 
     amended by adding at the end the following new item:

``1348. Securities fraud.''.
                                  ____


Sectional Analysis: Corporate and Criminal Fraud Accountability Act of 
                                  2002

     Section 1. Title.
       ``Corporate and Criminal Fraud Accountability Act.''
     Section 2. Criminal Penalties for Altering, Destroying, or 
         Failing to Maintain Documents
       This section provides two new criminal statutes which would 
     clarify and plug holes in the current criminal laws relating 
     to the destruction or fabrication of evidence, including the 
     shredding of financial and audit records. Currently, those 
     provisions are a patchwork which have been interpreted in 
     often limited ways in federal court. For instance, certain of 
     the current provisions make it a crime to persuade another 
     person to destroy documents, but not a crime to actually 
     destroy the same documents yourself. Other provisions have 
     been narrowly interpreted by courts, including the Supreme 
     Court in United States v. Aguillar, 115 S. Ct. 593 (1995), to 
     apply only to situations where the obstruction of justice can 
     be closely tied to a pending judicial proceeding.
       First, this section would create a new 5 year felony which 
     could be effectively used in a wide array of cases where a 
     person destroys or creates evidence with the specific intent 
     to obstruct a federal agency or a criminal investigation. 
     Second, the section creates another 5 year felony which 
     applies specifically to the willful failure to preserve audit 
     papers of companies that issue securities.
     Section 3. Amendment to Improve Enforcement of Civil RICO
       This section proposes an amendment to the civil RICO 
     provision found at 18 U.S.C. Section 1964 which would enhance 
     the abilities of federal and state regulators to enforce 
     existing law by giving State Attorneys General and the 
     Securities and Exchange Commission, SEC, explicit authority 
     to bring a suit under the civil RICO provisions. Currently, 
     only the Attorney General has such authority under RICO.
     Section 4. Bankruptcy
       This provision would amend the Federal bankruptcy code to 
     make judgments and settlements arising from state and federal 
     securities law violations brought by state or federal 
     regulators and private individuals non-dischargeable. Current 
     bankruptcy law may permit wrongdoers to discharge their 
     obligations under court judgments or settlements based on 
     securities fraud and securities law violations. This loophole 
     in the law should be closed to help defrauded investors 
     recoup their losses and to hold accountable those who 
     perpetrate securities fraud.
     Section 5. Statute of Limitations
       This section would set the statute of limitations in 
     private securities fraud cases to the earlier of 5 years 
     after the date of the fraud or three years after the fraud 
     was discovered. The current statute of limitations for 
     private securities fraud cases is the earlier of three 
     years from the date of the fraud or one year from the date 
     of discovery. In the Enron state pension fund litigation, 
     the current short statute of limitations has forced some 
     states to forgo claims against Enron based on securities 
     fraud in 1997 and 1998. Victims of securities fraud should 
     have a reasonable time to discover the facts underlying 
     the fraud.
       The Supreme Court, in Lampf v. Gilbertson, 501 U.S. 350 
     (1991), endorsed the current short statute of limitations for 
     securities fraud in a 5-4 decision. Justices O'Connor and 
     Kennedy wrote in their dissent in the Lampf decison: ``By 
     adopting a 3-year period of repose, the Court makes a 
     Sec. 10(b) action all but a dead letter for injured investors 
     who by no conceivable standard of fairness or practicality 
     can be expected to file suit within three years after the 
     violation occurred. In so doing, the Court also turns its 
     back on the almost uniform rule rejecting short periods of 
     repose for fraud-based actions.''
     Section 6. Review and Enhancement of Criminal Sentences in 
         Cases of Fraud and Evidence Destruction
       This section would require the United States Sentencing 
     Commission, ``Commission'', to consider enhancing criminal 
     penalties in cases involving the actual destruction or 
     fabrication of evidence or in fraud cases in which a large 
     number of victims are injured or when the injury to the 
     victims is particularly grave, i.e. they face financial ruin.
       This provision first requires the Commission to consider 
     sentencing enhancements in obstruction of justice cases where 
     physical evidence was actually destroyed. The provision, in 
     subsections 3 and 4, also requires the Commission to consider 
     sentencing enhancements for fraud cases which are 
     particularly extensive or serious. Specifically, once there 
     are more than 50 victims, the current guidelines do not 
     require any further enhancement of the sentence, so that a 
     case with 51 victims may be treated the same as a case with 
     5,000 victims. In addition, current guidelines allow only 
     very limited consideration of the extent of financial 
     devastation that a fraud offense causes to private victims. 
     This section corrects both these problems.
     Section 7. Whistleblower Protection for Employees of Publicly 
         Traded Companies
       This section would provide whistleblower protection to 
     employees of publicly traded companies, similar to those 
     currently available to many government employees. It 
     specifically protects them when they take lawful acts to 
     disclose information or otherwise assist criminal 
     investigators, federal regulators, Congress, supervisors (or 
     other proper people within a corporation), or parties in a 
     judicial proceeding in detecting and stopping fraud. Since 
     the bill's provisions only apply to ``lawful'' actions by an 
     employee, it does not protect employees from improper and 
     unlawful disclosure of trade secrets. In addition, a 
     reasonableness test is also set forth under the information 
     providing subsection of this section, which is intended to 
     impose the normal reasonable person standard used and 
     interpreted in a wide variety of legal contexts. See 
     generally Passaic Valley Sewerage Commissioners v. Department 
     of Labor, 992 F. 2d 474, 478. Certainly, although not 
     exclusively, any type of corporate or agency action taken 
     based on the information, or the information constituting or 
     leading to admissible evidence would be strong indicia that 
     it could support of such a reasonable belief. If the employer 
     does take illegal action in retaliation for lawful and 
     protected conduct, subsection (b) allows the employee to 
     elect to file an administrative complaint or to bring a case 
     in federal court, with a jury trial available in cases where 
     the case is an action at law. See United States Constitution, 
     Amendment VII; Title 42 United States Code, Section 1983. 
     Subsection (c) would require both reinstatement of the 
     whistleblower, double backpay, compensatory damages to make a 
     victim whole, and would allow punitive damages in extreme 
     cases where the public's health, safety or welfare was at 
     risk.
     Section 8. Criminal Penalties for Securities Fraud
       This provision would create a new 10 year felony for 
     defrauding shareholders of publicly traded companies. The 
     provision would supplement the patchwork of existing 
     technical securities law violations with a more general and 
     less technical provision, comparable to the bank fraud and 
     health care fraud statutes. The provision would be more 
     accessible to investigators and prosecutors and would provide 
     needed enforcement flexibility and, in the context of 
     publicly traded companies, protection against all the types 
     schemes and frauds which inventive criminals may devise in 
     the future.

[[Page S1791]]

     
                                  ____
         Vermont Department of Banking, Insurance, Securities and 
           Health Care Administration,
                                    Montpelier, VT, March 8, 2002.
     Senator Patrick Leahy,
     Russell Senate Office Building,
     U.S. Senate, Washington, DC.
       Dear Senator Leahy: Your staff recently forwarded a copy of 
     a bill you intend to introduce entitled, ``Corporate and 
     Criminal Fraud Accountability Act of 2002''. I read your 
     proposed legislation with special interest, as I am a trustee 
     of the Vermont State Teachers' Retirement Board. That system 
     recently experienced some losses due to its investment in 
     Enron, as did the other state retirement systems.
       I believe that your bill will have a significant and 
     positive effect on how we investigate and punish those 
     involved in cases of corporate and criminal fraud. The 
     provision of your bill making judgments arising from state 
     and federal securities law violations non-dischargeable under 
     the federal bankruptcy code is particularly welcome. This 
     improvement in the law would materially improve the ability 
     of defrauded investors to recoup their losses. I also support 
     your proposed expansion of the statute of limitations in 
     private securities fraud cases. This longer statute of 
     limitations will result in investors, including state 
     retirement funds, enjoying a more level playing field when 
     they are defrauded by complex schemes that they could not 
     reasonably be expected to discover within the current three 
     year period.
       I also support the provisions in the bill to clarify the 
     criminal laws concerning the destruction or fabrication of 
     evidence and the enhancement of criminal sentences in cases 
     of fraud and destruction of evidence. As the agency charged 
     with examining financial institutions, the integrity of 
     records is essential to our ability to do our jobs. Clear 
     federal laws and increased criminal penalties will provide 
     powerful deterrents to evidence destruction and securities 
     fraud. I also support the expansion of civil RICO to allow 
     state attorney generals and the SEC to bring civil RICO 
     suits.
       Please let me know if I can be of any further assistance on 
     this legislation.
           Sincerely,
                                                 Elizabeth Costle,
     Commissioner.
                                  ____



                                National Whistleblower Center,

                                   Washington, DC, March 11, 2002.
     Senator Patrick Leahy,
     Chairman, Senate Judiciary Committee, Dirksen Senate Office 
         Building, Washington, DC.
       Dear Chairman Leahy: Since 1988 the National Whistleblower 
     Center has aided or defended hundreds of employees who have 
     disclosed fraud and criminal activities within the public and 
     private sectors. During this time we have become painfully 
     aware of the major loopholes which often leave courageous 
     employees without any legal protection. One of the most 
     notorious loopholes exists under the securities laws, in 
     which employees who report fraud upon stockholders have no 
     protection under federal law. It is truly tragic that 
     employees who are wrongfully discharged merely for reporting 
     violations of law, which may threaten the integrity of 
     pension funds or education-based savings accounts, have no 
     federal protection. This point was made perfectly clear by 
     the recently released internal memorandum from attorneys for 
     Enron. According to Enron's own counsel, employees who raised 
     concerns over that company's accounting practices had no 
     protection under federal law and could be fired.
       With this background in mind, the National Whistleblower 
     Center strongly commends you for introducing the Corporate 
     and Criminal Fraud Accountability Act of 2002. This law would 
     protect employees who disclose Enron-related fraud to the 
     appropriate authorities. It is modeled on the airline safety 
     whistleblower law, which overwhelmingly passed Congress with 
     strong bi-partisan support. The next time a company like 
     Enron seeks advice from counsel as to whether they can fire 
     an employee, like Sharon Watkins, who merely discloses 
     potential fraud on shareholders, the answer must be a 
     resounding ``no.'' That can only happen if the Corporate and 
     Criminal Fraud Accountability Act is enacted into law.
           Respectfully submitted,
     Stephen M. Kohn,
       Chairman of the Board of Directors.
     Kris Kolesnik,
       Executive Director.
                                  ____

         Government Accountability Project and Taxpayers Against 
           Fraud,
                                   Washington, DC, March 11, 2002.
     Hon. Patrick Leahy,
     Chair, Senate Judiciary Committee, Dirksen Senate Office 
         Building, Washington, DC.
       Dear Senator Leahy: Thank you for your leadership in 
     introducing the Corporate Fraud and Criminal Accountability 
     Act of 2002. This is a landmark proposal, for which we offer 
     our complete support. The bill promises to make whistleblower 
     protection the rule rather than the exception for those 
     challenging betrayals of corporate fiduciry duty enforced by 
     the Securities and Exchange Commission. It would be the 
     single most effective measure possible to prevent recurrences 
     of the Enron debacle and similar threats to the nation's 
     financial markets, shareholders and pension holders. It also 
     would be a breakthrough in implementing recommendations 
     pending since 1985 by the Administrative Conference of the 
     United States for a consistent, coherent system of corporate 
     whistleblower protection.
       The Government Accountability Project (GAP) is a nonprofit, 
     nonpartisan public interest law firm dedicated since 1976 to 
     helping whistleblowers, those employees who exercise freedom 
     of speech to bear witness against betrayals of public trust 
     that they discover on the job. GAP has led the campaign for 
     passage of nearly all federal whistleblower laws over the 
     last two decades, as well as a model law approved by the 
     Organization of American States to implement its Inter-
     American Convention Against Corruption. Two decades of 
     lessons learned are summarized in GAP's book The 
     Whistleblower's Survival Guide: Courage Without Martyrdom. 
     Taxpayers Against Fraud, The False Claims Act Legal Center 
     (TAF) is a nonprofit, nonpartisan public interest 
     organization dedicated to combating fraud against the Federal 
     Government through the promotion and use of the federal False 
     Claims Act and its qui tam whistleblower provisions. TAF 
     supports effective anti-fraud legislation at the federal and 
     state level and, as part of its educational outreach, 
     publishes the False Claims Act and Qui Tam Quarterly Review.
       This bill is outstanding good goverenment legislation. It 
     uses the best combination of provisions that have proven 
     effective in other contexts. It has the modern burdens of 
     proof in the Whistleblower Protection Act of 1989, and offers 
     choices of forum that virtually guarantee whistleblowers will 
     have a fair day in court. Most significant, it closes the 
     loopholes that have meant whistleblowers proceed at their own 
     risk when warning Congress, shareholders or even their own 
     management or Board Audit Committees of financial misconduct 
     threatening the health both of their own company and, in some 
     cases, the nation's economy. You have our unqualified pledge 
     of helping to finish the public service you started by 
     introducing this legislation.
           Sincerely,
     Jim Moorman,
       Executive Director, TAF.
     Tom Devine,
       Legal Director, GAP.
                                  ____

         North American Securities Administrators Association, 
           Inc.,
                                    Washington, DC, March 5, 2002.
     Hon. Patrick J. Leahy,
     Chairman, Senate Judiciary Committee,
     Washington, DC.
       Dear Mr. Chairman: The North American Securities 
     Administrators Association, Inc., (NASAA), organized in 1919, 
     is the oldest international organization devoted to investor 
     protection. Its membership consists of the securities 
     administrators in the 50 states, the District of Columbia, 
     Canada, Mexico and Puerto Rico. NASAA is the voice of 
     securities agencies responsible for grass-roots investor 
     protection and efficient capital formation.
       NASAA members collectively bring thousands of enforcement 
     actions against violators of securities laws in an effort to 
     protect investors from fraud and abuse in connection with the 
     offer and sale of securities.
       We have reviewed a draft of the Corporate and Criminal 
     Fraud and Accountability Act of 2002, and we support it. Our 
     focus is on the section that would prevent the discharge of 
     certain debts in bankruptcy proceedings. At the present time, 
     the bankruptcy code enables defendants who are guilty of 
     fraud and other securities violations to thwart enforcement 
     of the judgments and other awards that are issued in these 
     cases.
       We support Section 4, as drafted, because it strengthens 
     the ability of regulators and individual investors to prevent 
     the discharge of certain debts and hold defendants 
     financially responsible for violations of securities laws. 
     This issue is of great interest to state securities 
     regulators, and we commend you for addressing it in the 
     proposed legislation.
       NASAA and its members are prepared to work with you as the 
     legislative process continues. We support your effort to 
     enhance the ability of state and federal regulators to help 
     defrauded investors recoup their losses and to hold 
     accountable those who perpetuate securities fraud.
           Sincerely,

                                               Joseph P. Borg,

                                      NASAA President, Director of
     Alabama Securities Commission.
                                  ____

     From: Jordan, Carl.
     Sent: Friday, August 24, 2001 7:02 PM.
     To: Butcher, Sharon (Enron).
     Subject: Confidential Employee Matter.

                Attorney Client Privileged Communication

       Sharon: Per your request, the following are some bullet 
     thoughts on how to manage the situation with the employee who 
     made the sensitive report.
       1. I agree that it is a positive that she has requested 
     reassignment to another department. Assuming a suitable 
     position can be found, I recommend documenting in memo form 
     that the transfer is being effected per her request. This 
     would be worded to convey that the company has considered and 
     decided to accommodate her request for reassignment. See 
     comments below re additional items to be addressed in the 
     memo.
       2. I suggest that the memo also name a designated company 
     officer for her to contact in the unlikely future event that 
     she believes she is being retaliated against for having made 
     the report. Case law suggests that she then will have the 
     burden of reporting

[[Page S1792]]

     any perceived retaliation and allowing the company a 
     reasonable opportunity to correct it before quitting and 
     asserting a constructive discharge. (Note: If there is any 
     chance that the decision might be made in the future to 
     discharge the employee for making the report--e.g., if the 
     company concludes that the allegations were not made in good 
     faith--then this assurance probably should not be given, at 
     least until later when (if) the company is satisfied that the 
     employee was not acting in bad faith or otherwise 
     improperly.)
       3. The memo should contain language that conveys that the 
     other terms of her employment--specifically, its at-will 
     status--remains unchanged. This is to avoid any future claim 
     that the understandings surrounding the transfer constitute a 
     contractual obligation of some sort.
       4. The new position, as we discussed, should have 
     responsibilities and compensation comparable to her current 
     one, to avoid any claim of constructive discharge.
       5. As we discussed, to the extent practicable, the fact 
     that she made the report should be treated as confidential.
       6. The individual or individuals who are implicated by her 
     allegations should be advised to treat the matter 
     confidentially and to use discretion regarding any comments 
     to or about the complaining employee. They should be advised 
     that she is not to be treated adversely in any way for having 
     expressed her concerns.
       7. You indicated that the officer in charge of the area to 
     which the employee may be reassigned would probably need to 
     be advised of the circumstances. I suggest he be advised at 
     the same time that it is important that she not be treated 
     adversely or differently because she made the report. And 
     that the circumstances of the transfer are confidential and 
     should not be shared with others.
       You also asked that I include in this communication a 
     summary of the possible risks associated with discharging (or 
     constructively discharging) employees who report allegations 
     of improper accounting practices:
       1. Texas law does not currently protect corporate 
     whistleblowers. The supreme court has twice declined to 
     create a cause of action for whistleblowers who are 
     discharged; however, there were special factors present in 
     both cases that weighed against the plaintiffs and the court 
     implied that it might reach a different conclusion under 
     other circumstances.
       2. Regardless of the whistleblower issue, there is often a 
     risk of a Sabine Pilot claim (i.e., allegation of discharge 
     for refusing to participate in an illegal act). Whistleblower 
     cases in Texas commonly are pled or repled as Sabine Pilot 
     claims--it is often an easy leap for the plaintiff to make if 
     she had any involvement in or duties relating to the alleged 
     improper conduct. For example, some cases say that if an 
     employee's duties involve recording accounting data that she 
     knows to be misleading onto records that are eventually 
     relied on by others in preparing reports to be submitted to a 
     federal agency (e.g., SEC, IRS, etc.), then the employee can 
     be subject to criminal prosecution even tho she did not 
     originated the misleading data and does not prepare the 
     actual document submitted to the government. Under such 
     circumstances, if the employee alleges that she was 
     discharged for refusing to record (or continuing the practice 
     of recording) the allegedly misleading data, then she has 
     stated a claim under the Sabine Pilot doctrine.
       3. As we discussed, there are a myriad of problems 
     associated with Sabine Pilot claims, regardless of their 
     merits, that involve allegations of illegal accounting or 
     related practices. One is that the company's accounting 
     practices and books and records are fair game during 
     discovery--the opposition typically will request production 
     of volumes of sensitive material. Another problem is that 
     because accounting practices often involve judgments in gray 
     areas, rather than non-judgmental applications of black-
     letter rules, there are often genuine disputes over whether a 
     company's practice or a specific report was materially 
     misleading or complied with some statutory or regulatory 
     requirements. Third, these are typically jury cases--that 
     means they are decided by lay persons when the legal 
     compliance issues are often confusing even to the lawyers and 
     experts. Fourth, because of the above factors, they are very 
     expensive and time consuming to litigate.
       4. In addition to the risk of a wrongful discharge claim, 
     there is the risk that the discharged employee will seek to 
     convince some government oversight agency (e.g., IRS, SEC, 
     etc.) that the corporation has engaged in materially 
     misleading reporting or is otherwise non-compliant. As with 
     wrongful discharge claims, this can create problems even tho 
     the allegations have no merit whatsoever.
       These are, of course, very general comments. I will be 
     happy to discuss them in greater detail at your convenience.

                          ____________________