[Congressional Record Volume 149, Number 59 (Friday, April 11, 2003)]
[Senate]
[Pages S5325-S5331]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




   LEGISLATIVE HISTORY OF TITLE IX OF THE SARBANES-OXLEY ACT OF 2002

  Mr. BIDEN. Madam President, I rise today to offer the following 
section-by-section analysis of Title IX of the ``Sarbanes-Oxley Act of 
2002,'' P.L. 107-204, of which I was the primary author along with my 
good friend from Utah, Senator Hatch. Title IX was derived

[[Page S5326]]

from S. 2717, the ``White-Collar Crime Penalty Enhancement Act of 
2002,'' which I introduced with Senator Hatch on July 10, 2002. That 
same day, Senator Hatch and I offered the text of S. 2717 as a floor 
amendment to the Public Company Accounting Reform and Investment 
Protection Act of 2002, S. 2673. Our amendment was unanimously adopted 
by the Senate on July 10, 2002, by a 96-0 vote. S. 2673 was 
overwhelmingly approved, as amended with the inclusion of S. 2717, on 
July 15, 2002, by a vote of 97-0. S. 2673 then went to a House-Senate 
conference. The Biden-Hatch amendment was retained in the final 
conference report as Title IX, and in substantially identical form to 
that in S. 2673. The conference report, the Sarbanes-Oxley Act, H.R. 
3763, was passed by the Senate on July 25, 2002, by a 99-0 vote. The 
President signed the Sarbanes-Oxley Act into law on July 30, 2002.
  As I mentioned, Title IX of the Sarbanes-Oxley Act, entitled the 
``White-Collar Crime Penalty Enhancement Act of 2002,'' closely mirrors 
the original S. 2717. In order to provide guidance in the legal 
interpretation of these provisions, I have compiled the following 
analysis and discussion, which are intended to augment, and not 
supplant, the legislative history and explanatory statements that 
accompanied passage of H.R. 3763. This legislative history is intended 
also to supplement my remarks at the time of the Sarbanes-Oxley Act's 
final passage. See S7426-S7425 (July 26, 2002). I ask unanimous consent 
that this section-by-section analysis be included in the Congressional 
Record as part of the official legislative history of these provisions.
  The content of Title IX was developed partly in response to a series 
of white-collar crime hearings I held in my capacity as Chairman of the 
Senate Judiciary Subcommittee on Crime and Drugs. Through those 
hearings, the subcommittee heard from a wide range of witnesses with 
expertise in both corporate law and white-collar crime--including 
current and former high-ranking officials from the United States 
Securities and Exchange Commission (SEC), the United States Departments 
of Justice and Treasury, and the Federal Reserve; business and law 
professors; corporate practitioners; as well as victims of corporate 
fraud.
  The first hearing, held on June 19, 2002, focused on the disparity in 
sentences between white-collar offenses, including pension fraud, and 
federal ``street crimes'' like car theft. Specifically, the hearing 
explored four broad areas: it focused on the human consequences of 
white-collar crimes; defined and quantified the problem, including an 
evaluation of the use of the criminal sanction against white-collar 
criminals and the severity of penalties typically imposed; explored the 
reasons that might explain the lighter sentences that white-collar 
offenders often receive; and discussed recent amendments to the federal 
sentencing guidelines that purport to address the historic, disparate 
treatment of economic crimes. The first-panel witnesses included 
Charles Prestwood, a retiree who lost his retirement savings in the 
bankruptcy of the Enron Corporation; Janice Farmer, a retiree who 
similarly lost her retirement savings in the Enron bankruptcy; and 
Howard Deputy, a former employee of the Metachem Company in Delaware 
who was at risk of losing a portion of his pension in Metachem's 
bankruptcy. The second-panel witnesses included James B. Comey, United 
States Attorney for the Southern District of New York; Glen B. Gainer, 
Chairman of the Board of Directors of the National White Collar Crime 
Center and West Virginia State Auditor; Bradley Skolnik, Chief of the 
Enforcement Section of the North American Securities Administrators 
Association and Securities Commissioner for the State of Indiana; Frank 
O. Bowman, Associate Law Professor at the University of Indiana School 
of Law; and Paul Rosenzweig, Senior Legal Research Fellow at the 
Heritage Foundation.
  The second hearing, held on July 10, 2002, also addressed the 
adequacy of criminal penalties for white-collar crimes and evaluated 
the use of the criminal sanction to deter wrongdoing and encourage 
corporate responsibility. We were particularly interested in learning 
whether the current federal criminal law, as opposed to civil 
enforcement mechanisms, was sufficient to address the range of 
corporate scandals that were then unfolding. Specifically, the hearing 
addressed the issue through the lense of the recent accounting 
scandals--exploring the pattern of corporate irresponsibility and the 
cultural and economic conditions that made the scandals possible; the 
impact of the scandals on investor confidence and economic health; and 
the need for investor protection and anti-fraud legislation which 
includes stiffened criminal penalties. The first-panel witnesses 
included Michael Chertoff, Assistant Attorney General for the Criminal 
Division at the United States Department of Justice; and William W. 
Mercer, United States Attorney for the District of Montana and head of 
the United States Attorneys' White-Collar Crime Working Group. The 
second-panel witnesses included John C. Coffee, Jr., Adolf A. Berle 
Professor of Law at Columbia University School of Law; Thomas 
Donaldson, Mark O. Winkelman Professor at the Wharton School of 
Business at the University of Pennsylvania; Charles M. Elson, Edgar S. 
Woolard, Jr. Chair at the Center for Corporate Governance at the 
University of Delaware; George Terwilliger, former Deputy Attorney 
General at the United States Department of Justice; and Tom Devine, 
Legal Director at the Government Accountability Project.
  The third hearing, held on July 24, 2002, continued the discussion 
initiated in the earlier hearings and featured three former, high-
ranking officials in the Executive Branch who commented on a host of 
suggested reforms--including S. 2717 which, by that time, had been 
amended to the Senate precursor to the Sarbanes-Oxley Act (the Public 
Company Accounting Reform and Investment Protection Act of 2002, S. 
2673). The witnesses included G. William Miller, former Secretary of 
the Treasury under President Carter and former Chairman of the Federal 
Reserve Board; Roderick Hills, former Chairman of the Securities and 
Exchange Commission under President Ford; and James Doty, former 
General Counsel to the Securities and Exchange Commission and head of 
the corporate and securities practice at Baker Botts LLP.
  On a final note, the legislation was introduced and subsequently 
enacted against the backdrop of the Sentencing Commission's ongoing 
efforts in the area of economic crime. We are aware of the ``Economic 
Crime Package,'' which was approved by the Commission in April 2001 and 
went into effect in November 2001. These amendments to the federal 
sentencing guidelines consolidated the guidelines for theft, property 
destruction, and fraud offenses; revised the definition of ``loss,'' 
which largely informs the range of sentencing available for an offense; 
increased penalties for offenses involving moderate and high-dollar 
losses and reduced penalties on some lower-level offenses; and revised 
the loss table for tax offenses to provide for higher penalty levels 
for offenses involving moderate and high tax losses. Title IX was 
developed and enacted with full awareness of these new amendments to 
the guidelines.
  I ask unanimous consent that the section-by-section analysis be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

Section-By-Section Analysis and Discussion of the ``White-Collar Crime 
       Penalty Enhancements Act of 2002'' (Title IX of H.R. 3763)

     Section 901. Short Title
       This section designates this title of the Act as the 
     ``White-Collar Crime Penalty Enhancement Act of 2002.''
     Section 902. Attempts and Conspiracies To Commit Criminal 
         Fraud Offenses
       This section adds a new provision to the United States Code 
     (18 U.S.C. Sec. 1349), which indicates that any person who 
     attempts or conspires to commit a fraud offense under Chapter 
     63 of Title 18 (in other words, 18 U.S.C. Sec. Sec. 1341-
     1348) shall face the same penalties as those provided for in 
     the predicate, or underlying, offense that was the object of 
     the attempt or the conspiracy. (While 18 U.S.C. Sec. 2 
     currently provides for the same penalties for aiding and 
     abetting offenses as the predicate crimes, prosecution under 
     that section requires the government to prove some 
     affirmative act by the defendant. In contrast, prosecution 
     under Section 902 requires no affirmative act, but only an 
     agreement to commit a future crime, as is the case with 18 
     U.S.C. Sec. 371.)
       During hearings by the Judiciary Subcommittee on Crime and 
     Drugs on the ``penalty gap'' between white-collar offenses 
     and

[[Page S5327]]

     other federal crimes, we observed that defendants charged 
     with conspiracy pursuant to 18 U.S.C. Sec. 371 were afforded 
     a potential windfall in terms of their sentence, vis-a-vis 
     their co-defendants who were convicted of the actual 
     offenses. That windfall resulted because the charge of 
     conspiracy under Section 371 only subjects a convicted 
     individual to a maximum imprisonment term of 5 years. In 
     contrast, certain fraud offenses in Chapter 63 carry maximum 
     penalties of up to 30 years imprisonment, e.g., 18 U.S.C. 
     Sec. 1344 (imposing up to 30 years imprisonment for bank 
     fraud). In the case of a particularly egregious bank fraud 
     case, then, one co-defendant could receive a 30-year sentence 
     while an equally culpable co-conspirator would receive only a 
     5-year sentence.
       Congress responded by creating a new Section 1349 for 
     defendants who attempt or conspire to commit a financial 
     fraud under Chapter 63 of Title 18. The Justice Department 
     may now elect to charge a fraud conspirator under this new 
     section, rather than pursuant to 18 U.S.C. Sec. 371, thereby 
     preserving the same maximum penalties. In enacting this new 
     section, we harmonize the penalties for financial fraud 
     conspiracy with those of narcotics offenses. See 21 U.S.C. 
     Sec. 846 (``[a]ny person who attempts or conspires to commit 
     any [narcotics] offense defined in this subchapter shall be 
     subject to the same penalties as those prescribed for the 
     offense, the commission of which was the object of the 
     attempt or conspiracy.'')
     Section 903. Criminal Penalties for Mail and Wire Fraud
       This section increases the potential maximum term of 
     imprisonment available upon conviction for mail fraud (18 
     U.S.C. Sec. 1341) or wire fraud (18 U.S.C. Sec. 1343) from 5 
     years to 20 years. Fraud affecting financial institutions in 
     both Sections 1341 and 1343 of Title 18 is unaffected by this 
     section, so the potential maximum term of imprisonment for 
     this offense remains 30 years.
       By raising the criminal penalties for Sections 1341 and 
     1343, we intended to harmonize the penalties for mail and 
     wire fraud with the penalties for other serious financial 
     crimes. See, e.g., 18 U.S.C. Sec. 1348 (25-year maximum 
     penalty for securities fraud); 18 U.S.C. Sec. 1956(a)(3)(A) 
     (20-year maximum penalty for money laundering); 18 U.S.C. 
     1962 (20-year maximum penalty for racketeering). In addition, 
     we intended to ensure that the penalty structure for these 
     offenses was sufficiently stiff to provide a real deterrent 
     effect. As support for that aim, the Subcommittee on Crime 
     and Drugs heard testimony from several witnesses who insisted 
     that (1) these federal penalties should be toughened; and (2) 
     in order to deter misconduct, offenders should be subject to 
     some amount of actual incarceration.
       For example, the Honorable James B. Comey, Jr., the United 
     States Attorney for the Southern District of New York, 
     observed that ``[w]hite collar criminals have broken serious 
     laws, done grave harm to real people . . . [and] should be 
     subject to the same serious treatment that we accord all 
     serious crimes: substantial periods of incarceration. While 
     we have made significant progress on some issues in recent 
     years, especially in improving the applicable sentencing 
     guidelines, we believe that current federal penalties for 
     white collar offenses should be toughened.'' Testimony of 
     Comey before the Senate Judiciary Subcommittee on Crime and 
     Drugs, June 19, 2002, p. 2. He continued: ``[E]nforcement can 
     be undermined when criminals perceive the risk of 
     incarceration as minimal and view fines and probation merely 
     as a cost of doing their criminal business. We believe that 
     if it is unmistakable that the automatic consequence for one 
     who commits a significant white collar offense is prison, 
     then many will be deterred. . . . [White collar criminals] 
     commit their crimes not in a fit of passion, but with 
     cold, careful calculation. Accordingly, they are the most 
     rational offenders and are more likely than most to weigh 
     the risks of possible courses of action against the 
     anticipated rewards of criminal behavior.'' Testimony of 
     Comey before the Senate Judiciary Subcommittee on Crime 
     and Drugs, June 19, 2002, p. 4.
       The Honorable Michael Chertoff, Assistant Attorney General 
     for the Criminal Division at the United States Department of 
     Justice, echoed this sentiment: ``We believe that strong 
     enforcement and tough penalties are especially important in 
     the context of white collar crimes, because business 
     criminals act with calculation rather than in a fit of anger 
     or compulsion. Because white collar criminals act more 
     rationally than most other criminals, they can more easily be 
     deterred. In our experience, one thing is crystal clear: 
     businessmen and women want to avoid jail at any cost. If 
     their calculus includes a reasonable likelihood that they 
     will be caught, and if caught, a reasonable likelihood that 
     they will go to jail rather than get probation, home 
     detention, or some other alternative to incarceration,' they 
     will be much less willing to roll the dice and commit a 
     fraud.'' Testimony of Chertoff before the Senate Judiciary 
     Subcommittee on Crime and Drugs, July 10, 2002, p. 3; see 
     also Testimony of G. William Miller, former Secretary of the 
     Treasury and former Chairman of the Federal Reserve Board, 
     before the Senate Judiciary Subcommittee on Crime and Drugs, 
     July 24, 2002, p. 3-4 (``[T]he greed that drives the recent 
     rash of alleged corporate wrongdoing is fostered by the 
     criminal's belief that the rewards are great and the 
     possibility of more than nominal punishment is low. For the 
     corporate wrongdoer the deterrent is only likely to be 
     effective if there is a high likelihood of detection and a 
     high probability of serious punishment. The most powerful 
     deterrent is the threat of jail time. The prospect of 
     substantial monetary penalties also can affect behavior.''); 
     Testimony of Bradley Skolnik, Securities Commissioner of the 
     State of Indiana and Chairman of the Enforcement Division of 
     the North American Securities Administrators Association, 
     before the Senate Judiciary Subcommittee on Crime and Drugs, 
     June 19, 2002, p. 2, 3 (``Investor education is an effective 
     crime prevention tool but the strongest deterrent to crime, I 
     believe is criminal prosecution and prison time. . . . [F]rom 
     my perspective as a state securities regulator, white-collar 
     criminals who commit securities fraud deserve prison time 
     just like thieves, muggers and murderers. . . . Someone 
     steals your car, they go to prison; some con artist steals 
     the money your parents needed for retirement, they get fined. 
     That's just not right.'') ``Jail time performs two 
     functions,'' Chertoff explained. ``It holds white collar 
     criminals accountable for their past misdeeds, and it 
     prevents future misbehavior by those executives who might toy 
     with the idea of beating the system.'' Testimony of Chertoff 
     before the Senate Judiciary Subcommittee on Crime and Drugs, 
     July 10, 2002, p. 5.
     Section 904. Criminal Penalties for Violations of the 
         Employee Retirement Income Security Act of 1974
       This section increases the maximum criminal penalties for a 
     willful violation of the reporting and disclosure provisions 
     of the Employee Retirement Income Security Act (ERISA), Title 
     I, subtitle B, part 1, or any regulation or order issued 
     thereunder. Section 904 increases the maximum fine for an 
     individual defendant convicted under 29 U.S.C. Sec. 1131 from 
     $5,000 to $100,000, and the maximum term of imprisonment from 
     1 year to 10 years. The increased maximum term of 
     imprisonment converts the offense from a misdemeanor to a 
     felony. In addition, this section increases the maximum fine 
     for a convicted organizational defendant from $100,000 to 
     $500,000.
       ERISA imposes on pension managers a number of reporting and 
     disclosure requirements regarding the administration of their 
     pension plans. Among other things, ERISA requires the 
     administrator of a pension plan to notify the United States 
     Department of Labor and the plan's participants and 
     beneficiaries of any material modifications in the terms of 
     the pension plan. It also creates a fiduciary relationship 
     between the pension managers and the pension plan 
     beneficiaries. Criminal penalties apply for violations of 
     Part 1 of ERISA, 29 U.S.C. Sec. 1131, which is designed, 
     among other things, to do the following: (1) require the 
     disclosure of significant information about employee benefit 
     plans and all transactions engaged in by those who control 
     the plans; (2) provide specific data to plan participants and 
     beneficiaries about the rights and benefits to which they are 
     entitled and the circumstances that may result in a loss of 
     those rights and benefits; and (3) set forth the 
     responsibilities and proscriptions applicable to persons 
     occupying a fiduciary relationship to employee benefit plans. 
     29 U.S.C. Sec. Sec. 1021-1031.
       Hearings by the Judiciary Subcommittee on Crime and Drugs 
     included a discussion of the penalty scheme under ERISA. 
     Section 1131 of ERISA only made it a criminal misdemeanor 
     ``willfully'' to violate Part 1 of ERISA, 29 U.S.C. 
     Sec. 1131, even though the potential harm flowing from an 
     ERISA violation could be enormous. A criminal violation of 
     Part 1 of ERISA could occur, for example, where a 
     corporation's pension administrator learns of information 
     relating to the company's financial health which, if not 
     disclosed, could result in a loss of the employees' rights 
     and benefits under the corporation's pension. (A recent study 
     by the Congressional Research Service of the Enron 
     Corporation collapse concluded that one criminal provision 
     which might be implicated is Section 1131 of ERISA. See CRS 
     Report for Congress, ``Possible Criminal Provisions Which May 
     Be Implicated in the Events Surrounding the Collapse of the 
     Enron Corporation,'' RS21177 (March 25, 2002)). In enacting 
     Section 904, Congress concluded that the disproportionately 
     low ERISA penalty constituted one of the ``penalty gaps'' 
     between white-collar offenses and other federal crimes. For 
     example, a defendant convicted of interstate auto theft is 
     subject to up to 10 years in prison, regardless of the value 
     of the stolen automobile. 18 U.S.C. Sec. 2312. In contrast, a 
     defendant who violates ERISA--but no other federal fraud 
     statute--was only subject to a maximum penalty of 1 year in 
     prison, regardless of the value of the loss to an employee's 
     pension.
       While a defendant who violates the criminal provisions of 
     ERISA may also violate another federal felony statute with 
     higher penalties, that will not always be the case. 
     Accordingly, the intention of this provision is to provide 
     federal prosecutors with an appropriate felony charge to 
     combat willful criminal conduct which devastates 
     employees' pension holdings. The United States Sentencing 
     Commission recognized that there are instances when an 
     ERISA criminal violation occurs in the absence of any 
     other federal criminal offense. The United States 
     Sentencing Guideline provision for the ERISA criminal 
     violation is USSG Sec. 2E5.3, entitled ``False Statements 
     and Concealment of Facts in Relation to Documents Required 
     by the Employee Retirement Income Security

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     Act.'' The background notes to Sec. 2E5.3 provide that 
     ``this section covers the falsification of documents or 
     records relating to a benefit plan covered by ERISA.'' The 
     background note to Sec. 2E5.3 recognizes that while ERISA 
     violations ``sometimes occur in connection'' with other 
     federal offenses, they do not always thus occur. The base 
     offense level under Sec. 2E5.3 for a ``stand-alone'' ERISA 
     violation, absent any other violation, is only 6.
       If the ERISA criminal offense is accompanied by another 
     criminal violation, however, the guidelines direct the 
     application of USSG Sec. 2B1.1, which addresses fraud, theft 
     and other white-collar offenses (which has a base offense 
     level of 6, but may increase to a level of 32 depending on 
     the monetary value of the loss). Thus, under prior law, if a 
     defendant violated both ERISA and the mail fraud statute, 
     Sec. 2B1.1 would apply--not Sec. 2E5.3--and the defendant's 
     sentence would be calculated with the loss calculations of 
     the guidelines, and apply the higher felony maximum penalties 
     of the mail fraud statute.
       In contrast, if the defendant were only convicted of an 
     ERISA criminal violation, the sentencing court would be 
     limited by the statutory cap in 29 U.S.C. Sec. 1131 and the 
     base offense level cap of Sec. 2E5.3. Accordingly, given the 
     relative potential for devastating economic loss to 
     pensioners who are victims of an ERISA criminal violation, it 
     is entirely appropriate for Congress to close the ``penalty 
     gap'' between ERISA and other federal statutes used to combat 
     securities fraud. Pursuant to Section 905 of the Sarbanes-
     Oxley Act, Congress expects the Sentencing Commission to 
     examine Sec. 2E5.3 of the Sentencing Guidelines and make any 
     appropriate modifications given the enactment of Section 904.
     Section 905. Amendment to Sentencing Guidelines Relating to 
         Certain White-Collar Offenses
  This section directs the United States Sentencing Commission, within 
180 days of enactment of the Sarbanes-Oxley Act, to review and, as 
appropriate, to amend the applicable sentencing guidelines and related 
policy statements. Section 905(b) directs the Commission, among other 
things, to ensure that the guidelines and policy statements reflect the 
seriousness of the offenses and the statutory increases in penalties 
set forth in the Act, the growing incidence of such fraud offenses, and 
the need to modify the guidelines and policy statements to deter, 
prevent, and punish such offenses.
       In passing the Sarbanes-Oxley Act, and the criminal and 
     sentencing provisions in particular, Congress was aware of 
     ongoing efforts by the Sentencing Commission to consolidate 
     certain economic crimes, as achieved through the ``Economic 
     Crime Package,'' and to study the effects of that 
     consolidation. Recognizing, however, that the length of an 
     offender's sentence is determined both by the operation of 
     the sentencing guidelines and by the strength of the 
     underlying statute, cf. Testimony of Paul Rosenzweig, Senior 
     Legal Research Fellow at the Heritage Foundation, before the 
     Senate Judiciary Subcommittee on Crime and Drugs, June 19, 
     2002, p.6 (noting that disparities in penalties are 
     principally the product of actions of Congress, i.e., the 
     criminal statutes passed by Congress), we amended the federal 
     criminal code to increase penalties significantly for certain 
     offenses (as discussed above). Our expectation is that, 
     similarly, the federal sentencing guidelines will be reviewed 
     and, where appropriate, modified accordingly.
       Although the Commission has recently considered the 
     severity of sentences for these economic crimes, we believe 
     that further study is warranted--as did several of the 
     witnesses who testified before the Subcommittee on Crime and 
     Drugs. This is particularly so, given the new and increased 
     penalties for white-collar offenses established by Title IX. 
     For instance, the Honorable Glen B. Gainer, III, State 
     Auditor of the State of West Virginia and Chairman of the 
     National White Collar Crime Center, a non-profit organization 
     that provides support services to state and local law 
     enforcement agencies and other organizations involved in the 
     prevention, investigation and prosecution of economic crimes, 
     noted: ``In terms of sentence length, research conducted in 
     the early 90's clearly demonstrates the disparity between 
     [white-collar and so-called `street' crime offenders. Those 
     incarcerated for losses in excess of $100,000 or more as a 
     result of the savings and loan scandals received an average 
     of 36.4 months in prison. During the same time period, those 
     nonviolent federal offenders who committed burglary got 55.6 
     months, car theft received 38 months, and first-time drug 
     dealing averaged 65 months. While some of this disparity may 
     have been corrected by revisions to the federal sentencing 
     policy for economic crimes, disparate sentencing can still be 
     seen between `white-collar' cases involving substantial 
     monetary loss, and other crimes with similar financial 
     impact.'' Testimony of Gainer before the Senate Judiciary 
     Subcommittee on Crime and Drugs, June 19, 2002, p. 4.
       Another witness, also using data that preceded adoption of 
     the ``Economic Crime Package,'' cited statistics that 
     similarly demonstrated a disparity in sentencing between 
     traditional white-collar and other crimes: ``[D]efendants 
     convicted of larceny, embezzlement, fraud, and counterfeiting 
     who were sentenced to federal prison received average (mean) 
     sentences of 15.6 months, 9.9 months, 18 months, and 17 
     months respectively. By contrast, robbery defendants received 
     110.6 months, drug defendants 75.3 months, and firearms 
     offenders 64.1 months. Even the average immigration sentence 
     was 27.8 months, ten months longer than the average fraud 
     penalty. Moreover, federal economic crime defendants receive 
     sentences of probation at dramatically higher rates than 
     virtually any other class of defendant. More than one-half of 
     all larceny defendants and one-third of all fraud defendants 
     receive probation.'' Testimony of Frank O. Bowman, Associate 
     Law Professor at the University of Indiana School of Law, 
     before the Senate Judiciary Subcommittee on Crime and Drugs, 
     June 19, 2002, p. 2. Similarly, Rosenzweig observed: ``An 
     overwhelming percentage of those who were sentenced for 
     traditional crimes received sentences requiring terms of 
     imprisonment. For example, 94.2 percent of those convicted 
     of drug trafficking were sentenced to prison. 97 percent 
     of those convicted for robbery were imprisoned, as were 93 
     percent of those convicted of arson, and 97.4 percent of 
     those convicted of murder. By contrast only 53.5 percent 
     of those convicted of fraud and 48.1 percent of those 
     convicted of embezzlement were sentenced to prison.'' 
     Testimony of Rosenzweig before the Senate Judiciary 
     Subcommittee on Crime and Drugs, June 19, 2002, p. 4.
       While there was not a consensus regarding the reasons for, 
     or desirability of, such a penalty disparity between 
     similarly egregious infractions, many of the witnesses 
     suggested that its existence worked to undermine the 
     integrity of the criminal justice system. For example, 
     Chairman Gainer concluded: ``The conclusion we can safely 
     draw from this body of information is that white-collar 
     criminals, particularly those involved in large, complex 
     frauds that impact hundreds, if not thousands of victims, do 
     not receive punishment that is proportionate to the harm that 
     they cause.'' Testimony of Gainer before the Senate Judiciary 
     Subcommittee on Crime and Drugs, June 19, 2002, p. 5.
       Finally, in its efforts to comply with the terms of this 
     title, we hope that the Sentencing Commission will take the 
     opportunity to review and advise Congress on a disturbing 
     development cited by the two witnesses from the Justice 
     Department, Assistant Attorney General Chertoff and United 
     States Attorney Comey--namely, an over-willingness in some 
     jurisdictions to depart downward from the mandated sentencing 
     guideline range for certain white-collar offenses. Justifying 
     the need to increase penalties for certain white collar 
     offenses, Chertoff explained: ``Not only are the maximum 
     statutory penalties for fraud and other white collar-type 
     offenses substantially less than those for violent offenders 
     or drug cases, but it appears that judges in some 
     jurisdictions are overly willing to depart downward from the 
     mandated federal sentencing guideline range to sentence such 
     offenders to minimal (if any) jail time, home detention, or 
     even probation.'' Testimony of Chertoff before the Senate 
     Judiciary Subcommittee on Crime and Drugs, July 10, 2002, p. 
     5.
       Comey's comments mirrored this concern: ``[I]n some 
     districts, non-substantial assistance downward departures are 
     anything but infrequent (9,286 non-substantial assistance 
     downward departures were made in 2000). . . . While available 
     analyses do not detail the bases of these departures in white 
     collar cases, a number of district judges appear to believe 
     that white collar defendants should not be incarcerated in 
     order to facilitate payment of restitution and fines. Of 
     course, this is at odds with the view that incarceration can 
     deter such crime in the first instance. . . . [F]or a variety 
     of reasons, federal judges are hesitant to incarcerate white 
     collar defendants. If past is prologue, even though the 
     economic crime amendments of 2001 increased penalties for 
     these crimes, departures will be used to undercut the 
     purposes of the new provisions.'' Testimony of Comey before 
     the Senate Judiciary Subcommittee on Crime and Drugs, June 
     19, 2002, p. 17.
       By citing this and other testimony, we underscore Congress' 
     belief that a ``penalty gap'' has existed between white-
     collar offenses and other offenses. Congress in particular is 
     concerned about base offense levels which may be too low. The 
     increased sentences, while meant to punish the most egregious 
     offenders more severely, are also intended to raise sentences 
     at the lower end of the sentencing guidelines. While Congress 
     acknowledges that the Sentencing Commission's recent 
     amendments are a step in the right direction, the Commission 
     is again directed to consider closely the testimony adduced 
     at the hearings by the Judiciary Subcommittee on Crime and 
     Drugs respecting the ongoing ``penalty gap'' between white-
     collar and other offenses. To the extent that the ``penalty 
     gap'' existed, in part, by virtue of higher sentences for 
     narcotics offenses, for example, Congress responded by 
     increasing sentences for certain white-collar offenses. 
     Accordingly, we ask the Commission to consider the issues 
     raised herein; determine if adjustments are warranted in 
     light of the enhanced penalty provisions contained in this 
     title; and make recommendations accordingly.
     Section 906. Corporate Responsibility for Financial Reports
       Summary. This section adds a new provision to the United 
     States Code (18 U.S.C.

[[Page S5329]]

     Sec. 1350), which requires the chief executive officer and 
     chief financial officer (or their equivalent) of an issuer, 
     foreign or domestic, to certify the accuracy of periodic 
     financial statements filed by the issuer with the Securities 
     and Exchange Commission under 15 U.S.C. Sec. Sec. 78m(a) or 
     78o(d). (An ``issuer'' is defined, under Section 2(a)(7) of 
     the Act, to mean an entity whose securities are registered 
     under Section 12 of the Securities and Exchange Act of 1934 
     or that is required to file reports under Section 15(d) of 
     that Act.) The chief executive and financial officers must 
     certify that the periodic financial statement complies with 
     certain specified requirements of the Securities and Exchange 
     Act and that it ``fairly presents, in all material respects, 
     the financial condition and results of operations of the 
     issuer.'' Pursuant to Section 1350(c)(1), anyone who makes 
     such a certification ``knowing'' that the report accompanying 
     the certifying statement does not meet the statutory 
     requirements would, upon conviction, face up to $1 million in 
     fines, up to 10 years in prison, or both. Pursuant to Section 
     1350(c)(2), anyone who ``willfully'' certifies compliance 
     ``knowing'' that the periodic report accompanying the 
     statement does not comport with the requirements of 18 U.S.C. 
     Sec. 1350 would face up to $5 million in fines, up to 20 
     years in prison, or both.
       Financial Reports. The backdrop to Section 906 is the long-
     standing requirement under Section 13(a) and Section 15(d) of 
     the Securities and Exchange Act (15 U.S.C. Sec. Sec. 78m(a) 
     or 78o(d)) that publicly-traded companies file reports with 
     the SEC regarding the financial well-being of the 
     corporation. See 15 U.S.C. Sec. 78m(a) (``Every issuer of a 
     security . . . shall file with the Commission . . . such 
     information and documents . . . as the Commission shall 
     require to keep reasonably current the information and 
     documents required to be included in or filed with an 
     application or registration statement [and] such annual 
     reports . . . as the Commission may prescribe.'') Pursuant to 
     this provision, the SEC requires publicly-traded companies to 
     file numerous reports (e.g., Forms 10-K, 20-F, 40-F, 10-Q, 8-
     K, 6-K), all intended to provide both the Commission and the 
     investing public with information regarding the financial 
     condition of the corporation. Willful failure to file these 
     periodic reports, or the making of materially 
     false statements therein, constitutes a felony. See 15 
     U.S.C. Sec. 78ff (``Any person who willfully violates any 
     provision of this chapter . . . or any person who 
     willfully and knowingly makes . . . [any] false or 
     misleading [statement] with respect to any material fact, 
     shall upon conviction be fined not more than $1,000,000, 
     or imprisoned not more than 10 years, or both[.]'') (We 
     note that, in contrast to the ``willful'' standard we 
     apply in Section 906, courts have ascribed a different 
     meaning to ``willful'' violations of the 1934 Act, e.g., 
     United States v. Dixon, 536 F.2d 1388 (2d Cir. 1976) 
     (determining that an act is done ``willfully'' if it is 
     done intentionally and deliberately and not the result of 
     innocent mistake, negligence or inadvertence; a specific 
     intent to disregard or disobey is not required). As 
     explained more fully below, Congress uses ``willful'' in 
     Section 906 to create a specific intent crime, not the 
     general intent crime which courts have sometimes used in 
     interpreting the penalty provisions of the 1934 Act.) 
     While defendants have been prosecuted under 15 U.S.C. 
     Sec. Sec. 78m and 78ff for filing false financial reports 
     with the SEC, see, e.g., United States v. Colasurdo, 453 
     F.2d 585 (2d Cir. 1971), cert. denied. 406 U.S. 917 
     (1972), the law has never required a company's top 
     corporate official to certify to the accuracy of the 
     company's financial reports. Section 906 closes this 
     loophole by imposing this responsibility upon the CEO and 
     CFO (or their equivalents) of all publicly-traded 
     corporations. Significantly, it does not mandate any 
     additional reporting requirements, but only applies to 
     those companies who are independently required, by 
     Sections 13(a) and 15(d) of the Securities and Exchange 
     Act of 1934, to certify the accuracy of those reports. As 
     noted above, the law has always required that those 
     reports be materially accurate.
       Executive Certification. The notion of requiring an 
     organization's primary or senior executive to certify a 
     statement submitted to the government, on threat of possible 
     criminal liability, is hardly novel. For example, Section 
     911(a)(1) of the National Defense Authorization Act for 
     Fiscal Year 1986 requires a senior executive of a defense 
     contractor to certify, to the best of his or her ``knowledge 
     and belief,'' that all costs included in a proposal for 
     settlement of indirect costs are allowable under the cost 
     principles of the Federal Acquisition Regulation and its 
     supplements. 10 U.S.C. Sec. 2324(h); 48 C.F.R. Sec. 52.242-4. 
     Like Section 906 of the Sarbanes-Oxley Act, the regulation 
     implementing the certification requirement contained in 
     Section 911(a)(1) mandates that the certificate be executed 
     by a company's senior executives, who face potential criminal 
     liability if the representations contained in the 
     certification are shown to be inaccurate. See 10 U.S.C. 
     Sec. 2324(i).
       Such a certification of accuracy is especially important in 
     the securities context, since the robustness of financial 
     markets and the success of national securities regulation are 
     based on the full disclosure of a company's financial state. 
     During the summer of 2002, as daily reports of alleged CEO 
     criminal wrongdoing filled the news, congressional testimony 
     from finance experts touted the critical need to impose 
     responsibility upon top corporate officials in ensuring 
     accuracy in financial reports. For example, Federal Reserve 
     Chairman Alan Greenspan testified before the Senate Committee 
     on Banking, Housing and Urban Affairs on July 16, 2002, the 
     day after the Senate passed S. 2673. Much of his testimony 
     focused on (1) the need for top corporate officials to report 
     accurately the financial health of their companies; and (2) 
     the need for criminal penalties for those who knowingly fail 
     to do so. Chairman Greenspan said the following: ``A CEO must 
     . . . bear the responsibility to accurately report the 
     resulting condition of the corporation to shareholders and 
     potential investors. Unless such responsibilities are 
     enforced with very stiff penalties for noncompliance, as many 
     now recommend, our accounting systems and other elements of 
     corporate governance will function in a less than optimum 
     manner. . . . Already existing statutes, of course, prohibit 
     corporate fraud and misrepresentation. But even a small 
     increase in the likelihood of large, possibly criminal 
     penalties for egregious behavior of CEOs can have profoundly 
     important effects on all aspects of corporate governance 
     because the fulcrum of governance is the chief executive 
     officer . . . . And I don't wish to make a generalized 
     statement, but I suspect that if the CEO issue [i.e., 
     accurate reporting of the financial health of a company] were 
     fully and completely resolved--which it never will be, 
     because we're dealing with human beings--I think all the rest 
     of the problems will just disappear . . . . [I]f you do not 
     get the CEO changing in the way that particular position 
     functions, a goodly part of the work of the Senate is not 
     going to be very effective . . . . [W]hat you can do is to 
     try to create an environment and a legal structure which very 
     significantly penalizes malfeasance.''
       Likewise, several witnesses before the Judiciary 
     Subcommittee on Crime and Drugs echoed the testimony of 
     Chairman Greenspan, suggesting that the best way to protect 
     investors from fraud is to require corporate executives at 
     publicly-traded companies to disclose detailed information 
     about their companies' financial health. For example, 
     Professor Thomas Donaldson, Mark O. Winkelman Professor at 
     the Wharton School of Business at the University of 
     Pennsylvania, commented: ``The importance of accurate 
     information in fueling efficient economic activity is well 
     substantiated. Rational choice demands accurate information. 
     When companies fail to provide investors with accurate 
     information, investors make worse decisions and markets, in 
     turn, become less efficient.'' Testimony of Donaldson before 
     the Senate Judiciary Subcommittee on Crime and Drugs, July 
     10, 2002, p. 4. Relatedly, he noted: ``Crony capitalism and 
     the lack of transparency were rightly implicated in the Asian 
     melt down of 1997-1998. Without transparency and reliable 
     numbers about the economic health of Asian companies, 
     investors were stymied from responding rationally to the 
     crisis. They were unable to dump their investments in poorer 
     companies and hold their investments in better companies 
     because they simply couldn't trust the numbers. In the 
     ensuing crisis, they dumped everything with pernicious 
     consequences. Today, we appear to be experiencing a 
     transparency discount in the American equity markets. 
     Investors pay less because they believe that they know 
     less.'' See id. at 2; see also Testimony of Devine before the 
     Senate Judiciary Subcommittee on Crime and Drugs, July 10, 
     2002, p. 2 (``Two long-accepted truths are that secrecy is 
     the breeding ground for corruption, and sunlight is the 
     best disinfectant.'')
       Thus, Section 906 simply seeks to facilitate full 
     disclosure and ensure the accuracy of financial reports by 
     requiring corporate executives' personal stamp of approval. 
     As Secretary Miller stated plainly but poignantly, ``[i]f the 
     CEO is required to certify the reports he will be hard 
     pressed later to say he thought the CFO had everything in 
     apple pie shape. So the certificate becomes the hook that 
     establishes accountability.'' Testimony of Miller before the 
     Senate Judiciary Subcommittee on Crime and Drugs, July 24, 
     2002, p. 5.
       State of Mind Requirement for Criminal Liability. Section 
     906 provides for a two-tiered penalty scheme for corporate 
     officials who certify financial statements which they know to 
     be false. It should be kept in mind that both penalties only 
     apply to corporate executives who certify statements 
     ``knowing that the periodic report accompanying the statement 
     does not comport with all the requirements set forth in this 
     section.''
       While it is common for drafters of legislation to use the 
     mens rea terms ``knowing'' and ``willful'' interchangeably, 
     there are some criminal statutes which distinguish between 
     them. See, e.g., 18 U.S.C. Sec. 35 (knowingly conveying false 
     information triggers civil liability, while willfully 
     conveying false information is a felony). When these two mens 
     rea requirements are used in setting forth graduated 
     penalties for the same predicate conduct, courts construe 
     ``knowing'' to embody a general intent standard and 
     ``willful'' to embody a specific intent standard. As such, 
     knowing conduct is distinct from, and less intentional than, 
     willful conduct. See Bryan v. United States, 524 U.S. 184, 
     193 (1998) (noting that ``more is required'' for a finding of 
     ``willful'' misconduct; ``[t]he jury must find that the 
     defendant acted with an evil-meaning mind, that is to say, 
     that he acted with knowledge that his conduct was 
     unlawful'').
       ``Knowing.'' Section 906 establishes 18 U.S.C. 
     Sec. 1350(c)(1), making it a 10-year felony

[[Page S5330]]

     for a corporate official to certify financial statements 
     ``knowing'' that they contain false or misleading 
     information. As explained above, ``knowing'' as used here is 
     meant to embody a general intent standard. It refers to 
     knowledge of the facts constituting the offense, as 
     distinguished from knowledge of the law. See Bryan, 524 U.S. 
     at 192 (quoting Justice Jackson). In other words, to certify 
     financial statements ``knowing'' them to be false simply 
     means to certify the financial statements intentionally, 
     voluntarily and with an awareness of their duplicity, rather 
     than by mistake or accident. Knowledge of the law is not 
     required, nor is a willful and intentional desire to evade 
     the law's requirements. Stated differently, Section 
     1350(c)(1) imposes criminal liability for corporate officials 
     who certify a financial statement ``knowing'' that it fails 
     to ``fairly present, in all material respect, the financial 
     condition and the operations of the issuer.'' It is not 
     required that the corporate official intended to violate the 
     statute (or even knew of the statute's certification 
     requirements). Rather, the government must only prove that 
     the corporate officer knew that the financial statements were 
     materially misleading or inaccurate.
       That is not to say, however, that certifying executives can 
     evade liability by avoiding acquiring knowledge. We agree 
     with the sentiments of Secretary Miller, who noted that 
     ``[t]he certifying officer should be judged upon whether he 
     has been diligent, exercised due care, established procedures 
     for verification, made adequate investigations, and provided 
     appropriate supervision.'' Testimony of Miller before the 
     Senate Judiciary Subcommittee on Crime and Drugs, July 24, 
     2002, p. 5. It is our intent that courts impose a duty on 
     these individuals to be reasonably informed of the material 
     facts necessary to prepare financial information for 
     submission to the SEC and for dissemination to the public. 
     This position is consistent with well-established law that 
     conscious avoidance, or a deliberate attempt to avoid 
     knowledge of the crime, will not be a defense to the criminal 
     penalties contained in a statute. See, e.g., United States v. 
     de Francisco-Lopez, 939 F.2d 1405, 1409 (10th Cir. 1991) 
     (```[T]he act of avoidance of knowledge of particular facts 
     may itself circumstantially show that the avoidance was 
     motivated by sufficient guilty knowledge to satisfy the . . . 
     `knowing' element of the crime.'''); United States v. Hanlon, 
     548 F.2d 1096, 1101 (2d Cir. 1977) (``It is settled law that 
     a finding of guilty knowledge may not be avoided by a showing 
     that the defendant closed his eyes to what was going on about 
     him; `see no evil' is not a maxim in which the criminal 
     defendant should take any comfort.''); United States v. 
     Jewel, 532 F.2d 697 (9th Cir.) (en banc) (``To act 
     `knowingly,' therefore, is not necessarily to act only with 
     positive knowledge, but also to act with an awareness of the 
     high probability of the existence of the fact in 
     question.''), cert. denied, 426 U.S. 951 (1976); see also 
     Leary v. United States, 395 U.S. 6, 46 n. 93 (1969).
       On the other hand, the standard articulated here is not 
     tantamount to negligence or recklessness. We simply note the 
     well-established proposition that conscious avoidance of 
     certain facts should not provide immunity from prosecution; 
     in contrast, if lower-level corporate officials conspire to 
     hide the true financial health of the company from the CEO 
     for whatever reasons, the CEO will not be held liable if he 
     or she did not know these facts. We expect that this would be 
     a rare event, however, given the requirement that a CEO be 
     aware of the contents of their company's financial reports 
     filed with the SEC. See, e.g., Howard v. Everix Systems, 
     Inc., 228 F.3d 1057, 1062 (9th Cir. 2000) (``Key corporate 
     officials should not be allowed to make important false 
     financial statements knowingly or recklessly, yet still 
     shield themselves from liability in the preparation of those 
     statements. Otherwise, the securities laws would be 
     significantly weakened, because corporate officers could stay 
     out of loop such that . . . only the SEC could bring suit 
     against them in an individual capacity for their 
     misrepresentations.'') Nor does Congress intend Section 906 
     to be a so-called ``public welfare law'' which would create 
     strict liability. See, e.g., United States v. Dee, 912 F.2d 
     741 (4th Cir. 1990) (holding that one who possesses hazardous 
     wastes will be presumed to be aware of federal regulations 
     governing such wastes, notwithstanding law's inclusion of a 
     knowledge mens rea requirement).
       ``Willful.'' Section 906 also creates a new 20-year felony 
     provision, 18 U.S.C. Sec. 1350(c)(2), which applies to 
     corporate officials who ``willfully'' certify financial 
     statements which they know to be false. ``Willfully'' here is 
     meant to denote a specific intent standard. When used in the 
     criminal context, a ``willful'' act is generally one 
     undertaken with a bad purpose, or with knowledge that the 
     prohibited conduct is unlawful. See Bryan, 524 U.S. at 
     191-92. Under Section 906, certifying financial statements 
     which the CEO knows are false is not enough to be 
     ``willful.'' Rather, the act also must be done with an 
     evil intent to evade the law. That evil intent is an 
     intent to disobey or disregard the law, rather than an 
     intent to do wrong in some more general sense. A corporate 
     executive who certifies financial statements which he 
     knows to be false is not guilty under this section unless, 
     in addition to knowing what he was doing, he voluntarily 
     and intentionally engaged in conduct that he knew was 
     prohibited. See Ratzlaf v. United States, 510 U.S. 135, 
     142 (1994) (describing a `` `willful' actor as one who 
     violates `a known legal duty' ''); Cheek v. United States, 
     498 U.S. 192, 201 (1991) (establishing that ``the standard 
     for the statutory willfulness requirement is the 
     `voluntary, intentional violation of a known legal duty' 
     '').
       Section 1350(c)(2)'s construction is consistent with prior 
     judicial interpretations of the word ``willful.'' As the 
     Supreme Court has observed, ``the word `willfully' is 
     sometimes said to be `a word of many meanings' whose 
     construction is often dependent on the context in which it 
     appears.'' Bryan, 524 U.S. at 191. ``Willfully'' may mean 
     either a requirement of general intent or specific intent. 
     Recognizing that ignorance of the law typically is no defense 
     to a criminal charge, Congress here intended to require a 
     more particularized showing of knowledge in order to access 
     the tougher criminal penalties under Sec. 1350(c)(2)--i.e., 
     knowledge of the specific law or rule that a defendant's 
     conduct is alleged to violate. In passing this section, 
     Congress relied on the Court's determination in cases like 
     Ratzlaf, 510 U.S. 135, and Cheek, 498 U.S. 192.
       In these cases, the Court interpreted the term 
     ``willfully'' in two different statutes, one dealing with 
     structuring transactions and the other dealing with tax 
     evasion, as requiring a finding of specific intent. Ratzlaf, 
     510 U.S. at 141; Cheek, 498 U.S. at 200. Part of the Court's 
     reasoning was that the complex nature of these laws justified 
     an inference that Congress intended ``willfully'' to be a 
     specific intent requirement so that those who were ignorant 
     of the law, but exercised reasonable care, would not be 
     subjected to the same punishment as bad actors with an evil 
     intent. Ratzlaf, 510 U.S. at 144-46; Cheek, 498 U.S. at 200, 
     205. Stated differently, Congress made violations of these 
     statutes ``specific intent crime[s] because, without 
     knowledge of the . . . requirement, a would-be violator 
     cannot be expected to recognize the illegality of his 
     otherwise innocent act.'' United States v. Eisenstein, 731 
     F.2d 1540, 1543 (11th Cir. 1984). Like the anti-structuring 
     and tax evasion provisions at issue in Ratzlaf and Cheek, 
     securities laws are complex, which is why Section 906 
     incorporates different penalties for ``knowing'' violations 
     committed with general intent and ``willful'' violations 
     characterized by a specific intent to violate the law. In 
     effect, for the heightened penalties triggered by ``willful'' 
     violations, Section 906 carves out a limited and rebuttable 
     exception to the traditional rule that ``ignorance of the law 
     is no excuse.'' See Bryan, 524 U.S. at 196.
       Finally, for purposes of clarity, we should mention that we 
     are aware that the term ``willfully'' is invoked and 
     interpreted differently in the context of civil 
     administrative disciplinary proceedings instituted by the SEC 
     under federal securities laws. For example, under Sections 
     15(b)(4) and 15(b)(6) of the Securities Exchange Act of 1934, 
     the SEC may discipline a registered broker-dealer in 
     securities or anyone associated or participating with the 
     broker-dealer if it finds in such proceedings that the 
     respondent has ``willfully'' violated or ``willfully'' aided 
     and abetted the violation by any person of any provision of 
     certain securities laws or rules. While, as we have noted, 
     the meaning of ``willfully'' depends on statutory context, in 
     the SEC administrative disciplinary context, it has been held 
     to mean ``no more than the person charged with the duty knows 
     what he is doing.'' Hughes v. Securities and Exchange 
     Commission, 174 F.2d 969, 977 (D.C. Cir. 1949); see also 
     Seaman v. Securities and Exchange Commission, 603 F.2d 1126, 
     1135 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 
     (1981); Arthur Lipper Corp. v. Securities and Exchange 
     Commission, 547 F.2d 171, 180 (2d Cir. 1976), cert. denied, 
     430 U.S. 1009; Stead v. Securities and Exchange Commission, 
     444 F.2d 713, 714-15 (10th Cir. 1971), cert. denied, 404 U.S. 
     1059. See also the discussion of willfulness in Wonsover v. 
     Securities and Exchange Commission, 205 F.3d 408, 413 (D.C. 
     Cir. 2000). The court reiterated its ``traditional 
     formulation of willfulness'' for purposes of Section 15(b) of 
     the Exchange Act. Citing its prior holding in Gerhard & Otis, 
     Inc. v. Securities and Exchange Commission, 348 F.2d 798 
     (D.C. Cir. 1965), the Court noted that ``willfully'' in that 
     provision ``means intentionally committing the act which 
     constitutes the violation,'' not that ``the actor [must] also 
     be aware that he is violating [the law].'' Tager v. 
     Securities and Exchange Commission, 344 F.2d 5, 8 (2d Cir. 
     1965); Edward J. Mawood & Co. v. Securities and Exchange 
     Commission, 591 F.2d 588, 595-96 (10th Cir. 1979) (same). 
     Needless to say, for purposes of Section 906, we do not adopt 
     the ``general intent'' interpretation of ``willful.''
       Expert Advice. Some defendants charged in white-collar 
     cases have attempted to avert criminal liability by claiming 
     reliance on expert advice. See, e.g., Ratzlaf, 510 U.S. at 
     142 n.10 (`` `[S]pecific intent to commit the crimes' . . . 
     might be negated by, e.g., proof that defendant relied in 
     good faith on advice of counsel.''); Eisenstein, 731 F.2d at 
     1543-44 (same). To the extent that it exists, the so-called 
     ``reliance on expert'' defense is held to apply only when the 
     defendant can demonstrate that he fully disclosed all 
     relevant facts to his accountant or attorney and that he 
     relied in good faith on the expert's advice. See United 
     States v. Johnson, 730 F.2d 683, 686 (11th Cir.), cert. 
     denied, 469 U.S. 867 (1984); United States v. McLennan, 563 
     F.2d 943, 946 (9th Cir. 1977), cert. denied, 435 U.S. 969 
     (1978) (noting that ``[a]dvice of counsel is no defense 
     unless the defendant gave his attorney all of the facts, and 
     unless counsel specifically advised the course of conduct 
     taken by the defendant''). It is not Congress' intent to

[[Page S5331]]

     disrupt this line of authority. We presume that, where it is 
     a reliance on expert advice that is truly at issue, see 
     Johnson, 730 F.2d at 686-87 (discounting defendants' defense 
     where reliance on expert advice was irrelevant to the real 
     claims at issue), the same standard articulated in the above-
     cited and other authority would apply to the criminal 
     provisions contained in this title.
       Finally, the duty imposed by the Section 906 certification 
     requirement is not intended to end once a financial statement 
     and accompanying certification are submitted. Upon 
     discovery that a statement contains an error, immediate 
     correction and disclosure of the correction should be 
     required.
       Interplay With Section 302 of S. 2673: Scope of 
     Certification Requirement. At the time I offered the Biden-
     Hatch Amendment to S. 2673, that bill already had a provision 
     (now codified at Section 302), which is similar to Section 
     906, with three significant exceptions. First, the provision 
     does not apply to the chairperson of a company's board of 
     directors (my original legislation and subsequent amendment 
     to S. 2673 applied the certification requirement to chief 
     executive officers, chief financial officers, and board 
     chairpersons). Second, it contains no criminal enforcement 
     provisions. Third, the scope of corporate filing activity 
     subject to the requirements of Section 302 is far narrower, 
     as I explain below.
       Section 302 provides that the SEC must require, for each 
     company filing periodic reports under Section 13(a) or 15(d) 
     of the Exchange Act, that the principal executive officer and 
     the principal financial officer, or persons performing 
     equivalent functions, make certain certifications in each 
     annual or quarterly report filed with or submitted to the 
     SEC. Section 302, by its terms, only applies to annual and 
     quarterly reports and, accordingly, its scope is so cabined. 
     Section 906, on the other hand and quite intentionally, 
     includes no such limitation of its scope. It is intended to 
     apply to any financial statement filed by a publicly-traded 
     company, upon which the investing public will rely to gauge 
     the financial health of the company. So, Section 906 applies 
     to annual and quarterly reports (e.g., Forms 10-K, 20-F, 40-
     F, 10-Q) but, unlike Section 302 certifications, is also 
     intended to apply to so-called ``current'' reports like Forms 
     8-K and 6-K (foreign issuer submissions), as well as 
     submissions of Form 11-K by employee benefit plans. The above 
     list is merely illustrative, not exhaustive, and Congress 
     intends the SEC to issue guidance on any additional reports 
     which are subject to Section 906.
       We are aware of the SEC's historic position that the term 
     ``periodic reports'' describes Forms 10-Q, 10-K, 10-QSB, 10-
     KSB, 40-F and 20-F, which are required to be filed at 
     specified intervals in time, and not Forms 8-K and 6-K, which 
     are only required to be filed upon the occurrence of 
     specified events. We in no way intend to import the more 
     expansive scope of Section 906 into broader securities 
     regulation; the wider view of ``periodic report'' is for 
     purposes of implementing this specific certification 
     requirement only.
       Note that Section 906 does not require certification that 
     the financial statements are in accordance with generally 
     accepted accounting principles (GAAP). That omission is 
     intentional in that the certification is designed to ensure 
     an overall accuracy and completeness that is broader than 
     financial reporting requirements under generally accepted 
     accounting principles. In so doing, for purposes of this 
     section, Congress effectively establishes possible liability 
     where statements may be GAAP-compliant but materially 
     misleading. See States v. Simon, 425 F.2d 796, 808 (2d Cir. 
     1969) (finding that accountants can be criminally liable for 
     preparing financial statements that are GAAP-compliant but 
     materially misleading).
       Certification Form. We do not intend to prescribe the 
     precise form or format of certification (e.g., whether the 
     certification should appear on the signature page or among 
     the exhibits or appendices to the report) or method of 
     submission to the appropriate regulators. On these questions, 
     Congress properly defers to the expert judgment of 
     experienced officials at the SEC, who we trust will fully 
     consider the liability implications of these administrative 
     options. What is important is that the ultimate form reflect 
     the substantive requirements of the Sarbanes-Oxley Act--
     including a recognition that, as the text of the statute and 
     the foregoing explanation should make clear, certification 
     under Section 302 applies to a subset of the certifications 
     required by Section 906. Nevertheless, I have encouraged the 
     SEC and the Justice Department to develop a single form which 
     could be used for certifications under both Sections 302 and 
     906. Section 906 certification establishes a ``floor'' of 
     minimum certification requirements, while Section 302 cites 
     some additional factors. Accordingly, any company properly 
     certifying under Section 302 will also satisfy the 
     requirements of Section 906. Thus, it may be possible for the 
     SEC to develop a unitary certification for the sake of 
     administrative ease. However, for companies that need only 
     certify under Section 906, a separate certification 
     satisfying the somewhat lesser requirements of Section 906 
     may be appropriate.
       Penalties for Failure to File Section 906 Certification. 
     Some observers have asked whether failure to file a 
     certification pursuant to 18 U.S.C. Sec. 1350(a)--as opposed 
     to certifying a false financial report as accurate in 
     violation of 18 U.S.C. Sec. 1350(c)--triggers criminal 
     liability. It does. Pursuant to Section 3(b) of the Sarbanes-
     Oxley Act, ``a violation by any person of this Act . . . 
     shall be treated for all purposes in the same manner as a 
     violation of the Securities Exchange Act of 1934 . . . and 
     any such person shall be subject to the same penalties, and 
     to the same extent, as for a violation of that Act or such 
     rules and regulations.'' As noted above, the criminal 
     provisions of the Securities Exchange Act of 1934 (15 U.S.C. 
     Sec. 78ff) include a 10-year felony for ``willful'' 
     violations. Accordingly, willful failure to file a 
     certification pursuant to Section 1350(a) of Title 18 
     triggers the criminal provisions of 15 U.S.C. Sec. 78ff. (As 
     noted above, courts have interpreted ``willful'' violations 
     of the 1934 Act to require only general intent to commit the 
     crime.) Significantly, the U.S. Department of Justice concurs 
     with this analysis. See Letter from Assistant Attorney 
     General Daniel J. Bryant to the Honorable Joseph R. Biden, 
     Jr., December 26, 2002 (``[A]s you have suggested, the 
     Department may utilize Section 78ff's criminal penalties to 
     prosecute executives who violate the Sarbanes-Oxley Act by 
     willfully failing to file Section 906's required 
     certification.''). Of course, in addition to this penalty 
     scheme, failure to file the required Section 1350(a) 
     certification may also result in an economic penalty, since 
     Wall Street analysts and investors would surely take note of 
     the failure and punish offending companies by shifting their 
     investment dollars to compliant companies. This potential 
     economic penalty should in no way mitigate application of the 
     criminal penalty.

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