[Senate Report 107-146]
[From the U.S. Government Publishing Office]
Calendar No. 366
107th Congress } { Report
SENATE
2d Session } { 107-146
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THE CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY ACT OF 2002
_______
May 6, 2002.--Ordered to be printed
_______
Mr. Leahy, from the Committee on the Judiciary, submitted the following
R E P O R T
together with
ADDITIONAL VIEWS
[Including the cost estimate of the Congressional Budget Office]
[To accompany S. 2010]
The Committee on the Judiciary, to which was referred the
bill (S. 2010) 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, having
considered the same, reports favorably thereon, with an
amendment in the nature of a substitute, and recommends that
the bill, as amended, do pass.
CONTENTS
Page
I. Purpose..........................................................2
II. Background and need for the legislation..........................2
III. Section-by-section analysis and discussion......................11
IV. Committee consideration.........................................21
V. Votes of the Committee..........................................21
VI. Congressional Budget Office cost estimate.......................23
VII. Regulatory impact statement.....................................23
VIII.Additional Views................................................26
IX. Changes in existing law made by the bill, as reported...........32
I. Purpose
The purpose of S. 2010, the ``Corporate and Criminal Fraud
Accountability Act of 2002,'' is to provide for criminal
prosecution and enhanced penalties of persons who defraud
investors in publicly traded securities or alter or destroy
evidence in certain Federal investigations, to disallow debts
incurred in violation of securities fraud laws from being
discharged in bankruptcy, to protect whistleblowers who report
fraud against retaliation by their employers, and for other
purposes.
II. Background and Need for the Legislation
A. Introduction
The ``Corporate and Criminal Fraud Accountability Act of
2002,'' S. 2010, was introduced by Senator Patrick Leahy, with
Senators Daschle, Durbin, and Harkin as original cosponsors, on
March 12, 2002. This legislation aims to prevent and punish
corporate and criminal fraud, protect the victims of such
fraud, preserve evidence of such fraud, and hold wrongdoers
accountable for their actions.
In the wake of the continuing Enron Corporation (``Enron'')
debacle, the trust of the United States' investors and
pensioners in the nation's stock market has been seriously
eroded. This is bad for our markets, bad for our economy, and
bad for the future growth of investment in American companies.
This bill would play a crucial role in restoring trust in the
financial markets by ensuring that the corporate fraud and
greed may be better detected, prevented and prosecuted. While
greed cannot be legislated against, the federal government must
do its utmost to ensure that such greed does not succeed. This
bill contains a number of provisions intended to increase the
criminal penalties for serious fraud, ensure that evidence--
both physical and testimonial--is preserved and available in
fraud cases, provide prosecutors with the tools they need to
prosecute those who commit securities fraud, and make sure that
victims of securities fraud have a fair chance to pursue their
claims and recoup their losses.
B. Enron's collapse
Enron began in 1985 as a pipeline company in Houston,
Texas. It garnered profits by promising to deliver agreed-upon
numbers of cubic feet of gas to a particular utility or
business on a specific day at market price. That changed with
the deregulation of electrical power markets, a change due in
part to lobbying from senior Enron officials. Under the
direction of former Chairman Kenneth L. Lay, Enron expanded
into an energy broker, trading electricity and other
commodities.
According to a Report of Investigation commissioned by a
Special Investigative Committee of Enron's Board of Directors
(``the Powers Report''), Enron apparently, with the approval or
advice of its accountants, auditors and lawyers, used thousands
of off-the-book entities to overstate corporate profits,
understate corporate debts and inflate Enron's stock price.
The alleged activity Enron used to mislead investors was
not the work of novices. It was the work of highly educated
professionals, spinning an intricate spider's web of deceit.
The partnerships--with names like Jedi, Chewco, Rawhide,
Ponderosa and Sundance--were used essentially to cook the books
and trick both the public and federal regulators about how well
Enron was doing financially. The actions of Enron's executives,
accountants, and lawyers exhibit a ``Wild West'' attitude which
valued profit over honesty.
Some Enron executives, with the knowledge and approval of
its Board of Directors, managed these entities, reaped millions
of dollars in salary and stock options, and received conflict-
of-interest waivers from Enron's Board. As the Powers Report
states, ``[m]any of the most significant transactions
apparently were designed to accomplish favorable financial
statement results, not to achieve bona fide economic objectives
or to transfer risk'' (Powers Report at 4). Much of this
conduct occurred with ``extensive participation and structuring
advice from [Arthur] Andersen,'' (``Andersen'') which was
simultaneously serving as both consultant and ``independent''
auditor for Enron.\1\
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\1\ Powers Report at 5. For example, Enron's records show that
Andersen billed Enron $5.7 million for advice in connection with the
now infamous ``LJM'' and ``Chewco'' transactions, beyond its regular
audit fees. Id.
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With the assistance of Andersen and its other auditors,
Enron apparently successfully deceived the investing public and
reaped millions for some select few insiders.\2\ To the outside
world, Enron and its auditors were either not reporting their
massive debt at all, or were making ``disclosures [that] were
obtuse, did not communicate the essence of [Enron] transactions
completely or clearly, and failed to convey the substance of
what was going on between Enron and its partnerships'' (Powers
Report at 17). In short, through the use of sophisticated
professional advice and complex financial structures, Enron and
Andersen were able to paint for the investing public a very
different picture of the company's financial health than the
true picture revealed. By the fall of 2001, the painting bore
little or no resemblance to the reality.
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\2\ For example, in one insider transaction, known as
``Southhampton Place,'' insider Andrew Fastow, a senior Enron official,
invested $25,000 and received $4.5 million in return in a period of two
months. Powers Report at 16. On an annual basis, this represents a
profit margin of over 100,000%.
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According to a federal indictment, on October 16, 2001,
Enron announced a $618 million net loss for the third quarter
of 2001 and that it would reduce shareholder equity by $1.2
billion.\3\ Six days later, the Securities and Exchange
Commission (``SEC'') began investigating the financial
practices of Enron and Andersen. On November 8, 2001, Enron
announced that it had overstated earnings during the prior four
years by $586 million and was responsible for $3 billion in
obligations that were never publicly reported. Upon these
disclosures, Enron stock fell to $8.41 a share and has since
fallen to less than $1 (the stock had been trading at near $90
per share). Less than a month later Enron filed for
bankruptcy--the largest corporate bankruptcy in the history of
the United States.
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\3\ See Indictment, United States v. Arthur Andersen LLP, Cr. No.
CRH-02-121, United States District Court for the Southern District of
Texas at 2-3. (``Andersen Indictment''). The indictment, filed on March
7, 2002, charges Andersen with persuading others to destroy documents
in violation of 18 U.S.C. Sec. 1512(b)(2).
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On February 6, 2001, at a Senate Judiciary Committee
hearing on ``Accountability Issues: Lessons Learned from
Enron's Fall'' (``Committee hearing''), witnesses testified
that Enron's sudden collapse left thousands of investors
holding virtually worthless stock, and most Enron employees
with a worthless retirement account. Pension funds nationwide,
including state and union-owned pension funds, literally lost
billions on Enron-related investments. Bruce Raynor, President
of the Union of Needletrades, Industrial and Textile Employees
(``UNITE'') and Vice President of the American Federation of
Labor-Congress of Industrial Organizations (``AFL-CIO''), and
Co-Chair of the Council of Institutional Investors, testified
that UNITE members lost millions in the Enron collapse and that
institutional investments, such as pension funds, are
``particularly vulnerable'' to such fraud because of their
reliance on index funds, which ``rely on the market to
accurately price securities.'' Firefighters, teachers, garment
workers, and police officers who had no way of knowing or
finding out about Enron's apparently deceitful conduct ahead of
time lost millions in pension fund investments.
Mr. Raynor, Washington State Attorney General Christine O.
Gregoire, and securities and legal ethics expert Professor
Susan P. Koniak, of the Boston University School of Law, also
testified that Enron was merely one extreme example of numerous
other cases of fraud on investors. Like those cases, the few at
Enron who profited appear to be senior officers and directors
who cashed out while they and professionals from accounting
firms, law firms and business consulting firms, who were paid
millions to advise Enron on these practices, assured others
that Enron was a solid investment.
C. The aftermath of Enron's collapse and the cover up
As investors and regulators attempted to ascertain both the
extent and cause of their losses, employees from Andersen were
allegedly shredding ``tons'' of documents, according to the
Andersen Indictment. Instead of preserving records relevant and
material to the later investigation of Enron or any private
action against Enron, ``Andersen partners assigned to the Enron
engagement team launched on October 23, 2001, a wholesale
destruction of documents at Andersen's offices in Houston,
Texas.'' Moreover, ``instead of being advised to preserve
documentation so as to assist Enron and the SEC, Andersen
employees on the Enron engagement team were instructed by
Andersen partners and others to destroy immediately
documentation relating to Enron, and told to work overtime if
necessary to accomplish the destruction'' (Andersen Indictment
at 5-6).
The systematic destruction of records apparently extended
beyond paper records and included efforts to ``purge the
computer hard drives and E-mail system of Enron related files''
not only in Houston but in Andersen's offices in Portland,
Chicago, Illinois, and London, England (Id. at 6). Indeed, the
current rules on audit record retention are so vague that
Andersen's lawyers issued ambiguous adviceencouraging such
document destruction--advice that they linked to highly questionable
interpretations of current law. In addition to the indictment of
Andersen, Andersen partner David Duncan, who did significant work for
Enron, has pleaded guilty to the same obstruction charge. Allegedly,
these actions were undertaken in anticipation of a SEC subpoena to
Andersen for its auditing and consulting work related to Enron.
The apparent efforts to cover up any alleged misconduct by
Enron or Andersen were not limited to Andersen and the
destruction of physical evidence and documents. In a variety of
instances when corporate employees at both Enron and Andersen
attempted to report or ``blow the whistle'' on fraud, but they
were discouraged at nearly every turn. For instance, a shocking
e-mail from Enron's outside lawyers to an Enron official was
uncovered. This e-mail responds to a request for legal advice
after a senior Enron employee, Sherron Watkins, tried to report
accounting irregularities at the highest levels of the company
in late August 2001. The outside lawyer's counseled Enron, in
pertinent part, as follows:
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 * * *
In other words, after this high level employee at Enron
reported improper accounting practices, Enron did not consider
firing Andersen; rather, the company sought advice on the
legality of discharging the whistleblower. Of course, Enron's
lawyers would claim that they merely provided their client with
accurate legal advice--there is no protection for corporate
whistleblowers under current Texas law. In the end, Ms. Watkins
did not report the matter to the authorities until after she
had been subpoenaed, and after ``tons'' of documents had been
destroyed.\4\
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\4\ ``Enron Changes Climate for Whistle-blowers,'' The Christian
Science Monitor, March 1, 2002.
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According to media accounts, this was not an isolated
example of whistleblowing associated with the Enron case. In
addition, a financial adviser at UBS Paine Webber's Houston
office claims that he was fired for e-mailing his clients to
advise them to sell Enron stock.\5\ A top Enron risk management
official alleges he was cut off from financial information and
later resigned from Enron after repeatedly warning both orally
and in writing as early as 1999 of improprieties in some of the
company's off-balance sheet partnerships.\6\ An Andersen
partner was apparently removed from the Enron account when he
expressed reservations about the firm's financial practices in
2000.\7\ These examples further expose a culture, supported by
law, that discourage employees from reporting fraudulent
behavior not only to the proper authorities, such as the FBI
and the SEC, but even internally. This ``corporate code of
silence'' not only hampers investigations, but also creates a
climate where ongoing wrongdoing can occur with virtual
impunity. The consequences of this corporate code of silence
for investors in publicly traded companies, in particular, and
for the stock market, in general, are serious and adverse, and
they must be remedied.
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\5\ ``Man Says Advice to Sell Enron Led to Firing,'' New York
Times, March 5, 2002.
\6\ ``Economist Raised Doubts About Partnerships; Enron Researcher
Raised Issue in '99,'' Houston Chronicle, March 19, 2002.
\7\ ``Andersen Whistleblower was Removed,'' New York Times, April
3, 2002.
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D. The legal and ethical landscape and the need for reform
The Committee hearing of February 6, 2002, revealed that
while Enron and Andersen were taking advantage of a system that
allowed them to behave in an apparently fraudulent manner, as
well as engage in both the destruction of valuable evidence and
retaliation against potential witnesses, the regulators, the
victims of fraud, and the corporate whistleblowers were faced
with daunting challenges to punish the wrongdoers and protect
the victims' rights. The legal regime that, on one hand,
allowed this conduct to take place, and, on the other, may
serve as an impediment to punishing all the wrongdoers and
protecting all the victims has led to widespread calls for
reform and support for S. 2010, in particular.
The following groups and individuals have written in
support of S. 2010: a bipartisan group of State Attorneys
General from Kansas, Oklahoma, Oregon, Georgia, Washington,
Ohio, and Vermont, including both the current and incoming
heads of the National Association of Attorneys General; the
North American Securities Administrators Association, whose
membership consists of the securities administrators in all
fifty states, the District of Columbia, Canada, Mexico, and
Puerto Rico; the AFL-CIO; numerous whistleblower protection
groups, including the Government Accountability Project,
Taxpayers Against Fraud, and the National Whistleblower Center;
consumer protection groups, including the Consumers Union and
the Consumer Federation of America; the Vermont Department of
Banking, Insurance, Securities and Health Care Administration;
and the California State Teachers' Retirement System.
Outlined below are some of the shortcomings in current law
that the Enron matter has publicly exposed.
First, unlike bank fraud, health care fraud, and bankruptcy
fraud, there is no specific ``securities fraud'' provision in
the criminal code to outlaw the breadth of schemes and
artifices to defraud investors in publicly traded companies.\8\
Currently, in securities fraud cases, prosecutors must rely on
generic mail and wire charges that carry maximum penalties of
up to only five years imprisonment and require prosecutors to
carry the sometimes awkward burden of proving the use of the
mail or the interstate wires to carry out the fraud.
Alternatively, prosecutors may charge a willful violation of
certain specific securities laws or regulations, but such
regulations often contain technical legal requirements, and
proving willful violations of these complex regulations allows
defendants to argue that they did not possess the requisite
criminal intent.\9\ There is no logical reason for imposing
such awkward and heightened burdens on the prosecution of
criminal securities fraud cases. The investing public is
entitled to no less protection than those who keep money in
federally insured financial institutions enjoy under the bank
fraud statute.
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\8\ See 18 U.S.C. 1344 (bank fraud), 1347 (health care fraud), and
157 (bankruptcy fraud).
\9\ See e.g., SEC v. Zandford, 238 F.3d 559 (4th Cir. 559) (holding
that straight out stealing of investors' money did not violate SEC rule
10b-5 because stealing was not sufficiently related to technical
``purchase or sale'' requirement), cert. granted, 122 S. Ct. 510
(2001). This case is one, although not the only example, of why federal
prosecutors are justifiably hesitant to include technical SEC
regulations as part of a criminal indictment.
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Second, current federal obstruction of justice statutes
relating to document destruction is riddled with loopholes and
burdensome proof requirements. Those provisions are a patchwork
of various prohibitions that have been interpreted very
narrowly by federal courts. For instance, certain 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 destroy the same documents personally.
Other provisions, such 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 when the obstruction of
justice may be closely tied to a judicial proceeding. 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 must be corrected.
Indeed, even in the current Andersen case, prosecutors have
been forced to use the ``witness tampering'' statute, 18 U.S.C.
1512, and to proceed under the legal fiction that the
defendants are being prosecuted for telling other people to
shred documents, not simply for destroying evidence themselves.
Although prosecutors have been able to bring charges thus far
in the case, in a case with a single person doing the
shredding, this legal hurdle might present an insurmountable
bar to a successful prosecution. When a person destroys
evidence with the intent of obstructing any type of
investigation and the matter is within the jurisdiction of a
federal agency, overly technical legal distinctions should
neither hinder nor prevent prosecution and punishment.
Even more surprising, in the context of audits and reviews
conducted under the Securities and Exchange Act of 1934, there
is currently no clear statutory requirement that accountants
retain the most basic work papers to support the conclusions
reached and opinions expressed in their audits, much less more
detailed records, to facilitate determinations by federal
regulators and law enforcement officials of whether a
corporation or its accountants tried to mislead the public, as
in the Enron matter.
Third, federal sentences sufficiently neither punish
serious frauds and obstruction of justice nor take into account
all aggravating factors that should be considered in order to
enhance sentences for the most serious fraud and obstruction of
justice cases. Currently, United States Sentencing
Guidelines(U.S.S.G.) Sec. 2J1.2 recognizes 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 when obstruction is the only offense, however, the guidelines
provide little assistance in differentiating between different types of
obstruction--including the organized, large scale shredding that
apparently occurred in the Enron/Andersen matter.
The current fraud sentencing guidelines also fail to
provide for sufficient additional punishment based upon certain
important aggravating factors. For instance, the fraud
guidelines in U.S.S.G. Sec. 2B1.1, require the sentencing judge
to take the number of victims into account, but only to very
limited degrees in small and medium-sized cases. Specifically,
once there are more than fifty victims, the guidelines do not
require any further enhancement of the sentence, so that a case
with fifty-one victims may be treated the same as a case with
five thousand victims. As the Enron matter demonstrates,
serious frauds, especially for cases in which publicly traded
securities are involved, can leave thousands of victims robbed
of their life savings. In addition, while the 2B1.1 guidelines
provide a specific offense characteristic to enhance sentences
where a financial institution's solvency is jeopardized, there
is no similar enhancement for the risk of devastating a
substantial number of private fraud victims, which is instead
treated only as a ground for departure. That distinction is
unsound and should be reconsidered. Finally, the Chapter 8
Guidelines relating to Sentencing Organizations for criminal
conduct are outdated and do not sufficiently deter
organizational or corporate misconduct.
Fourth, innocent, defrauded investors attempting to recoup
their losses face unfair time limitations under current law.
The current statute of limitations for most securities fraud
cases is three years from the date of the fraud or one year
after the fraud was discovered. This can unfairly limit
recovery for defrauded investors in some cases. As Washington
State Attorney General Gregoire testified at the Committee
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 alleged securities fraud
in1997 and 1998. In Washington state alone, the short statute
of limitations may cost hard-working state employees,
firefighters and police officers nearly $50 million in lost
Enron investments, which they will never recover.
Especially in complex securities fraud cases, the current
short statute of limitations may insulate the worst offenders
from accountability and rewards those who can successfully
cover up their misconduct for at least a year. 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 Supreme Court decision that changed decades of
presumably settled law, and imposed a uniform, 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 three years after the violation
occurred.''\10\
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\10\ Lampf, Pleva. Lipkind, Prupis, & Petigrow v. Gilbertson, 111
S. Ct. 2773, 2790 (1991). In Lampf, the 5-4 majority changed the
decades old practice of deferring to state limitations period in
securities fraud cases, and it adopted a national statute of
limitations instead. In addition, as opposed to adopting the longer
federal limitations period that the SEC and then Solicitor General
Kenneth Starr supported from a 1988 securities law, id. at 2781, the
Court held not only that the shorter ``1 and 3'' period imported from
Sec. 9(e) of the 1934 Act (15 U.S.C. Sec. 78i(e)) governed, but that
fraud victims did not even have the right to raise the customary
doctrine of ``equitable tolling,'' which can protect them in cases
where they can demonstrate that the defendant took affirmative steps to
conceal the fraud. Id. at 2782. In short, current law encourages fraud
artists to game the system.
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Other experts agree with Justices Kennedy and O'Connor. 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 three years.'' Before
Chairman Levitt, in the first 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.
The one year statute of limitations from the date the fraud
is discovered is also particularly harsh on innocent defrauded
investors. This short limitations period has the effect of
placing true fraud victims on a ``stop watch,'' from the moment
they know that they have been cheated. As most prosecutors and
victims will confirm, however, the best cons are designed so
that even after victims are cheated, they will not know who
cheated them, or how. Especially in securities fraud cases, the
complexities of how the fraud was executed often take well over
a year to unravel, even after the fraud is discovered. Even
with use of the full resources of the FBI, a Special Task Force
of Justice Department Attorneys, and the power of a federal
grand jury, complex fraud cases such as Enron are difficult to
unravel and rarely can be charged within a year.
This one year ``stop watch'' is even more unfair when
considered in light of the significant obstacles that current
law places between a victim and the courthouse in securities
fraud cases. A lead plaintiff must be selected by the court, a
process that can take months. Discovery is automatically stayed
during the pendency of any motion to dismiss, consideration of
which can take over a year in itself. During that period the
stop watch continues to run on the claim, even though the
victim has little or no ability to find out more about exactly
who participated in the fraudulent activity and how the fraud
was accomplished. With the higher pleading standards that also
govern securities fraudvictims, it is unfair to expect victims
to be able to negotiate such obstacles in the span of 12 months (See 15
U.S.C. Sec. 78u-4).
In short, by the time a victim learns enough facts to file
a complaint under a heightened pleading standard, survives a
motion to dismiss, begins discovery, and learns that an
additional wrongdoer or theory should be added to the case,
that claim is likely to be time barred, then the wrongdoer is
able to avoid liability and the victim is left holding the
proverbial bag. Moreover, current law sets up a perverse
incentive for victims to race into court, so as not to be
barred by time, and immediately sue. Plaintiffs who wish to
spend more time investigating the matter or trying to resolve
the matter without litigation are punished under the current
law.
Furthermore, the short statute of limitations does nothing
to discourage frivolous cases, as a plaintiff operating in bad
faith would have little trouble meeting the one year deadline
and simply throwing in every possible defendant and every
claim. After all, by definition of the so-called ``strike
suit,'' filing occurs almost immediately upon a change in the
stock price. Instead of stopping bad faith suits, the short
statute merely blocks the meritorious claims of fraud victims.
Statutes of limitations are simply not proper means of deciding
legitimate cases which should be decided on the merits--that is
the role of the underlying substantive law.
In many securities 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, and unfortunately they have been proven right. Based on
the Enron and Andersen cases, it only takes a few seconds to
warm up the shredder, but it will take years for victims to put
this complex case back together again. It is time that the law
is changed to provide victims the time they need to prove their
cases to recoup their losses.
Fifth, victims of securities fraud can be thwarted from
fair recovery when a debtor, such as Enron, declares
bankruptcy. Current bankruptcy law permits 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 incur debts by violating our securities laws.
State regulators are also unfairly disadvantaged under the
current system. Under current laws, state regulators are often
forced to ``re-prove'' 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 limited resources
already stretched to protect fraud victims, state regulators
must plow the same ground twice in securities fraud cases.\11\
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\11\ The North American Securities Administrators Association
(NASAA) has endorsed S. 2010, stating that it would ``enhance the
ability of state and federal regulators to help defrauded investors
recoup their losses and to hold accountable those who perpetrate
securities fraud.'' See letter from Joseph P. Borg, NASAA President and
Director of Alabama Securities Commission.
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Sixth, corporate whistleblowers are left unprotected under
current law. This is a significant deficiency because often, in
complex fraud prosecutions, these insiders are the only
firsthand witnesses to the fraud. They are the only people who
can testify as to ``who knew what, and when,'' crucial
questions not only in the Enron matter but in all complex
securities fraud investigations. 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 one in every two Americans
investing in public companies, this distinction fails to serve
the public good.
Corporate employees who report fraud are subject to the
patchwork and vagaries of current state laws, although 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, as demonstrated in the
tobacco industry litigation and the Enron case, efforts to
quiet whistleblowers and retaliate against them for being
``disloyal'' or ``litigation risks'' transcend state lines.
This corporate culture must change, and the law can lead the
way. That is why S. 2010 is supported by public interest
advocates, such as the National Whistleblower Center, the
Government Accountability Project, and Taxpayers Against Fraud,
who have called this bill ``the single most effective measure
possible to prevent recurrences of the Enron debacle and
similar threats to the nation's financial markets.''
E. The future
Many people and institutions contributed to the Enron
debacle, including the corporate officers and directors whose
actions led to Enron's failure, the well-paid professionals who
helped create, carry out, and cover up the complicated
corporate ruse when they should have been raising concerns, the
regulators who did not protect the public and our public
markets, and the Congress and the courts, which have thrown
obstacles in the way of securities fraud victims. Now Congress
must contribute to making the Enron situation right and
ensuring that this never happens again. Without discipline,
professionalism, an effective legal structure, and
accountability, greed can run rampant, with devastating
results. Unfortunately, business failures during a permissive
era rarely happen in isolation.
Accountability is important and must be restored because
Enron is not alone. It is only a case study exposing the
shortcomings in our current laws. At the Committee hearing,
experts gave investors the grave warnings that it is likely
that there are more ``Enrons'' lurking out there, simply
eluding discovery. Future debacles wait 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 public markets.
The majority of Americans depend on capital markets to
invest in the future needs of their families--from their
children's college fund to their retirement nest eggs. American
investors deserve action.Congress must act now to restore
confidence in the integrity of the public markets and deter fraud
artists who believe their crimes will go unpunished. Restoring such
accountability is the aim of the Corporate and Criminal Fraud
Accountability Act of 2002.
Accountability and transparency help our markets work as
they should, in ways that benefit investors, employees,
consumers and our national economy. The Enron debacle has
arrived on our doorstep, and our job is to make sure that there
are adequate doses of accountability in our legal system to
prevent such occurrences in the future, and to offer a
constructive remedy and decisive punishment should they occur.
The time has come for Congress to rethink and reform our laws
in order to prevent corporate deceit, to protect investors and
to restore full confidence in the capital markets.
III. Section-by-Section Analysis and Discussion
S. 2010 has three major components that will enhance
accountability. First, it provides prosecutors with new and
better tools to effectively prosecute and punish those who
defraud investors, which means ensuring criminal laws are
flexible enough to keep pace with the most sophisticated and
clever con artists. It also means providing for criminal
penalties tough enough to make them think twice before
defrauding the public.
Second, this bill establishes tools to improve the ability
of investigators and regulators to collect and preserve
evidence which proves fraud. This ensures 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, S. 2010 will not only
save documents from the shredder, but also send wrongdoers to
jail once they are caught.
section-by-section analysis
Section 1.--Title. ``Corporate and Criminal Fraud
Accountability Act.''
Section 2. Criminal penalties for altering 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 and the preservation
of financial and audit records.
First, this section would create a new 10-year felony which
could be effectively used in a wide array of cases where a
person destroys or creates evidence with the intent to obstruct
an investigation or matter that is within the jurisdiction of
any federal agency or any bankruptcy.
Second, the section creates a new 5-year felony which
applies specifically to the willful failure to preserve audit
papers of companies that issue securities. Section (a) of the
statute has two sections which apply to accountants who conduct
audits under the provisions of the Securities and Exchange Act
of 1934. Subsection (a)(1) is an independent criminal
prohibition on the destruction of audit or review work papers
for five years, as that term is widely understood by regulators
and in the accounting industry. Subsection (a)(2) requires the
SEC to promulgate reasonable and necessary regulations within
180 days, after the opportunity for public comment, regarding
the retention of categories of electronic and non electronic
audit records which contain opinions, conclusions, analysis or
financial data, in addition to the actual work papers. Willful
violation of such regulations would be a crime. Neither the
statute nor any regulations promulgated under it would relieve
any person of any independent legal obligation under state or
federal law to maintain or refrain from destroying such
records.
Section 3.--Debts nondischargeable if incurred in violation of
securities fraud laws
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.
Section 4.--Statute of limitations
This section would set the statute of limitations in
private securities fraud cases to the earlier of five years
after the date of the fraud or two years after the fraud was
discovered. The current statute of limitations for most private
securities fraud cases is the earlier of three years from the
date of the fraud or one year from the date of discovery. This
provision states that it is not meant to create any new private
cause of action, but only to govern already existing private
causes of action under federal securities laws.
Section 5.--Review and enhancement of criminal sentences in cases of
fraud and evidence destruction
This section would require the United States Sentencing
Commission (``Commission'') to review and consider enhancing,
as appropriate, criminal penalties in cases involving
obstruction of justice and in serious fraud cases. The
Commission is also directed to generally review the U.S.S.G.
Chapter 8 guidelines relating to sentencing organizations for
criminal misconduct, to ensure that such guidelines are
sufficient to punish and deter criminal misconduct by
corporations.
Subsection 1 requires that the Commission generally review
all the base offense level and sentencing enhancements under
U.S.S.G. Sec. 2J1.2. Subsection 2 specifically directs the
Commission to consider including enhancements or specific
offense characteristics for cases based on various factors
including the destruction, alteration, or fabrication of
physical evidence, the amount of evidencedestroyed, the number
of participants, or otherwise extensive nature of the destruction, the
selection of evidence that is particularly probative or essential to
the investigation, and whether the offense involved more than minimal
planning or the abuse of a special skill or position of trust.
Subsection 3 requires the Commission to establish appropriate
punishments for the new obstruction of justice offenses created in this
Act.
Subsections 4 and 5 require the Commission to review
guideline offense levels and enhancements under U.S.S.G.
Sec. 2B1.1, relating to fraud. Specifically, the Commission is
requested to review the fraud guidelines and consider
enhancements for cases involving significantly greater than 50
victims and cases in which the solvency or financial security
of a substantial number of victims is endangered. Subsection 6
requires a comprehensive review of Chapter 8 guidelines
relating to sentencing organizations.
Section 6.--Whistleblower protection for employees of publicly traded
companies
This section would provide whistleblower protection to
employees of publicly traded companies. 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. If the employer does take illegal
action in retaliation for lawful and protected conduct,
subsection (b) allows the employee to file a complaint with the
Department of Labor, to be governed by the same procedures and
burdens of proof now applicable in the whistleblower law in the
aviation industry.\12\ The employee can bring the matter to
federal court only if the Department of Labor does not resolve
the matter in 180 days (and there is no showing that such delay
is due to the bad faith of the claimant) as a normal case in
law or equity, with no amount in controversy requirement.
Subsection (c) governs remedies and provides for the
reinstatement of the whistleblower, backpay, and compensatory
damages to make a victim whole, including reasonable attorney
fees and costs, as remedies if the claimant prevails.
---------------------------------------------------------------------------
\12\ See 49 U.S.C. Sec. 42121 et seq.
---------------------------------------------------------------------------
Section 7.--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, with elements and intent requirements
comparable to current bank fraud and health care fraud
statutes.
discussion
S. 2010 is one part of the response needed to solve the
problems exposed by Enron's fall. Securities law experts,
consumer protection groups, and others in Congress, both in the
Senate and the Houseof Representatives, have made various
proposals and introduced legislation that deserve careful
consideration. Certainly, in light of recent events, careful
reexamination is required of both the decisions of the Supreme Court
and current laws. Despite the best of intentions, federal laws may have
helped create an environment in which greed was inflated and integrity
devalued. S. 2010 is an important starting point in that process.
Following is a discussion and analysis of the bill's provisions.
Section 2 of the bill would create two new felonies to
clarify and close loopholes in the existing criminal laws
relating to the destruction or fabrication of evidence and the
preservation of financial and audit records. First, it creates
a new general anti shredding provision, 18 U.S.C. Sec. 1519,
with a 10-year maximum prison sentence. Currently, provisions
governing the destruction or fabrication of evidence are a
patchwork that have been interpreted, often very narrowly, by
federal courts. For instance, certain current provisions make
it a crime to persuade another person to destroy documents, but
not a crime to actually destroy the same documents
yourself.\13\ Other provisions, such as 18 U.S.C. Sec. 1503,
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. Still other
statutes have been interpreted to draw distinctions between
what type of government function is obstructed.\14\ 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 technical
limitations that should be corrected. This provision is meant
to accomplish those ends.
---------------------------------------------------------------------------
\13\ See 18 U.S.C. Sec. 1512(b).
\14\ See United States v. Frankhauser, 80 F.3d 641 (1st Cir. 1996)
(1503 prohibits destroying evidence to thwart grand jury investigation,
but not FBI investigation).
---------------------------------------------------------------------------
Section 1519 is meant to apply broadly to any acts to
destroy or fabricate physical evidence so long as they are done
with the intent to obstruct, impede or influence the
investigation or proper administration of any matter, and such
matter is within the jurisdiction of an agency of the United
States, or such acts done either in relation to or in
contemplation of such a matter or investigation. This statute
is specifically meant not to include any technical requirement,
which some courts have read into other obstruction of justice
statutes, to tie the obstructive conduct to a pending or
imminent proceeding or matter. It is also sufficient that the
act is done ``in contemplation'' of or in relation to a matter
or investigation. It is also meant to do away with the
distinctions, which some courts have read into obstruction
statutes, between court proceedings, investigations, regulatory
or administrative proceedings (whether formal or not), and less
formal government inquiries, regardless of their title.
Destroying or falsifying documents to obstruct any of these
types of matters or investigations, which in fact are proved to
be within the jurisdiction of any federal agency are covered by
this statute.\15\ Questions of criminal intent are, as in all
cases, appropriately decided by a jury on a case-by-cases
basis. It also extends to acts done in contemplation of such
federal matters, so that the timing of the act in relation to
the beginning of the matter or investigation is also not a bar
to prosecution. The intent of the provision is simple; people
should not be destroying, altering, or falsifying documents to
obstruct any government function. Finally, this section could
also be used to prosecute a person who actually destroys the
records himself in addition to one who persuades another to do
so, ending yet another technical distinction which burdens
successful prosecution of wrongdoers.\16\
---------------------------------------------------------------------------
\15\ See 18 U.S.C. Sec. 1001.
\16\ See 18 U.S.C. Sec. 1512(b).
---------------------------------------------------------------------------
Second, Section 2 creates a five-year felony, 18 U.S.C.
Sec. 1520, to punish the willful failure to preserve financial
audit papers of companies that issue securities as defined in
the Securities Exchange Act of 1934. The new statute, in
subsection (a)(1), would independently require that accountants
preserve audit work papers for five years from the conclusion
of the audit. Subsection (b) would make it a felony to
knowingly and willfully violate the five-year audit retention
period in (1)(a). The materials covered in subsection (1)(b),
which requires the SEC to issues reasonable rules and
regulations, are intended to include additional records which
contain conclusions, opinions, analysis, and financial data
relevant to an audit or review. The regulations are intended to
cover the retention of such substantive material, whether or
not the conclusions, opinions, analyses or data in such records
support the final conclusions reached by the auditor or
expressed in the final audit or review so that state and
federal law enforcement officials and regulators can conduct
more effective inquiries into the decisions and determinations
made by accountants in auditing public corporations. Non-
substantive materials, however, such as administrative records,
which are not relevant to the conclusions or opinions expressed
(or not expressed), need not be included in such retention
regulations. The language of the provision is clear. The SEC
``shall'' promulgate regulations relating to the retention of
the categories of items which are specifically enumerated in
the statutory provision. Willful violation of these regulations
will also be a crime under this section.
In light of the apparent massive document destruction by
Andersen, and the company's apparently misleading document
retention policy, even in light of its prior SEC violations, it
is intended that the SEC promulgate rules and regulations that
require the retention of such substantive material, including
material which casts doubt on the views expressed in the audit
of review, for such a period as is reasonable and necessary for
effective enforcement of the securities laws and the criminal
laws, most of which have a five-year statute of limitations. It
should also be noted that criminal tax violations, which many
of these documents relate to, have a six-year statute of
limitations. By granting the SEC the power to issue such
regulations, it is not intended that the SEC be prohibited from
consulting with other government agencies, such as the
Department of Justice, which has primary authority regarding
enforcement of federal criminal law or pertinent state
regulatory agencies. Nor is it the intention of this provision
that the general public, private or institutional investors, or
other investor or consumer protection groups be excluded from
the SEC rulemaking process. These views of these groups, who
often represent the victims of fraud, should be considered at
least on an equal footing with ``industry experts'' and others
who participate in the rulemaking process at the SEC.
This section not only penalizes the willful failure to
maintain specified audit records, but also will result in clear
and reasonable rules that will require accountants to put
strong safeguards in place to ensure that such corporate audit
records are retained. Had such clear requirements and policies
been established at the time Andersen was considering what to
do with its audit documents, countless documents might have
been saved from the shredder. The idea behind the statute is
not only to provide for prosecution of those who obstruct
justice, but to ensure that important financial evidence is
retained so that law enforcement officials, regulators, and
victims can assess whether the law was broken to begin with
and, if so, whether or not such was done intentionally, or with
or without the knowledge or assistance of an auditor.
Section 3 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 violate securities laws after a government unit or
private suit results in a judgement or settlement against the
wrongdoer.
State securities regulators have indicated their strong
support for this change in the bankruptcy law. 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, state regulators must plow the same ground
twice in securities fraud cases. By ensuring securities law
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 4 of S. 2010 would protect victims by extending the
statute of limitations in private securities fraud cases. It
would set the statute of limitations in private securities
fraud cases to the earlier of five years after the date of the
fraud or two years after the fraud was discovered. The current
statute of limitations for most such fraud cases is three years
from the date of the fraud or one year after discovery, which
can unfairly limit recovery for defrauded investors in some
cases. As Attorney General Gregoire testified at the Committee
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 alleged 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 in lost Enron
investments which they can never recover.
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 three years
after the violation occurred.'' The Consumers Union and
Consumer Federation of America, along with the AFL-CIO and
other institutional investors, strongly support the bill, and
view 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. Former 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 three 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 recent
experience shows, 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.\17\ It is time that
the law is changed to give victims the time they need to prove
their fraud cases.
---------------------------------------------------------------------------
\17\ Of course, the allegations in the Enron case as set forth in
this report are still being investigated, and 8 months after the public
disclosures of Enron's conduct, not one Enron executive has been
charged, even with the resources of the FBI available. That is another
example of why a one year statute of limitations for such complex fraud
cases is simply unreasonable.
---------------------------------------------------------------------------
Section 5 of S. 2010 ensures that those who destroy
evidence or perpetrate fraud are appropriately punished. It
would require the Commission to consider enhancing criminal
penalties in cases involving obstruction of justice and serious
fraud cases where a large number of victims are injured or when
the victims face financial ruin.
Currently, the U.S.S.G. 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 U.S.S.G. allow, by cross reference,
significant enhancements based on the underlying crimes, such
as murder or attempted murder. For cases when obstruction is
the only offense, however, they provide little guidance on
differentiating between different types of obstruction. This
provision requests that the Commission consider raising the
penalties for obstruction where no cross reference is available
and defining meaningful specific enhancements and adjustments
for cases whereevidence and records are actually destroyed or
fabricated (and for more serious cases even within that category of
case) so as to thwart investigators, a serious form of obstruction.
This provision, in subsections (4) and (5), also requires
that the Commission consider enhancing the penalties in fraud
cases which are particularly extensive or serious, even in
addition to the recent amendments to the Chapter 2 guidelines
for fraud cases. The current fraud guidelines require that the
sentencing judge 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. A case with 51 victims, therefore, 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 affect thousands
of victims.
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. This is not a factor in establishing the range itself
unless the victim is a financial institution. Subsection (5)
requires the Commission to consider requiring judges to
consider the extent of such devastation in setting the actual
recommended sentencing range in cases such as the Enron matter,
when many private victims, including individual investors, have
lost their life savings. Finally this provision requires a
complete review of the Chapter 8 corporate misconduct
guidelines, which are outdated and need to be toughened to
deter corporate crime.
Section 6 of the bill would provide whistleblower
protection to employees of publicly traded companies who report
acts of fraud to federal officials 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 (e.g.,
Texas, see supra) may be far more vulnerable to retaliation
than a fellow employee in another state who takes the same
actions. Unfortunately, companies with a corporate culture that
punishes whistleblowers for being ``disloyal'' and ``litigation
risks'' often transcend state lines, and most corporate
employers, with help from their lawyers, know exactly what they
can do to a whistleblowing employee under the law. U.S. laws
need to encourage and protect those who report fraudulent
activity that can damage innocent investors in publicly traded
companies. S. 2010 is supported by groups such as the National
Whistleblower Center, the Government Accountability Project,
and Taxpayers Against Fraud, all of whom have written a letter
placed in the Committee record 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 provision 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 at any later
proceeding would be strong indicia that it could support such a
reasonable belief.
Under new protections provided by S. 2010, 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 aviation
safety. Only if there is no final agency decision within 180
days of the complaint (and such delay is not shown to be due to
the bad faith of the claimant) may he or she may bring a de
novo case in federal court with a jury trial available (See
United States Constitution, Amendment VII; Title 42 United
States Code, Section 1983). Should such a case be brought in
federal court, it is intended that the same burdens of proof
which would have governed in the Department of Labor will
continue to govern the action. Subsection (c) of this section
requires both reinstatement of the whistleblower, backpay, and
compensatory damages to make a victim whole should the claimant
prevail. 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 7 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 that deals 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 and regulations, 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 five 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. It adds a provision to Chapter 63 of Title 18 at
section 1348 which would criminalize the execution or attempted
execution of any scheme or artifice to defraud persons in
connection with securities of publicly traded companies or
obtain their money or property. The provision should not be
read to require proof of technical elements from the securities
laws, and is intended to provide needed enforcement flexibility
in the context of publicly traded companies to protect
shareholders and prospective shareholders against all the types
schemes and frauds which inventive criminals may devise in the
future. The intent requirements are to be applied consistently
with those found in 18 U.S.C. Sec. Sec. 1341, 1343, 1344, 1347.
By covering all ``schemes and artifices to defraud'' (see
18 U.S.C. Sec. Sec. 1344, 1341, 1343, 1347), new Sec. 1348 will
be more accessible to investigators and prosecutors and will
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.
This bill is only part of the needed response to the
problems exposed by the Enron debacle. For instance, a
provision granting State Attorneys General and the SEC the
authority to use the civil RICO statute would have been another
important tool in battling fraud and protecting investors. The
SEC has tremendous expertise in protecting investors, and the
States, whose officials are more directly accountable to the
public than federal officials, have traditionally played a
major positive role in responsibly exercising their authority
to protect our nation's investors and consumers. The tobacco
industry litigation is but one recent example of this important
role played by the States. Although the provision had received
bipartisan support from State Attorneys General around the
nation, it was removed from S. 2010 as a compromise, after
objections were raised that such elected state officials could
not be entrusted with the same enforcement powers as the
federal government.
Changes are clearly needed to restore accountability in
U.S. markets, which have already been adversely affected by
recent events. 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. Congress must
reconsider the incentive system that has been set up that
encourages accountants and lawyers who come across fraud in
their work to remain silent.
IV. Committee Consideration
On Thursday, April 25, 2002, the full Committee met in open
session and ordered favorably reported the bill, S. 2010, by
unanimous consent, with an amendment in the nature of a
substitute sponsored by Senator Leahy and, after adopting an
amendment sponsored by Senator Hatch and cosponsored by Senator
Leahy and Senator Schumer, an amendment sponsored by Senator
Feinstein and cosponsored by Senator Cantwell, and an amendment
sponsored by Senator Grassley and cosponsored by Senator Leahy,
a quorum being present.
V. Votes of the Committee
First, Senator Leahy offered an amendment in the nature of
a substitute, clarifying that the statute of limitations
provision in Section 5 of S. 2010 was not intended to establish
any new private right of action, amending Section 7 of S. 2010
dealing with whistleblowers, removing Section 3 from S. 2010,
which would have authorized State Attorneys General and the
Securities and Exchange Commission to bring suits under 18
U.S.C. Sec. 1964 [civil provision of the Racketeering
Influenced Corrupt Organizations Act (``RICO'')], and
renumbering the remaining provisions accordingly. This
substitute was accepted by unanimous consent.
Second, Senator Hatch offered an amendment to the
substitute, cosponsored by Senator Leahy and Senator Schumer,
to make technical corrections to the criminal provisions,
defining a publicly tradedcompany in Section 7 of the
substitute, narrowing the scope of the new audit records destruction
crime created in Section 2 of the substitute, raising the maximum
penalty for the general anti-shredding provision created in Section 2
of the substitute (new 18 U.S.C. Sec. 1519) from 5 to 10 years, and
modifying and adding additional provisions to Section 5 of the
substitute relating to review of the sentencing guidelines in fraud and
obstruction of justice cases a well as for organizational misconduct.
The amendment was adopted by vote of 18 yeas to 0 nays.
Yeas Nays
Leahy
Kennedy (proxy)
Biden (proxy)
Kohl
Feinstein
Feingold
Schumer
Durbin
Cantwell
Edwards (proxy)
Hatch
Thurmond (proxy)
Grassley
Kyl (proxy)
DeWine
Sessions (proxy)
Brownback
McConnell (proxy)
Third, Senator Feinstein offered an amendment, cosponsored
by Senator Cantwell, to Section 4 of the substitute to lower
the statute of limitations created in that provision from the
earlier of 3 years from the date of discovery of the fraud or
five years from the fraud to the earlier of 2 years from the
date of discovery of the fraud or 5 years from the fraud.
Senator Hatch offered a second degree amendment to the
Feinstein-Cantwell amendment to strike the statute of
limitations provision in Section 4 of the substitute. Senator
Hatch's second degree amendment was rejected by vote of 7 yeas
to 11 nays.
Yeas Nays
Hatch Leahy
Thurmond (proxy) Kennedy (proxy)
Grassley Biden (proxy)
Kyl (proxy) Kohl
DeWine Feinstein
Sessions (proxy) Feingold
McConnell (proxy) Schumer
Durbin
Cantwell
Edwards (proxy)
Brownback
The Feinstein-Cantwell amendment was then adopted by voice
vote.
Fourth, Senator Grassley offered an amendment, cosponsored
by Senator Leahy, to Section 5 of the substitute dealing with
whistleblower rights. This amendment replaced the option for
immediate suit in federal court with an administrative remedy
and resort to federal court if the administrative decision is
not made within six months, removed enhanced penalties in
whistleblower matters, removed the provision dealing with
arbitration agreements, and lowered the statute of limitations
in whistleblower cases from 180 to 90 days. The amendment was
adopted by unanimous consent.
The Committee agreed to favorably report S. 2010, as
amended, by unanimous consent.
VI. Congressional Budget Office Cost Estimate
In compliance with paragraph 11(a) of rule XXVI of the
standing rules of the Senate, the Committee sets forth, with
respect to the bill, S. 2010, the following estimate and
comparison prepared by the Director of the Congressional Budget
Office under section 403 of the Congressional Budget Act of
1974:
VII. Regulatory Impact Statement
U.S. Congress,
Congressional Budget Office,
Washington, DC, May 2, 2002.
Hon. Patrick J. Leahy,
Chairman, Committee on the Judiciary,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 2010, the Corporate
and Criminal Fraud Accountability Act of 2002.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Ken Johnson
(for federal costs), Susan Sieg Tompkins (for the state and
local costs), and Paige Piper/Bach (for the private-sector
impact).
Sincerely,
Barry B. Anderson
(For Dan L. Crippen, Director).
Encloures:
S. 2010--Corporate and Criminal Fraud Accountability Act of 2002
Summary: S. 2010 would create new crimes for persons who
destroy records that could aid a federal investigation, people
who commit securities fraud, or auditors who intentionally fail
to retain certain audit records five years. In addition, the
bill would prohibit certain fines assessed for violations of
securities laws from being discharged in bankruptcy
proceedings. Under S. 2010, employees who aid the SEC with
investigations of publicly traded companies and who are
subsequently discriminated against by their employer would have
access to the Occupational Safety and Health Administration's
(OSHA's) program for investigating illegal discrimination and
termination of whistleblowers.
CBO estimates that implementing S. 2010 would cost about $2
million over the 2003-2007 period, subject to the availability
of appropriated funds. The bill also would increase direct
spending and receipts by less than $500,000 a year; therefore,
pay-as-you-go procedures would apply.
S. 2010 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA) and would not affect
the budgets of state, local, or tribal governments. This
legislation would impose private-sector mandates, as defined by
UMRA, but CBO estimates that the direct cost of the mandates
would fall well below the annual threshold established by UMRA
($115 million in 2002, adjusted annually for inflation).
Estimated cost to the Federal Government: CBO estimates
that implementing S. 2010 would cost about $2 million over the
2003-2007 period, subject to the availability of appropriated
funds. This bill also would increase direct spending and
receipts by less than $500,000 a year. The costs of this
legislation fall within budget functions 370 (mortgage and
housing credit) and 550 (health).
Basis of estimate: For this estimate, CBO assumes that S.
2010 will be enacted before the start of fiscal year 2003, and
that the necessary amounts will be appropriate each fiscal
year. Components of the estimated costs are described below.
Spending subject to appropriation
Under S. 2010, employees who provide information or
otherwise assist investigations could file claims with OSHA in
the event of discrimination or termination by their employer as
a result of their whistleblowing activities. OSHA currently
investigates whistleblower claims of discrimination against
employers who violate occupational or environmental laws and
regulations. To handle the additional claims that would arise
if S. 2010 were enacted. CBO assumes OSHA would have to hire
three additional employees. Subject to the availability of
appropriated funds, CBO estimates that implementing the bill
would cost less than $500,000 in 2003 and about $2 million over
the 2003-2007 period.
Under S. 2010, the federal government would be able to
pursue cases that it otherwise would not be able to prosecute.
CBO expects that any increase in federal costs for law
enforcement, court proceedings, or prison operations would not
be significant, however, because of the small number of cases
likely to be involved. Any such additional costs would be
subject to the availability of appropriated funds.
Direct Spending and Revenues
Because those prosecuted and convicted under S. 2010 could
be subject to criminal fines, the federal government might
collect additional fines if the bill is enacted. Collections of
such fines are recorded in the budget as governmental receipts
(revenues), which are deposited in the Crime Victims Fund and
spent in subsequent years. CBO expects that any additional
receipts and direct spending would be less than $500,000 each
year.
S. 2010 also would affect revenues by preventing certain
fines the SEC assesses for violations for securities laws from
being discharged in bankruptcy proceedings. This provision
would apply to disgorgement funds, under which the SEC collects
payments from violators and distributes them directly to the
victims of the violation. Typically, these disgorgement funds
are deposited in the Treasury only if the administrative costs
of distributing the funds to the victims are prohibitive. Under
current law, a violator could escape paying disgorgement funds
under bankruptcy proceedings. S. 2010 would no longer allow
such payments to be discharged in bankruptcy, and therefore, in
certain cases could result in an increase of receipts to the
Treasury. CBO estimates that any such increase would not be
significant.
Pay-as-you-go-considerations: The Balanced Budget and
Emergency Deficit Control Act sets up pay-as-you-go procedures
for legislation affecting direct spending or receipts through
2006. CBO estimates that any such effects would be less than
$500,000 a year.
Estimated impact on state, local, and tribal governments:
S. 2010 contains no intergovernmental mandates as defined in
UMRA and would not affect the budgets of state, local, or
tribal governments.
Estimated impact on the private sector: S. 2010 would
impose private-sector mandates, as defined by UMRA, but CBO
estimates that the direct cost of the mandates would fall well
below the annual threshold established by UMRA ($115 million in
2002, adjusted annually for inflation).
The bill would impose a private-sector mandate by requiring
that any accountant who conducts certain corporate audits to
maintain all audit or review work papers for a five-year time
period. According to the American Institute of Certified Public
Accountants and industry representatives, the accounting
industry currently retains financial statement working papers
and records for seven years. Therefore, CBO estiamtes that the
direct cost, if any, to comply with this mandate would be
small.
The bill also would protect employees of certain publicly
traded companies who provide information to the U.S. government
(whistleblowers). Those companies would not be able to
discharge, demote, suspend, threaten, harass, or discriminate
against such employees in the terms and conditions of their
employment. Based on information from the Occupational Safety
and Health Administration, the agency that would enforce this
provision, CBO estimates that those publicly traded companies
would incur minimal, if any, direct cost to comply with the
whistleblower protection requirements.
Estimate prepared by: Federal Costs: Ken Johnson and Alexis
Ahlstrom; Impact on State, Local, and Tribal Government: Susan
Sieg Tompkins; and Impact on the Private Sector: Paige Piper/
Bach.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis.
VIII. ADDITIONAL VIEWS OF SENATORS HATCH, THURMOND, GRASSLEY, KYL,
DeWINE, SESSIONS, BROWNBACK, AND McCONNELL
A. General
The Chairman's Report contains a lengthy dissertation of
facts and circumstances that allegedly gave rise to Enron's
bankruptcy. We do not ascribe to the particulars outlined in
the Report because at this point, a determination of the facts
is the subject of ongoing investigations and court proceedings.
We also do not necessarily agree that the Enron situation can
be attributed to loopholes in current law; rather, it appears
to be the result of bad actors violating existing laws.
In its amended form, S. 2010 is a marked improvement from
the original version as introduced, and thus, the bill passed
out of this committee unanimously by voice vote. We note that
the amended version incorporates some of the provisions Senator
Hatch included in his original amendment to S. 2010.
Specifically, it further strengthens and refines prosecutorial
tools and penalties for criminal conduct. In addition, as
amended, S. 2010 removes a particularly troubling and
unnecessary provision that would have extended the Department
of Justice's (DOJ) automatic standing to bring suit under the
civil provision of the Racketeer Influenced and Corrupt
Organizations Act (RICO) to the 50 State Attorneys General and
the Securities and Exchange Commission (SEC). To date, the
Enron situation has left no doubt that the DOJ and SEC are
aggressively investigating and bringing charges against
offending parties. Moreover, to allow all 50 State Attorneys
General and the SEC to bring multiple and duplicative civil
RICO actions would result in inconsistent applications of the
statute and undermine DOJ's proper role in this area. We know
that other members of this committee, on both sides, shared
these concerns, and we are pleased that we were able to remove
this section from the bill.
Another improvement to S. 2010 resulted from a revision to
the proposed new protections for corporate whistleblowers. As
originally drafted, the proposal would have provided for overly
expansive damage awards which could have encouraged frivolous
claims that abuse the protections we seek to bestow. We believe
that protections for corporate whistleblowers should track
those already existing for airline employees. Those
protections, contained in the Aviation Safety Protection Act of
2000, do not include a private cause of action, excessive
damages or voluntary arbitration. To reach a compromise, we
agreed to allow whistleblowers access to federal district court
in cases where the Secretary of Labor has failed to issue a
final decision on a whistleblower claim within 6 months.
Despite these improvements, we believe that S. 2010 still
contains language that is problematic and even unnecessary to
address the concerns that have arisen in light of the Enron
bankruptcy, the consequences of which have indeed been
devastating to a great many people. We are hopeful that
improvements to S. 2010 will continue.
Below we clarify our intent and understanding with regard
to specific provisions of S. 2010, as amended.
B. Specific Provisions
section 2.--criminal penalties for altering documents
Section 2 of S. 2010 creates two new Title 18 offenses: an
obstruction statute specifically directed to the destruction of
documents, 18 U.S.C. 1519, and a document retention provision
that applies to auditors of publicly traded securities, 18
U.S.C. 1520. Although it certainly appears, to date, that
existing criminal obstruction of justice statutes are adequate
to prosecute those who may be culpable in the Enron matter, we
support providing prosecutors with all the tools they need to
ensure that individuals who destroy evidence with the intent to
impede a pending or future criminal investigation are punished.
We also support the view that there is a need for a baseline
retention standard that will apply to audit or review
workpapers, which are the most critical documents relating to
audits of publicly traded companies.
Section 1519
We recognize that section 1519 overlaps with a number of
existing obstruction of justice statutes, but we also believe
it captures a small category of criminal acts which are not
currently covered under existing laws--for example, acts of
destruction committed by an individual acting alone and with
the intent to obstruct a future criminal investigation.
We have voiced our concern that section 1519, and in
particular, the phrase ``or proper administration of any matter
within the jurisdiction of any department or agency of the
United States'' could be interpreted more broadly than we
intend. In our view, section 1519 should be used to prosecute
only those individuals who destroy evidence with the specific
intent to impede or obstruct a pending or future criminal
investigation, a formal administrative proceeding, or
bankruptcy case. It should not cover the destruction of
documents in the ordinary course of business, even where the
individual may have reason to believe that the documents may
tangentially relate to some future matter within the
conceivable jurisdiction of an arm of the federal bureaucracy.
Section 1520
Although the scope of section 1520, the document retention
provision, has been significantly narrowed since S. 2010 was
introduced, we are concerned that the Chairman's Report does
not reflect the full extent to which this provision was
narrowed.
As we made clear before S. 2010 was amended, we strongly
believe that a broad federal mandate requiring accountants of
publicly traded companies to retain all documents sent,
received or created in connection with any audit, review or
other similar engagement, would create an unworkable standard--
one that would require auditors to retain warehouses of
documents, including those immaterial to an audit's
conclusions. We believe that any such mandate would have a
substantial and adverse effect on this nation's economy.
In its current form, section 1520 requires accountants of
publicly traded companies to maintain audit and review
workpapers for a period of 5 years. It does not impose any such
requirement with respect to other documents, such as memoranda,
correspondence, communications, and electronic records.
Instead, with respect to other such documents, section
1520(a)(2) directs the SEC to promulgate, after adequate notice
and opportunity for comment from industry experts, regulators
and government agencies, such rules and regulations ``as are
reasonably necessary''.
It is our intention that the SEC will exercise its
discretion prudently in determining the necessity for and the
scope of document retention regulations. In so doing, we
anticipate that the SEC may well determine that the retention
of many documents that fall within the list of categories of
documents enumerated in section 1520(a)(2) is unecessary.
Similarly, the SEC may also determine that it is unreasonable
to apply a 5-year retention period, to all regulated documents.
We understand that the accounting profession has
implemented standards relating to the retention of workpapers.
We encourage the profession to review their existing standards,
and we urge the SEC to consider such standards when
implementing regulations pursuant to section 1520(a)(2).
In supporting section 1520, it is our intention to strike a
fair balance between the legitimate needs of investigators and
the accounting profession. In our view, it is not the role of
Congress to impose unnecessary and draconian retention
requirements on a profession, particularly where broad criminal
obstruction statutes serve to deter and punish severely those
who destroy documents with the intent to impede a pending or
future investigation.
Section 4.--Statute of limitations
1. General views
We believe current law likely provides an adequate length
of time in which people who have been defrauded can file suit--
one year after an individual knows he or she has been defrauded
or three years after the date of the fraud. This period mirrors
legislatively enacted limitations that apply to statutory
claims that are most analogous to those contemplated here. Such
statutes of limitations provide for certainty in the markets
and adequately protect genuinely aggrieved consumers. There has
been no evidence to indicate that the time period after a
claimant has discovered a fraud needs to be doubled, let alone
tripled, as was proposed originally in S. 2010. It is worthy to
note that even though they dissented from the majority holding
in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501
U.S. 350, 369, 374 (1991) Justices O'Connor and Kennedy were
clear in their support for the current one-year limitation
after discovery of the fraud. Regrettably, the sponsors of S.
2010 prevailed in their effort to extend the current statute of
limitations, and we would like to clarify our understanding of
the intended parameters of that extension.
Section 4(a) of this bill amends section 1658 of Title 28,
United States Code to address the Lampf holding. Specifically,
it sets a five-year outer limit on implied private rights of
action involving a claim of fraud, deceit, manipulation, or
contrivance, which are in contravention of a regulatory
requirement concerning the federal securities laws.
Consequently, section 4(a) is not intended to conflict with
existing limitations periods for any express private rights of
action under the federal securities laws.
2. Five-year maximum limit
In addition, because of the two-year limitation provided in
section 1658(b)(2) of Title 28, United States Code, as amended
by this bill, the five-year outer limit is not subject to
equitable tolling. This is consistent with existing law
applying statutes of limitation to securities fraud actions.
Where there is a bifurcated limitations period, with an inner
limit running from the time when the fraud was or should have
been discovered, the inner limit ``by its terms, begins after
discovery of the facts constituting the violation, making
tolling unnecessary. The [outer limit] is a period of repose
inconsistent with tolling.'' Lampf, 501 U.S. at 363.
3. Two-year discovery limit
Section 4 of this bill is not intended to change existing
case law holding that an objective standard should be used to
measure the starting point as to when a securities fraud should
have been discovered for purposes of a limitations period. In
other words, this provision is intended to be consistent with
established case law in that the ``discovery'' limitations
period for private antifraud actions under section 10(b) of the
Exchange Act begins to run when the plaintiff is on ``inquiry
notice'' of a fraud. Rather than requiring actual knowledge to
begin the running of the statute of limitations, the
limitations period begins to run after discovery should have
been made by exercise of reasonable diligence. This
requirement, which has ``long applied in fraud cases outside as
well as in the securities field,'' Tregenza v. Great American
Communications Co., 12 F.3d 717, 722 (7th Cir. 1993) and cases
cited therein, is necessary to limit ``the opportunistic use of
federal securities law to protect investors against market
risk.'' Id. When ``the circumstances would suggest to an
investor of ordinary intelligence that she has been defrauded,
a duty of inquiry arises, and knowledge will be imputed to the
investor who does not make such an inquiry.'' Dodds v. Cigna
Sec., Inc., 12 F.3d 346, 350 (2d Cir. 1993), cert. denied, 511
U.S. 1019 (1994). See also, inter alia, Menowitz v. Brown, 991
F.2d 36, 41 (2d Cir. 1993); Kahn v. Kohlberg, Kravis, Roberts &
Co., 970 F.2d 1030, 1042 (2d Cir.), cert. denied, 506 U.S. 986
(1992).
4. No expansion of existing private rights of action
We agree that Section 4 of this bill is not intended to
create a new private right of action or to broaden any existing
private right of action.
Section 5.--Review and enhancement of criminal sentences in cases of
fraud and evidence destruction
We support the provisions of section 5 which have
incorporated many of our suggestions. We strongly endorse the
view that the Sentencing Commission should revisit the
guidelines that apply to corporate misconduct, as well as to
those that apply to obstruction of justice and fraud offenses.
We believe that tougher penalties, coupled with new criminal
offenses, will enhance the ability of prosecutors to respond to
egregious acts of obstruction and fraud.
Section 6.--Whistleblower protection for employees of publicly traded
companies
This bill provides federal protection for corporate
whistleblowers, who should be shielded from illegal retaliatory
action. The amendment offered by Senators Grassley and Leahy
revises the original bill to make these protections consistent
with the Aviation Safety Protection Act of 2000 in which we
provided whistleblower protections to another class of non-
government employees. Because we had already extended
whistleblower protections to non civil service employees, we
thought it best to track those protections as closely as
possible.
To make the corporate whistleblower protections consistent
with those provided to airline employees, the amendment struck
the excessive damages included in the original bill and
subsequent compromises. It also removed a provision that
allowed immediate access to federal district courts. However,
this compromise does provide whistleblowers with access to
federal court in the event the Secretary of Labor fails to
issue a final decision within 6 months.
Section 7.--Criminal penalties for securities fraud
Although we believe that existing criminal statutes are
adequate to prosecute criminal acts involving securities fraud,
we support the creation of a new securities fraud offense. In
our view, this provision will make it easier, in a limited
class of cases, for prosecutors to prove securities fraud by
eliminating, for example, the element that the mails or wires
were used to further the scheme to defraud.
This new securities fraud offense does not lower the
standard of criminal intent prosecutors must meet to convict
securities fraud offenders. Like the bank and health care fraud
statutes on which this provision is modeled, prosecutors must
prove that a defendant knowingly engaged in a scheme or
artifice to defraud, or knowingly made false statements or
representations to obtain money in a securities transaction.
This standard, which includes knowledge and intent elements, is
consistent with existing securities fraud statutes.
3. Conclusion
As we consider legislative reforms to address concerns
highlighted by the Enron debacle, it should be noted that there
are a host of issues, many of which are outside of the
jurisdiction of this Committee. While S. 2010 tightens and
strengthening criminal penalties, among other things, it does
not address issues relating to corporate and professional
responsibility and disclosure. Complementary legislation is
necessary to address these issues which are the focus of the
President's ``10 Point Plan'' and debate in other Senate and
House committees.
Not only does legislation need to address corporate and
professional responsibility and disclosure, it also must be
deliberate and measured so that our economy is not adversely
affected. We look forward to working with the full Senate, the
other legislative chamber and the President to find the
appropriate balanced solution to these complex issues.
Orrin G. Hatch.
Strom Thurmond.
Chuck E. Grassley.
Jon Kyl.
Mike DeWine.
Jeff Sessions.
Sam Brownback.
Mitch McConnell.
IX. Changes in Existing Law Made by the Bill, as Reported
In compliance with paragraph 12 of rule XXVI of the
Standing Rules of the Senate, changes in existing law made by
S. 2010, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in brackets, new matter is
printed in italic, and existing law in which no change is
proposed is shown in roman):
UNITED STATES CODE
* * * * * * *
TITLE 11--BANKRUPTCY
Chap. Sec.
1. General Provisions..................................... 101
3. Case Administration.................................... 301
501. Creditors, the Debtor, and the Estate..................
* * * * * * *
CHAPTER 5--CREDITORS, THE DEBTOR, AND THE ESTATE
Subchapter I--Creditors and Claims
* * * * * * *
SUBCHAPTER II--DEBTOR'S DUTIES AND BENEFITS
Sec.
521. Debtor's duties.
522. Exemptions.
523. Exceptions to discharge.
* * * * * * *
Sec. 523. Exceptions to discharge
(a) A discharge under section 727, 1141, 1228(a), 1228(b),
or 1328(b) of this title does not discharge an individual
debtor from any debt--
(1) for a tax or a customs duty--
* * * * * * *
(17) for a fee imposed by a court for the filing of a
case, motion, complaint, or appeal, or for other costs
and expenses assessed with respect to such filing,
regardless of an assertion of poverty by the debtor
under section 1915(b) or (f) of title 28, or the
debtor's status as a prisoner, as defined in section
1915(h) of this title 28; [or]
(18) owed under State law to a State or municipality
that is--
(B) enforceable under part D of title IV of
the Social Security Act (42 U.S.C. 601 et
seq.)[.]; or
(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.
* * * * * * *
TITLE 18--CRIMES AND CRIMINAL PROCEDURE
Part Section
1 I. CRIMES.................................................
* * * * * * *
PART I--CRIMES
* * * * * * *
CHAPTER 63--MAIL FRAUD
Sec.
1341. Frauds and swindles.
* * * * * * *
1347. Health care fraud.
1348. Securities fraud.
* * * * * * *
Sec. 1341. Frauds and swindles
Whoever, having devised * * *
* * * * * * *
Sec. 1347. Health care fraud
Whoever knowingly and willfully executes, or attempts to
execute, a scheme or artifice--
(1) to defraud any health care benefit program; or
(2) to obtain, by means of false or fraudulent
pretenses, representations, or promises, any of the
money or property owned by, or under the custody or
control of, any health care benefit program.
in connection with the delivery of or payment for health care
benefits, items, or services, shall be fined under this title
or imprisoned not more than 10 years, or both. If the violation
results in serious bodily injury (as defined in section 1365 of
this title), such person shall be fined under this title or
imprisoned not more than 20 years, or both; and if the
violation results in death, such person shall be fined under
this title, or imprisoned for any term of years or for life, or
both.
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 of an issuer with a class of securities
registered under section 12 of the Securities Exchange
Act of 1934 (15 U.S.C. 78l) or that is required to file
reports under section 15(d) of the Securities Exchange
Act of 1934 (15 U.S.C. 78o(d)); 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 of an issuer with a class of securities
registered under section 12 of the Securities Exchange
Act of 1934 (15 U.S.C. 78l) or that is required to file
reports under section 15(d) of the Securities Exchange
Act of 1934 (15 U.S.C. 78o(d));
shall be fined under this title, or imprisoned not more than 10
years, or both.
* * * * * * *
CHAPTER 73--OBSTRUCTION OF JUSTICE
Sec.
1501. Assault on process server.
* * * * * * *
1514. Civil action to restrain harassment of a victim or witness.
1514A. Civil action to protect against retaliation in fraud cases.
* * * * * * *
1518. Obstruction of criminal investigations of health care offenses.
1519. Destruction, alteration, or falsification of records in Federal
investigations and bankruptcy.
1520. Destruction of corporate audit records.
Sec. 1501. Assault on process server
Whoever knowingly * * *
* * * * * * *
Sec. 1514. Civil action to restrain harassment of a victim or witness
(a)(1) A United States * * *
* * * * * * *
(c) As used in this section--
(1) the term ``harassment'' means a course of conduct
directed at a specific person that--
(A) causes substantial emotional distress in
such person; and
(B) serves no legitimate purpose; and
(2) the term ``course of conduct'' means a series of
acts over a period of time, however short, indicating a
continuity of purpose.
Sec. 1514A. Civil action to protect against retaliation in fraud cases
(a) Whistleblower Protection for Employees of Publicly
Traded Companies.--No company with a class of securities
registered under section 12 of the Securities Exchange Act of
1934 (15 U.S.C. 78l), or that is required to file reports under
section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
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 sections 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 sections 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) Enforcement Action.--
(1) In general.--A person who alleges discharge or
other discrimination by any person in violoation of
subsection (a) may seek relief under subsection (c),
by--
(A) filing a complaint with the Secretary of
Labor; or
(B) if the Secretary has not issued a final
decision within 180 days of the filing of the
complaint and there is no showing that such
delay is due to the bad faith of the claimant,
bringing an action at law or equity for de novo
review in the appropriate district court of the
United States, which shall have jurisdiction
over such an action without regard to the
amount in controversy.
(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
90 days after the date on which the violation
occurs.
(c) Remedies.--
(1) In general.--An employee prevailing in any action
under subsection (b)(1) 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) 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.
(d) Rights Retained by Employee.--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.
Sec. 1518. Obstruction of criminal investigation of health care
offenses.
(a) Whoever willfully prevents, obstructs, misleads, delays
or attempts to prevent, obstruct, mislead, or delay the
communication of information or records relating to a violation
of a Federal health care offense to a criminal investigator
shall be fined under this title or imprisoned not more than 5
years, or both.
(b) As used in this section the term ``criminal
investigator'' means any individual duly authorized by a
department, agency, or armed force of the United States to
conduct or engage in investigations for prosecutions for
violations of health care offenses.
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 10 years, or both.
Sec. 1529. Destruction of corporate audit records
(a)(1) 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
audit or review workpapers for a period of 5 years from the end
of the fiscal period in which the audit or review was
concluded.
(2) The Securities and Exchange Commission shall
promulgate, within 180 days, after adequate notice and an
opportunity for comment, such rules and regulations, as are
reasonably necessary, relating to the retention of relevant
records such as workpapers, documents that form the basis of an
audit or review, memoranda, correspondence, communications,
other documents, and records (including electronic records)
which are created, sent, or received in connection with an
audit or review and contain conclusions, opinions, analyses, or
financial data relating to such an audit or review, which is
conducted by 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.
(b) Whoever knowingly and willfully violates subsection
(a)(1), or any rule or regulation promulgated by the Securities
and Exchange Commission under subsection (a)(2), 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.
* * * * * * *
TITLE 28--JUDICIARY AND JUDICIAL PROCEDURE
Part Sec.
I. ORGANIZATION OF COURTS................................. 1
* * * * * * *
V. PROCEDURE.............................................. 1651
* * * * * * *
PART V--PROCEDURE
Chapter Sec.
III. General Provisions................................... 1651
* * * * * * *
CHAPTER 111--GENERAL PROVISIONS
Sec.
1651. Writs.
* * * * * * *
1658. Time limitations on the commencement of civil actions arising
under Acts of Congress.
Sec. 1658. Time limitations on the commencement of civil actions
arising under Acts of Congress
(a) Except as otherwise provided by law, a civil action
arising under an Act of Congress enacted after the date of the
enactment of this section may not be commenced later than 4
years after the cause of action accrues.
(b) Notwithstanding subsection (a), a private right of
action that involves a claim of fraud, deceit, manipulation, or
contrivance in contravention of 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) 2 years after the date on which the alleged
violation was discovered.
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