Last week, Bloomberg ran an article about SEC proceedings involving Chancellor Corporation and its former officers, directors and auditors in which one director was sued in an injunctive proceeding and another director consented to an administrative settlement.
The interesting aspect of these proceedings is that they were based on alleged anti-fraud and reporting violations under the Securities Exchange Act of 1934 – even though there were no allegations that these directors participated in the fraud. Instead, the directors appear to have been targeted because they neglected to make proper inquiries when there were indications that management was engaged in fraudulent conduct.
As John Olson noted in an email to the ABA Corporate Governance subcommittee, the directors were alleged to have been “reckless” in their lack of due care when they signed SEC annual report filings – and that this is one of the few situations where the SEC has sought a federal scienter-based anti-fraud remedy for what amounts to an abdication of state law duties of care, attention and, possibly, good faith.
Marty Lipton came out with a client alert indicating that the business judgment rule is alive and well and is not affected by these SEC proceedings, even as explicated by SEC Director of Enforcement Stephen Cutler, due to the extreme circumstances of the facts in these proceedings.
For TheCorporateCounsel.net subscribers, we have created a new “Convertible Debt Offerings” practice area, with a September webcast on this topic to be announced soon.