April 6, 2004

SEC Brings Another Certification Enforcement

A week ago Thursday, the SEC’s Enforcement Division filed another lawsuit based on false CEO/CFO certifications as well as other fraud offenses. This complaint is entitled SEC v. Cedric Kushner Promotions.

According to Ken Winer of Foley & Lardner, based on the allegations in the complaint, the conduct at issue was egregious. so the case probably would have been brought even without the Section 302 certification.

Nevertheless, Ken points out that the complaint is interesting in one respect. The SEC charged that the CEO “signed [the annual report] and the Sarbanes-Oxley certification without having read either document and without having taken any steps to determine their accuracy or truthfulness, relying instead on nothing more than Angel’s representation to that effect.” According to the complaint, Angel was a 27-year old executive vice president, whose responsibilities included working hand-in-hand with the issuer’s auditors to ensure that filings are complete and accurate, and to review filings for completeness and accuracy prior to presenting them to the CEO and to the executive vice president who was principal finance and accounting officer.

Thus, the enforcement action signals that a CEO must do more than obtain conclusory assurances from a senior officer of an issuer. Certifying officers should not take comfort from the appearance that this case does not break new ground. Ken fully expects that the SOX certification will result in the SEC bringing enforcement actions against certifying officers that would not have been brought absent the certification.