October 4, 2004

SEC Brings First “Up-The-Ladder” Case

Without much fanfare, the SEC Enforcement Division recently brought what could be considered the first “up-the-ladder” case, a settlement with John Isselmann.

As proof that Enforcement Director Steve Cutler was serious in his recent gatekeeper speech that the SEC is setting a high bar for attorneys that represent public companies – and expects to be bringing more actions against lawyers – this case was brought against a general counsel, even though he was the one that blew the whistle against wrongdoing within the company! However, the Staff believed he didn’t blow it soon enough.

Also notable is that the conduct in question occurred in December 2002 – before Part 205 was adopted – so it is a more traditional “causing” violation and not really a true “reporting up” case. This is important because it shows that – with respect in-house counsel who have a direct role in preparing and approving public statements and filings – that the SEC believes that the pre-SOX securities laws have the practical effect of requiring “reporting up.” (I imagine that when – and if – the SEC sues an associate at a company’s outside law firm under Part 205, there’ll be some commotion!)

The bottom line is that this case indicates that the SEC is prepared to seek additional penalties against counsel who do not promptly notify the audit committee upon learning that their client is about to violate the federal securities laws. Thanks to Ken Winer and Tom Kuczajda for the heads-up!

Dilbert Enters Into Excessive Compensation Fray!

During the past few days, Scott Adams has challenged excessive compensation practices through his famous Dilbert comic strips. Here are two from the weekend:


dilbert 2.bmp