The next group to be targeted in the SEC's ramped up effort to stop corporate fraud will be corporate directors who do not exercise their fiduciary responsibility to the investing public, according to the SEC's top enforcement official.
Since the Enron collapse, the SEC has brought enforcement proceedings against a variety of groups, including accounting firms, management, auditors, and investment banks. But now, Stephen Cutler, the SEC's Chief Enforcement Officer, says that a current case in Boston against an outside Board member is being viewed as a model for future proceedings.
The case targets Rudolph Peselman, a former outside director and member of the audit committee of Boston-based Chancellor Corp., a transportation equipment leasing company. The case alleges that Mr. Peselman was presented with information that should have alerted him to possible accounting irregularities but he failed to act on that information. As a result, the case alleges, the company overstated revenue in 1998 by over 175%.
At issue is the fact that the company replaced its outside auditor because the auditor didn't agree with the way revenue was recognized, and found another auditing firm that would sign-off on the financial statements. Also involved were over $1 million in payments to related party entities controlled by the company CEO. The SEC alleges that Peselman knew about the reason for changing auditors, yet still approved the financial statements, resulting in a "complete neglect of his duties as a director and an audit committee member."
"This case signifies the commission's willingness to pursue cases against outside directors who were reckless in their oversight of management and asleep at the switch," said Stephen Cutler.
"This is definitely a sign of things to come," said Harvey Pitt, the former SEC chairman who now heads Kalorama Partners, a Washington-based consulting firm. "The commission has made it clear it wants outside directors to uphold the highest standards. This case definitely shows the agency's determination to go after them."