SEC Brings Charges Against Director And Former Executive Officers For Allegedly Lying To Auditors About Loss Contingencies Concerning A Government Investigation

• Published date: 30 September 2022
• Subject Matter: Accounting and Audit, Corporate/Commercial Law, Audit, Corporate and Company Law, Directors and Officers, Securities
• Law Firm: WilmerHale
• Author: Mr Alan Wilson

Last week, the Securities and Exchange Commission (SEC) filed a complaint in U.S. District Court against a company's director, former CEO and former CFO for allegedly making false and misleading statements to the company's auditors, in violation of Rule 13b2-2 of the Securities Exchange Act of 1934, as amended (Exchange Act).

This latest enforcement action underscores the SEC's continued focus on loss contingencies and serves as a reminder to directors and officers of the need to carefully assess company disclosures and the statements made to auditors about loss contingencies, including in management representation letters.

This enforcement action also highlights the challenges often associated with government investigations when making disclosure and/or accrual determinations under Accounting Standards Codification 450-20 (Contingencies'Loss Contingencies). The loss contingency at issue in this latest matter involved an SEC investigation into the company's investment in a separate biotechnology company. A chronology of relevant events is as follows:

• 2014. SEC commences an investigation into the company's investment in a certain biotechnology company.
• November 2014. The then CFO forwards a letter to the company's auditor from the company's outside counsel regarding the SEC's investigation. Thereafter nothing was updated or disclosed to that auditor (or the successor auditor).
• March 2015 - November 2017. SEC Division of Enforcement sends multiple subpoenas to the company and its officers and directors seeking documents and testimony related to the investigation.
• April 2017. SEC Division of Enforcement sends a Wells Notice to the company's counsel which indicated that the SEC intended to recommend to the Commission that it charge someone with violating the federal securities laws.
• May 2017. Company responds to the Wells Notice.
• June 2017 - December 2017. Company receives additional subpoenas from the SEC Division of Enforcement and holds meetings with senior SEC staff about the recommended charges and potential settlement options.
• January 24, 2018. Counsel for the company and its board chair sends a settlement offer to the SEC's Division of Enforcement. An SEC attorney responded and indicated (i) that any settlement offer must include an injunction prohibiting further violations of Section 7(a) of the Investment Company Act and a civil penalty and (ii) that the SEC's process was moving forward.
• January 26, 2018. Counsel for the company and its board...