Attachment to Attorney General August 1, 2002 Memorandum on the Sarbanes-Oxley Act of 2002

Field Guidance on New Criminal Authorities
Enacted in the Sarbanes-Oxley Act of 2002 (H.R. 3763)
Concerning Corporate Fraud and Accountability

Section 802. Criminal Penalties for Altering Documents

Previous law: Prior to the Sarbanes-Oxley Act of 2002, anyone who "corruptly persuades" others to destroy, alter or conceal evidence can be prosecuted under 18 U.S.C. § 1512. Section 1512 reaches destruction of evidence with intent to obstruct an official proceeding which may not yet have been commenced. However, Section 1512 does not reach the "individual shredder." While prosecution of obstruction under 18 U.S.C. § 1505 does not require "corrupt persuasion," it does require the existence of a pending proceeding. In addition, existing law does not explicitly address the retention of accounting work papers for a fixed period of time.

 

Amendment: Section 802 adds two new criminal provisions, 18 U.S.C. §§ 1519 and 1520. Section 1519 expands existing law to cover the alteration, destruction or falsification of records, documents or tangible objects, by any person, with intent to impede, obstruct or influence, the investigation or proper administration of any "matters" within the jurisdiction of any department or agency of the United States, or any bankruptcy proceeding, or in relation to or contemplation of any such matter or proceeding. This section explicitly reaches activities by an individual "in relation to or contemplation of" any matters. No corrupt persuasion is required. New Section 1519 should be read in conjunction with the amendment to 18 U.S.C. 1512 added by Section 1102 of this Act, discussed below, which similarly bars corrupt acts to destroy, alter, mutilate or conceal evidence, in contemplation of an "official proceeding."

 

Accountants who fail to retain the audit or review workpapers of a covered audit for a period of 5 years will violate Section 1520, which creates a new felony, with a maximum period of incarceration of ten years. Under rulemaking authority granted in Section 1520(b), the SEC will promulgate rules relating to the retention of workpapers and other audit or review documents.

New 18 U.S.C. § 1519 provides:

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

New 18 U.S.C. § 1520 provides:

(a)(l) Any accountant who conducts an audit of an issuer of securities to which section l0A(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78j-l(a)) applies, shall maintain all audit or review workpapers for a period of 5 years from the end of the fiscal period in which the audit or review was concluded.

(2) The Securities and Exchange Commission shall promulgate, within 180 days, after adequate notice and an opportunity for comment, such rules and regulations, as are reasonably necessary, relating to the retention of relevant records such as workpapers, documents that form the basis of an audit or review, memoranda, correspondence, communications, other documents, and records (including electronic records) which are created, sent, or received in connection with an audit or review and contain conclusions, opinions, analyses, or financial data relating to such an audit or review, which is conducted by any accountant who conducts an audit of an issuer of securities to which section l0A(a) of the Securities Exchange Act of l934 (15 U.S.C. 78j-l(a)) applies....

(b) Whoever knowingly and willfully violates subsection (a)(l), or any rule or regulation promulgated by the Securities and Exchange Commission under subsection (a)(2), shall be fined under this title, imprisoned not more than l0 years, or both.

(c) Nothing in this section shall be deemed to diminish or relieve any person of any other duty or obligation imposed by Federal or State law or regulation to maintain, or refrain from destroying, any document.

Sec. 805. Review of Federal Sentencing Guidelines for Obstruction of Justice and Extensive Criminal Fraud

 

Previous Law: Questions have arisen whether the Sentencing Guidelines sufficiently address obstruction of justice crimes.

 

Amendment: This section directs the Sentencing Commission to undertake an expedited review of these issues, particularly in light of the two new obstruction of justice statutes, described above. It also directs the Sentencing Commission to consider a number of factors such as destruction of a large amount of evidence, participation of a large number of individuals, or destruction of particularly probative or essential evidence, which might be considered sufficiently aggravating as to warrant additional enhancements or inclusion as offense characteristics. The Attorney General has advised the Sentencing Commission of this provision and asked the Commission to implement it fully and expeditiously.

Sec. 807. Criminal Penalties for Defrauding Shareholders of Publicly Traded Companies

 

Previous Law: Title 18 does not have a specific crime directly prohibiting securities fraud schemes. Prosecutors have found it necessary to reach many securities fraud schemes through the mail and wire fraud statutes. Securities fraud has also been prosecuted as a violation of provisions of title 15.

 

Amendment: New 18 U.S.C. § 1348 creates a specific felony for securities fraud punishable by up to 25 years incarceration. This provision complements existing securities law. The statute requires a nexus to certain types of securities, no proof of the use of the mails or wires is required. The text of the new section provides:

Whoever knowingly executes, or attempts to execute, a scheme or artifice-

(1) to defraud any person in connection with any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 780(d)); or

(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781) or that is required to file reports under section l5(d) of the Securities Exchange Act of 1934 (15 U.S.C. 780(d));

shall be fined under this title, or imprisoned not more than 25 years, or both.

Sec. 902. Attempts and Conspiracies to Commit Criminal Fraud Offenses

 

Previous Law: Under Chapter 63 (Mail Fraud) of Title 18, conspiracies to violate the mail fraud statute (§ 1341), the wire fraud statute (§ 1343), the bank fraud statute (§ 1344) and the health care fraud statute (§ 1347) are punishable by a maximum 5 year sentence. The wire fraud offense did not explicitly reach "attempts" to commit the substantive offense. However, this was not an impediment in practice, because proof of a scheme to defraud did not necessarily require proof that the scheme was successful.

 

Amendment: New 18 U.S.C. § 1349 provides that attempts and conspiracies to commit the substantive Federal fraud offenses listed above, as well as the new securities fraud offense, will have the same maximum punishment as the substantive crime. This section also effectively adds an "attempt" to commit the wire fraud offense as a federal crime. The remainder of the fraud statutes listed above already include "attempts."

New 18 U.S.C. § 1349 provides:

Any person who attempts or conspires to commit any offense under this chapter shall be subject to the same penalties as those prescribed for the offense, the commission of which was the object of the attempt or conspiracy.

Sec. 903. Criminal Penalties for Mail and Wire Fraud

 

Previous Law: The maximum term of imprisonment for violations of the mail and wire fraud statutes (18 U.S.C. §§ 1341, 1343) is 5 years, with the exception of fraud affecting a financial institution, which has a maximum term of incarceration of up to 30 years.

 

Amendment: This section amends 18 U.S.C. §§ 1341 and 1343 by increasing the maximum 5 year penalty for mail or wire fraud to 20 years. The maximum term of incarceration for fraud affecting a financial institution remains at a maximum of 30 years.

Sec. 904. Criminal Penalties for Violations of the Employee Retirement Income Security Act of 1974

 

Previous Law: Under 29 U.S.C. § 1131, any person who willfully violates the reporting and disclosure requirements concerning employee benefit plans as set forth in 29 U.S.C. §§ 1021-1031, or any regulation or order issued thereunder, is punishable by a fine, and/or a term of imprisonment not to exceed 1 year.

 

Amendment: This amendment increases the fines in Section 1131 to $100,000 (for an individual person), $500,000 (for persons other than an individual). Section 1131 also increases the maximum term of imprisonment from 1 year (a misdemeanor) to a maximum term of imprisonment of 10 years. The increase in the fine for individuals will have no limiting effect insofar as individuals convicted of violating Section 1131 will now be subject to the alternative fine provisions of 18 U.S.C. § 3571 for felony convictions. In the absence of restrictive language in Section 904 of the Act, individuals will be subject to the maximum fine of $250,000, or fine based on the defendant's gain or the victims loss, under § 3571. While the amendment also increases the fine in § 1131 to $500,000 for persons other than an individual, this change has merely increased the fine to the level of the maximum fine for an organization already set forth in § 3571.

Section 905. Amendment to the Sentencing Guidelines Relating to Certain White Collar Offenses

 

Previous Law: Questions have arisen whether the Sentencing Guidelines sufficiently address white collar offenses.

 

Amendment: This Section reaches beyond Section 803 of this Act, which addresses sentencing guidelines solely for obstruction of justice, to require that the Sentencing Commission study the existing guidelines and consider expedited issuance of amended guidelines within 180 days after enactment of this Act, which would address all the new criminal provisions and increased criminal penalties in this Act. This section also requires the Sentencing Commission to consider the broader issues of whether the white collar crime guidelines provide for sufficient deterrence and punishment, and assure reasonable consistency with other relevant directives and guidelines. The Attorney General has advised the Sentencing Commission of this provision and asked the Commission to implement it fully and expeditiously.

Section 906. Corporate Responsibility for Financial Reports

 

Previous Law: There are no statutory requirements that the chief executive officer or the chief financial officer certify certain periodic corporate financial statements. By instructions issued by the SEC for periodic and other filings, there was a general requirement that the forms had to be signed by officers, and in the case of annual reports, by a majority of the directors as well. These signing requirements did not include any type of certification or other attestation regarding the accuracy or completeness of the report. On June 20, 2002, the SEC published a Notice of Proposed Rulemaking, contemplating a requirement that a company's chief executive officer and chief financial officer certify that the information contained in its financial reports is complete and true in all important respects. See 67 Fed. Reg. 41877 (2002). More recently, the SEC issued an order requiring that the principal executive officer and principal financial officer of the largest 947 companies whose securities are registered with the SEC certify the completeness, truth and accuracy of the most recent annual report, subsequent 10-Q and 8-K reports, and proxy materials filed with the Commission.

 

Amendment: This section enacts new 18 U.S.C. § 1350, which creates a requirement that the chief executive officer and the chief financial officer (or the equivalent thereof) of the "issuer" provide a statement which certifies that the periodic reports containing the financial statements, filed by an issuer with the SEC, fully comply with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, and that the information contained in the periodic reports fairly presents, in all material respects, the financial condition and results of operations of the issuer. Certifying a report, knowing that it does not comport with all of the requirements of § 1350, is punishable by a fine of not more than $ 1,000,000 and imprisonment of up to 10 years. A willful violation is punishable by a fine of not more than $5,000,000 and imprisonment of up to 20 years.

New Section 1350 provides:

(a) CERTIFICATION OF PERIODIC FINANCIAL REPORTS.- Each periodic report containing financial statements filed by an issuer with the Securities Exchange Commission pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78O(d)) shall be accompanied by a written statement by the chief executive officer and chief financial officer (or equivalent thereof) of the issuer.

(b) CONTENT.- The statement required under subsection (a) shall certify that the periodic report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act pf [sic] 1934 (15 U.S.C. 78m or 78o(d)) and that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

(c) CRIMINAL PENALTIES.- Whoever

(1) certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $1,000,000 or imprisoned not more than 10 years, or both; or

(2) willfully certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.

Sec. 1102. Tampering with a Record or Otherwise Impeding an Official Proceeding.

 

Previous Law: Title 18 U.S.C. § 1512, in part, provides a 10 year maximum term of incarceration for an offender who corruptly persuades another person with the intent to, in part, destroy or alter evidence.

 

Amendment: The amendment adds new subsection (c) to Section 1512 and renumbers existing subsections (c) through (i) as (d) through (j). New subsection (c) imposes a fine and/or a term of imprisonment of up to 20 years on any person who corruptly alters, destroys, mutilates or conceals a record, document or other object with the intent to impair the object's integrity or availability for use in an official proceeding, or who corruptly otherwise obstructs, influences or impedes an official proceeding. Section 1512, as amended, should be read in conjunction with the new Section 1519, added by section 802 of this Act, which criminalizes certain acts intended to impede, obstruct or influence "any matter" within the jurisdiction of any Department or agency of the United States, or in relation to or contemplation of any such matter. The term "corruptly" shall be construed as requiring proof of a criminal state of mind on the part of the defendant.

New Section 1512 (c) provides:

(c) Whoever corruptly-

(1) alters, destroys, mutilates, or conceals a record, document, or other object, or attempts to do so, with the intent to impair the object's integrity or availability for use in an official proceeding; or

(2) otherwise obstructs, influences, or impedes any official proceeding, or attempts to do so,

shall be fined under this title or imprisoned not more than 20 years, or both.

Section 1104. Amendment to the Federal Sentencing Guidelines

 

Previous Law: Questions have arisen whether the current Sentencing Guidelines sufficiently address securities, accounting, and pension fraud, and related offenses.

 

Amendment: This section requests the Sentencing Commission to study existing guidelines and consider expedited issuance of amended guidelines within 180 days after enactment of this Act, which address securities, accounting, and pension fraud, and related offenses. The Attorney General has advised the Sentencing Commission of this provision and asked the Commission to implement it fully and expeditiously.

Section 1106. Increased Penalties Under Securities Exchange Act of 1934

 

Previous Law: Section 78ff of Title 15, Sec. 32(a) of the Securities Exchange Act of 1934, provides for a criminal fine of $1,000,000 for individuals and/or imprisonment of up to 10 years, or a fine of $2,500,000 for anyone other than an individual.

 

Amendment: This amendment increases the fine amounts to $5,000,000 and $25,000,000 respectively, and raises the maximum term of imprisonment to 20 years.

Section 1107. Retaliation Against Informants

 

Previous Law: There is no explicit protection from retaliation for an individual who provides truthful information to a law enforcement officer concerning the commission or possible commission of a Federal offense.

 

Amendment: New subsection (e) of 18 U.S.C. § 1513 creates a felony offense for any person knowingly to take any action, with intent to retaliate, harmful to a person who provides such information concerning a federal offense.

New subsection (e) of § 1513 provides:

(e) Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.

Retroactive Application of the New Provisions:

 

The Ex Post Facto Clause prohibits, inter alia, punishing as a crime an act previously committed that was innocent when done and increasing the punishment for a crime after its commission. See, e.g., Carmell v. Texas, 520 U.S. 513, 522 (2000); Collins v. Youngblood, 497 U.S. 37, 42 (1990). The Act adds several new criminal provisions: 18 U.S.C. 1519 and 1520 (added by Section 802); 18 U.S.C. 1350 (added by Section 906); 18 U.S.C. 1512(c) (added by Section 1102), and 18 U.S.C. 1513(e) (added by Section 1107). Those new criminal provisions will apply only to criminal conduct committed after the effective date of the Act. The Act also includes criminal provisions increasing the punishment for some existing criminal offenses: 29 U.S.C. 1131 (added by Section 904) and 15 U.S.C. 78ff (added by Section 1106). The increased penalties set forth in those provisions will apply only to criminal conduct committed after the effective date of the Act.

 

Section 807 adds a new criminal provision, 18 U.S.C. 1348, that creates a felony for securities fraud punishable by up to 25 years' imprisonment. Section 903 amends the existing mail and wire fraud statutes, 18 U.S.C. 1341 and 1343, to increase the maximum term of imprisonment for schemes to defraud not affecting financial institutions to 20 years' imprisonment. Those provisions will apply to any criminal conduct committed after the effective date of the Act. It is unclear, however, whether those provisions can be applied to schemes to defraud that straddle the effective date of the Act, i.e., schemes begun before the effective date of the Act but continuing after the effective date of the Act. Generally, mail and wire fraud offenses are complete upon the use of the mails or wires. See, e.g., United States v. Barger, 178 F.3d 844, 847 (7th Cir. 1999). Similarly, the new securities fraud offense will likely be considered complete upon the execution of the scheme. Cf. United States v. De La Mata, 266 F.3d 1275, 1287 (11th Cir. 2001) (bank fraud statute, 18 U.S.C. 1344), cert. denied, 122 S. Ct. 1543 (2002). The Ex Post Facto Clause likely bars applying the new provisions to schemes to defraud that extend beyond the effective date of the Act if the use of the mails or wire in a mail or wire fraud scheme occurred before the effective date of the Act or the execution of a securities fraud scheme occurred before the effective date of the Act. On the other hand, the Ex Post Facto Clause should pose no bar to applying the new provisions to schemes to defraud that began before the effective date of the Act if the use of the mails or wire in a mail or wire fraud scheme occurred after the effective date of the Act or the execution of a securities fraud scheme occurred after the effective date of the Act.

 

Finally, Section 902 adds a new criminal provision, 18 U.S.C. 1349, that punishes attempts and conspiracies to commit fraud offenses, including the new securities fraud offense. The Ex Post Facto Clause should pose no bar to applying that provision to a conspiracy that straddles the effective date of the Act because conspiracy is considered a continuing offense. See, e.g., United States v. Hersh, No. 00-14592, 2002 WL 1574990 (11th Cir. July 17, 2002).

 

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