Outside Director Exposure for Disclosure Violations

Outside Director Exposure for Disclosure Violations

From time to time, the SEC reiterates its view of the critical role companies' outside directors play in safeguarding investors' interests. Nevertheless, it has been relatively rare for SEC to pursue enforcement actions against outside directors based on an alleged failure to fulfill that role, at least in connection with disclosure violations. A recent enforcement action in which the SEC charged an outside director as a primary violator for the company's financial disclosures may suggest that the SEC is taking a more active enforcement approach against outside directors.

As reflected in the SEC's March 15, 2010 press release, the SEC filed enforcement actions against three former senior executives and a former director of InfoGROUP. A copy of the enforcement complaint against the former director can be found here.

The actions arose out of allegations that the company's CEO had used nearly $9.5 in corporate funds for a variety of personal expenses and that the company had entered into an undisclosed $9.3 million transaction with companies in which the CEO had a personal stake. The alleged personal expenses included personal travel on private jets; expenses related to the CEO's yacht; personal credit card expenses, and other items.

The former director against whom the SEC pursued an enforcement action, Vasant Raval, had been chair of the board's audit committee. Beginning in January 2005, Raval became aware of "red flags" concerning the CEO's expenses and the related party transactions. The board asked Raval, in his capacity as audit committee chair, to investigate.

Ravel conducted his own investigation, without the assistance of independent counsel. His investigation revealed information suggesting inadequate documentation and explanations for many of the expenses and the related party transactions. He also received an unsolicited document from the company's director of internal audit that questioned the business purpose of certain of the expenses. The SEC alleged that despite this information, "Ravel failed to take meaningful action to further investigate [the CEO's] expenses."

Less than 2 weeks after beginning his investigation, Ravel presented he company's board and its outside counsel the results of what he described as his "in-depth investigation," which, according to the SEC, failed to advise the board that he (Ravel) was aware of insufficient documentation for certain expenses.

Read Outside Director Exposure for Disclosure Violations in its entirety at D&O Diary, a blog by Kevin LaCroix.