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