Unfit to Serve: Permanently Barring People from Serving as Officers and Directors of Publicly Traded Companies After the Sarbanes-Oxley Act
On June 4, 2003, lifestyle guru Martha Stewart was indicted on multiple criminal and civil charges by the Securities and Exchange Commission (SEC or Commission). The charges, including obstruction of justice and civil insider trading, stemmed from Stewart's sale of ImClone stock shortly before the Food and Drug Administration rejected a drug produced by ImClone and sent the company's stock price tumbling. Although Stewart could face a number of serious penalties under her criminal indictment, the primary remedy sought by the SEC for her civil insider trading charges is rather uncommon-a bar from serving as a director of Martha Stewart Living or any other public company.
The SEC's attempt to bar Martha Stewart from serving as a director came on the heels of new "officer and director bar" legislation that was passed in the wake of the collapse of Enron and other recent corporate scandals. In response to public outcry over these corporate scandals, Congress enacted the Sarbanes-Oxley Act, which President Bush signed into law on July 30, 2002. The Sarbanes-Oxley Act added a number of provisions to the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (1934 Act) in an attempt to increase the accuracy of audits and financial disclosures and to increase the accountability of and penalties for dishonest corporate officers and directors. In comments at the signing, President Bush discussed the need to restore public faith in America's economic system and noted ways that the new bill would increase corporate oversight and stiffen penalties for corporate wrongdoers. Sarbanes- Oxley increased authority to the SEC by allowing the SEC to permanently bar corporate wrongdoers from serving as officers or directors of any publicly traded company. Upon signing the act into law, President Bush declared that "[t]he SEC will now have the administrative authority to bar dishonest directors and officers from ever again serving in positions of corporate responsibility."
Two specific sections of the Sarbanes-Oxley Act changed the existing law concerning suspension of officers and directors. The first is section 305, "Officer and Director Bars and Penalties," which modifies the 1933 and 1934 Acts by lowering the standard that the SEC has to meet to persuade a federal court to issue an officer or director bar. The second, more important change is found in section 1105, "Authority of the Commission to Prohibit Persons from Serving as Officers or Directors." This section allows the SEC, for the first time, to issue officer and director bars directly as part of a cease-and- desist proceeding, thereby eliminating the requirement that the SEC go through a federal court. Under these provisions, if an officer or too, entered bankruptcy after $9 billion in misstated earnings were revealed. Lavelle, supra, at director's conduct both violates an antifraud provision of federal securities laws and demonstrates "unfitness" to serve, the SEC may bar that officer or director from serving in that capacity with any other public company in the future. The SEC can pursue such a bar in an administrative cease-and-desist proceeding or an action brought in the courts.
Philip F.S. Berg,
Unfit to Serve: Permanently Barring People from Serving as Officers and Directors of Publicly Traded Companies After the Sarbanes-Oxley Act,
56 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol56/iss6/5