Tuesday, December 05, 2006

SOX Whistleblower’s Disclosures Lead to SEC Action

As The D & O Diary has previously noted (most recently here), many of the protections and benefits Congress hoped for from the Sarbanes Oxley Act’s whistleblower provisions have been slow to materialize. And there has been relatively little enforcement action or shareholder litigation arising from the revelations of SOX whistleblowers. But in one recent action involving Ashland Inc., the disclosures of a whistleblower who later invoked the SOX protections led to a settled SEC action.

According to a November 29, 2006 SEC Order (here), the SEC settled charges against Ashland and a former employee (Olasin), based on a finding that Olasin had improperly reduced Ashland’s estimates for environmental remediation at numerous chemical and refinery sites. The SEC found that there was no reasonable basis for the reduction, which had the effect of materially understating Ashland’s environmental remediation reserves and overstating its net income in quarterly and annual reports filed from 1999 to 2001.

According to the SEC, three engineers who had been involved in setting the reserves that were later reduced brought the reductions to the attention of the company. One of the three specifically asserted that the reductions were "improper." These concerns led to an internal audit, which consisted of little more than an interview of Olasin. After the audit report came out, Olasin contacted the engineer who had called the reductions "improper" (and whose name Olasin had been able to uncover) and told him that "his performance was suffering" and that he should "spend the weekend thinking about whether he wanted to stay with the company." The individual left Ashland because he felt he was being retaliated against. He later filed a SOX whistleblower complaint against the company with the Department of Labor. According to the SEC’s order, the company later settled the whistleblower action.

Under the settlement with the SEC, Ashland was ordered to cease and desist from committing future violations; to strengthen internal controls; and to hire its independent auditor and an outside firm to oversee the company’s procedures for setting environmental reserves and for handling employee complaints. There were not fines or penalties against either Ashland or Olasin.

Firm Indictment: The Paulson Committee’s recent interim report (here) contained a number of comments and recommendations relating to corporate criminality. Among other things, the Report suggested that the indictment of a company ought to be a "last resort," because of the devastating (and potentially fatal) impact that indictment alone might have on the targeted firm.

In its discussion of these issues, the Report referred to the example of Arthur Anderson’s indictment. The D & O Diary wonders whether the Paulson Committee ever considered a more recent example – the indictment of the Milberg Weiss firm. According to a December 1, 2006 Bloomberg.com article entitled "Big, Powerful and Indicted: Milberg Firm Shrinks" (here), Milberg has "shuttered six of its eight offices and lost more than 50 lawyers of the 125 it had when indicted in May." The article also details a number of class action cases where Milberg has been removed as lead plaintiff counsel since the indictment. With the criminal trial now more than a year away, these circumstances can only deteriorate while the firm awaits its day in court.

While the Paulson Committee would not have been likely to refer sympathetically to the Milberg firm, the events at the firm following its indictment certainly substantiate the concerns noted in the Committee’s Report about the indictment of a corporate entity.

More Press About Larry Sonsini: As The D & O Diary previously noted here, Fortune magazine had a recent article (here) looking at the various complicated circumstances in which Larry Sonsini at the Wilson Sonsini firm has found himself involved. The Fortune article was generally favorable to Sonsini. A harsher take of Sonsini’s role in the HP pretexting scandal can be found in a December 1, 2006 American Lawyer article entitled "The Trouble With Larry" (here).

Hat tip to the WSJ.com Law Blog (here) for the link to the American Lawyer article.

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