SOX compliance: Title VIII Corporate and Criminal Fraud Accountability

Title VIII of the Sarbanes-Oxley Act (SOX) introduces significant measures to enhance accountability and deter fraud. It imposes severe penalties for altering documents to obstruct investigations, mandates the retention of audit records, makes debts from securities law violations non-dischargeable in bankruptcy, and extends the statute of limitations for securities fraud.

The act directs the United States Sentencing Commission to ensure adequate penalties for fraud and obstruction of justice and provides robust whistleblower protections for employees reporting fraud. Additionally, it introduces substantial criminal penalties for defrauding shareholders of publicly traded companies, including up to 25 years of imprisonment for securities fraud.

Section 801: Short title

This title may be cited as the ‘‘Corporate and Criminal Fraud Accountability Act of 2002’’.

Section 802: Criminal penalties for altering documents

• Section 802 of SOX introduces stringent criminal penalties for tampering with documents to obstruct federal investigations or bankruptcy cases.
• It adds two new sections to Chapter 73 of Title 18 of the United States Code, Section 1519, which imposes fines and includes up to 20 years of imprisonment for knowingly altering or falsifying records to impede investigations.
• Section 1520 mandates that accountants auditing public companies must retain audit records for five years and empowers the SEC to set and update regulations for record retention.
• Violations of these record-keeping requirements can result in fines and up to 10 years of imprisonment.
• These provisions aim to ensure the integrity and availability of critical audit records and to deter corporate fraud and obstruction of justice.

Section 803: Debts non dischargeable if incurred in violation of securities fraud laws

• Section 803 of SOX amends section 523(a) of Title 11 of the United States Code to make debts incurred due to securities fraud non-dischargeable in bankruptcy.
• Specifically, it adds a new category of non-dischargeable debts, which include those arising from violations of federal or state securities laws or from common law fraud in connection with securities transactions.
• These debts can result from judgments, orders, settlements, or administrative orders for various types of payments, including damages, fines, penalties, and restitution.
• This amendment aims to prevent individuals from using bankruptcy to escape liabilities related to securities fraud.

Section 804: Statute of limitations for securities fraud

• Section 804 of SOX amends the statute of limitations for securities fraud claims under Title 28 of the United States Code.
• It establishes that a private right of action for securities fraud must be filed within the earlier of two years after discovering the facts constituting the violation or five years after the violation itself.
• This amendment applies to all relevant proceedings initiated on or after the act's enactment date.
• Additionally, the section clarifies that it does not create any new private rights of action.

Section 805: Review of Federal sentencing guidelines for obstruction of justice and extensive criminal fraud

• Section 805 of SOX mandates the United States Sentencing Commission to review and amend Federal Sentencing Guidelines to ensure effective deterrence and punishment for fraud and obstruction of justice.
• This includes enhancing penalties for extensive destruction or fabrication of evidence, abuse of special skills or positions of trust, and violations involving a significant number of victims.
• The guidelines for organizational misconduct must also be adequate.
• The Commission is directed to implement these amendments within 180 days of the act's enactment using emergency authority procedures.

Section 806: Protection for employees of publicly traded companies who provide evidence of fraud

• Section 806 of SOX establishes whistleblower protections for employees of publicly traded companies.
• It prohibits retaliation against employees who provide evidence of fraud to federal agencies, Congress, or supervisors, or who participate in related proceedings.
• Employees can seek relief through the Department of Labor or file a lawsuit if no decision is made within 180 days.
• Remedies for prevailing employees include reinstatement, back pay with interest, and compensation for special damages.
• This section does not diminish any existing employee rights under other laws or agreements.

Section 807: Criminal penalties for defrauding shareholders of publicly traded companies

• Section 807 of SOX establishes severe penalties for defrauding shareholders of publicly traded companies.
• The table of sections at the beginning of Chapter 63 of Title 18 of the United States Code is amended to include a new item: 1348. Securities fraud.
• This section criminalizes schemes to defraud or obtain money or property through false representations regarding the securities of companies registered under the Securities Exchange Act.
• Offenders face fines and up to 25 years of imprisonment.