Sarbanes Oxley and the Legal Risks for Companies

Sarbanes Oxley is not only the original Act of 2002, but also all the interpretations in the new (after Enron and World Com) legal and political context. There is no room to "forget" to disclose legal proceedings after Sarbanes Oxley. The Act imposes a number of new disclosure requirements designed to enhance visibility.

- Disclosure of financial information prepared in accordance with (or reconciled to) generally accepted accounting principles.

- Disclosure of all material off-balance sheet transactions, arrangements, contingent obligations and other relationships with unconsolidated entities.

- Disclosure of codes of ethics for senior financial officers and, if a code of ethics has not been adopted, the reasons why the issuer has not done so.

- Real-Time Disclosure (§ 409). Under the Act, issuers will be required to disclose to the public, in plain English and on a “rapid and current basis,” such additional information concerning material changes in the issuer's financial condition or results of operations as the SEC determines, by rule, is necessary or useful for the protection of investors and in the public interest.

And, disclosure of the legal risks ( www.legal-risk.com ). George Lekatis, a senior risk and compliance consultant that leads several Sarbanes Oxley compliance classes every month, said: " Trying to measure the legal risk and to understand what we have to disclose to the public, is similar to crawling around in a cave with a candle. If we disclose more information than needed, we harm the company's reputation. If we disclose less information, the public statements are misleading. And, if shareholders lose money, they will blame the company for hiding information. The disclosure issues are discussed in every class, and month after month I see that it an area of great concern"

There are several other legal risks in the Sarbanes Oxley Act. These risks include:

- The “whistleblower” protection for employees who assist in investigations of securities fraud claims against their companies (§ 806) ( www.sarbanes-oxley-act.biz/SarbanesOxleyAct.htm )

- Retaliation against Informants (§ 1107)

- The destruction, alteration or falsification of documents (§ 802)

- The destruction of corporate audit records (§ 802)

- The White-Collar Crimes (§ 903, 904) ( www.sarbanes-oxley-act.biz/SarbanesOxleyAct.htm )

- The "mistakes" or "omissions" in the certification by corporate officers (§ 906)

The worst nightmare for companies is called “Class Action”. A lawsuit against a corporation is granted class action status by a judge. After that, all shareholders receive a letter alerting them of the litigation. Attorneys advertise the terms of the award in major newspapers, and encourage shareholders to contact them. Law firms issue press releases announcing the filing of a securities fraud class action. Lawyers in class action cases keep about one-third of any negotiated settlement or jury award, so they do not want money from the shareholders. Shareholders have to lose nothing, and they feel that there is a hope to make money.

The negative publicity is a disaster for any company (and for its stock price).

This release was published on openPR.