Legislative Update Corporate and Criminal Fraud Accountability Act (as Passed by the Senate)

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Jul/Aug 2002

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<h3>Corporate and Criminal Fraud Accountability Act (as Passed by the Senate)</h3>

The Senate on July 15 voted 97-0 to approve accounting reform and corporate
responsibility legislation (S. 2673) crafted in the wake of recent corporate
scandals. Among other provisions, the bill enhances penalties for white collar crime
involving securities laws, shredding documents, obstruction of justice and protection of
whistleblowers. The bill also includes language that prevents securities law violators
from discharging debts based on fraud judgments. A similar bill passed the House on
July 16. The Senate amendment to Title 11 is found in Sec. 803.

<h3>TITLE VIII—CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY</h3>

<h4>SEC. 801. SHORT TITLE.</h4>

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

<h4>SEC. 802. CRIMINAL PENALTIES FOR ALTERING DOCUMENTS.</h4>

(a) IN GENERAL.—Chapter 73 of title 18, U.S. Code, is amended by
adding at the end the following:

§1519. Destruction, alteration or falsification of records in Federal
investigations and bankruptcy.

"Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies or
makes a false entry in any record, document or tangible object with the intent to
impede, obstruct or influence the investigation or proper administration of any matter
within the jurisdiction of any department or agency of the United States or any case
filed under title 11, or in relation to or contemplation of any such matter or
case, shall be fined under this title, imprisoned not more than 10 years, or
both."

§1520. Destruction of corporate audit records.

"(a)(1) Any accountant who conducts an audit of an issuer of securities to which
§10A(a) of the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Exchange Act of 1934 (15 U.S.C.
78j-1(a)</a>) applies, shall maintain all audit or review workpapers for a period
of five years from the end of the fiscal period in which the audit or review was
concluded.

"(2) The Securities and Exchange Commission shall promulgate, within 180 days,
after adequate notice and an opportunity for comment, such rules and regulations as
are reasonably necessary, relating to the retention of relevant records such as
workpapers, documents that form the basis of an audit or review, memoranda,
correspondence, communications, other documents and records (including electronic records)
which are created, sent or received in connection with an audit or review and contain
conclusions, opinions, analyses or financial data relating to such an audit or review,
which is conducted by any accountant who conducts an audit of an issuer of securities
to which §10A(a) of the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Exchange Act of 1934 (15 U.S.C.
78j-1(a)</a>) applies.

"(b) Whoever knowingly and willfully violates subsection (a)(1), or any rule or
regulation promulgated by the Securities and Exchange Commission under subsection
(a)(2) shall be fined under this title, imprisoned not more than five years, or
both.

"(c) Nothing in this section shall be deemed to diminish or relieve any person of
any other duty or obligation, imposed by federal or state law or regulation, to
maintain or refrain from destroying, any document."

(b) CLERICAL AMENDMENT.—The table of sections at the beginning of chapter
73 of title 18, U.S. Code, is amended by adding at the end the following new
items:

1519. Destruction, alteration, or falsification of records in Federal
investigations and bankruptcy.

1520. Destruction of corporate audit records.

<h4>SEC. 803. DEBTS NON-DISCHARGEABLE IF INCURRED IN VIOLATION OF SECURITIES FRAUD LAWS.</h4>

Section 523(a) of title 11, U.S. Code, is amended—

(1) in paragraph (17), by striking "or" after the semicolon,

(2) in paragraph (18), by striking the period at the end and inserting ";
or", and

(3) by adding at the end, the following:

"(19) that—

"(A) arises under a claim relating to—

"(i) the violation of any of the federal securities laws (as that term is defined
in §3(a)(47) of the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Exchange Act of 1934 (15 U.S.C.
78c(a)(47)</a>), any state securities laws, or any regulations or orders issued
under such federal or state securities laws; or

"(ii) common law fraud, deceit or manipulation in connection with the purchase or
sale of any security; and

"(B) results, in relation to any claim described in subparagraph (A), from—

"(i) any judgment, order, consent order or decree entered in any federal or state
judicial or administrative proceeding;

"(ii) any settlement agreement entered into by the debtor; or

"(iii) any court or administrative order for any damages, fine, penalty, citation,
restitutionary payment, disgorgement payment, attorney fee, cost or other payment owed
by the debtor."

<h4>SEC. 804. STATUTE OF LIMITATIONS FOR SECURITIES FRAUD.</h4>

(a) IN GENERAL—Section 1658 of title 28, U.S. Code, is amended—

(1) by inserting "(a)" before "Except"; and

(2) by adding at the end the following:

"(b) Notwithstanding subsection (a), a private right of action that involves a claim
of fraud, deceit, manipulation or contrivance in contravention of a regulatory
requirement concerning the securities laws, as defined in §3(a)(47) of the
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Exchange Act of 1934 (15 U.S.C. 78c(a)(47)</a>), may be
brought not later than the earlier of—

"(1) two years after the discovery of the facts constituting the violation, or

"(2) five years after such violation."

(b) EFFECTIVE DATE.—The limitations period provided by §1658(b) of title
28, U.S. Code, as added by this section, shall apply to all proceedings
addressed by this section that are commenced on or after the date of enactment of this
Act.

(c) NO CREATION OF ACTIONS.—Nothing in this section shall create a new,
private right of action.

<h4>SEC. 805. REVIEW OF FEDERAL SENTENCING GUIDELINES FOR OBSTRUCTION OF JUSTICE AND
EXTENSIVE CRIMINAL FRAUD.</h4>

Pursuant to §994 of title 28, U.S. Code, and in accordance with this section,
the U.S. Sentencing Commission shall review and amend, as appropriate, the Federal
Sentencing Guidelines and related policy statements to ensure that—

(1) the base offense level and existing enhancements contained in U.S. Sentencing
Guideline 2J1.2 relating to obstruction of justice are sufficient to deter and
punish that activity;

(2) the enhancements and specific offense characteristics relating to obstruction of
justice are adequate in cases where—

(A) documents and other physical evidence are actually destroyed, altered or
fabricated;

(B) the destruction, alteration or fabrication of evidence involves—

(i) a large amount of evidence, a large number of participants or is otherwise
extensive;

(ii) the selection of evidence that is particularly probative or essential to the
investigation; or

(iii) more than minimal planning; or

(C) the offense involved abuse of a special skill or a position of trust;

(3) the guideline offense levels and enhancements for violations of §1519 or
1520 of title 18, U.S. Code, as added by this title, are sufficient to
deter and punish that activity;

(4) the guideline offense levels and enhancements under U.S. Sentencing Guideline
2B1.1 (as in effect on the date of enactment of this Act) are sufficient for
a fraud offense when the number of victims adversely involved is significantly greater
than 50;

(5) a specific offense characteristic enhancing sentencing is provided under U.S.
Sentencing Guideline 2B1.1 (as in effect on the date of enactment of this Act)
for a fraud offense that endangers the solvency or financial security of a substantial
number of victims; and

(6) the guidelines that apply to organizations in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. Sentencing Guidelines,
chapter 8</a>, are sufficient to deter and punish organizational criminal misconduct.

<h4>SEC. 806. PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES WHO PROVIDE
EVIDENCE OF FRAUD.</h4>

(a) IN GENERAL—Chapter 73 of title 18, U.S. Code, is amended by
inserting after §1514 the following:

§1514A. Civil action to protect against retaliation in fraud cases.

"(a) WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED
COMPANIES.—No company with a class of securities registered under §12 of the
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Exchange Act of 1934 (15 U.S.C. 78l</a>), or that is required
to file reports under §15(d) of the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Exchange Act of 1934 (15
U.S.C. 78o(d)</a>), or any officer, employee, contractor, subcontractor or agent
of such company, may discharge, demote, suspend, threaten, harass or in any other
manner discriminate against an employee in the terms and conditions of employment because
of any lawful act done by the employee—

"(1) to provide information, cause information to be provided, or otherwise assist
in an investigation regarding any conduct which the employee reasonably believes
constitutes a violation of §1341, 1343, 1344 or 1348, any rule or
regulation of the Securities and Exchange Commission, or any provision of Federal
law relating to fraud against shareholders, when the information or assistance is
provided to or the investigation is conducted by—

"(A) a federal regulatory or law enforcement agency;

"(B) any Member of Congress or any committee of Congress; or

"(C) a person with supervisory authority over the employee (or such other person
working for the employer who has the authority to investigate, discover or terminate
misconduct); or

"(2) to file, cause to be filed, testify, participate in or otherwise assist
in a proceeding filed or about to be filed (with any knowledge of the employer)
relating to an alleged violation of §1341, 1343, 1344 or 1348, any
rule or regulation of the Securities and Exchange Commission, or any provision of
federal law relating to fraud against shareholders.

"(b) ENFORCEMENT ACTION.—

"(1) IN GENERAL.—A person who alleges discharge or other discrimination by any
person in violation of subsection (a) may seek relief under subsection (c), by—

"(A) filing a complaint with the Secretary of Labor; or

"(B) if the Secretary has not issued a final decision within 180 days of the
filing of the complaint and there is no showing that such delay is due to the bad
faith of the claimant, bringing an action at law or equity for de novo review in
the appropriate district court of the United States, which shall have jurisdiction over
such an action without regard to the amount in controversy.

"(2) PROCEDURE.—

"(A) IN GENERAL.—An action under paragraph (1)(A) shall be governed under
the rules and procedures set forth in §42121(b) of title 49, U.S. Code.

"(B) EXCEPTION.—Notification made under §42121(b)(1) of title 49,
U.S. Code, shall be made to the person named in the complaint and to the
employer.

"(C) BURDENS OF PROOF.—An action brought under paragraph (1)(B) shall be
governed by the legal burdens of proof set forth in §42121(b) of title 49,
U.S. Code.

"(D) STATUTE OF LIMITATIONS.—An action under paragraph (1) shall be
commenced not later than 90 days after the date on which the violation occurs.

"(c) REMEDIES.—

"(1) IN GENERAL.—An employee prevailing in any action under subsection
(b)(1) shall be entitled to all relief necessary to make the employee whole.

"(2) COMPENSATORY DAMAGES.—Relief for any action under paragraph (1) shall
include—

"(A) reinstatement with the same seniority status that the employee would have had,
but for the discrimination;

"(B) the amount of back pay, with interest; and

"(C) compensation for any special damages sustained as a result of the
discrimination, including litigation costs, expert witness fees and reasonable attorney
fees.

"(d) RIGHTS RETAINED BY EMPLOYEE.—Nothing in this section shall be deemed
to diminish the rights, privileges or remedies of any employee under any federal or
state law, or under any collective bargaining agreement."

(b) CLERICAL AMENDMENT.—The table of sections at the beginning of chapter
73 of title 18, U.S. Code, is amended by inserting after the item relating
to section 1514 the following new item:

"1514A. Civil action to protect against retaliation in fraud cases."

<h4>SEC. 807. CRIMINAL PENALTIES FOR DEFRAUDING SHAREHOLDERS OF PUBLICLY TRADED
COMPANIES.</h4>

(a) IN GENERAL.—Chapter 63 of title 18, U.S. Code, is amended by
adding at the end the following:

§1348. Securities fraud.

"Whoever knowingly executes, or attempts to execute, a scheme or artifice—

"(1) to defraud any person in connection with any security of an issuer with a
class of securities registered under §12 of the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Exchange Act of 1934
(15 U.S.C. 78l</a>) or that is required to file reports under §15(d) of the
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Exchange Act of 1934 (15 U.S.C. 78o(d)</a>); or

"(2) to obtain, by means of false or fraudulent pretenses, representations or
promises, any money or property in connection with the purchase or sale of any
security of an issuer with a class of securities registered under §12 of the
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Exchange Act of 1934 (15 U.S.C. 78l</a>) or that is required to
file reports under §15(d) of the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Exchange Act of 1934 (15
U.S.C. 78o(d)</a>)."

Journal Date

Monday, July 1, 2002 - 12:00

Bankruptcy Rule

2002