Part I: Self-Reporting And Cooperation: Key Issues

An analysis of the question of self-reporting begins with the legal obligation to take this step. In some instances, there is a clear legal obligation. In others, there may, in practical terms, be an obligation to report. And, in still others, a complex of legal obligations and the ramifications of a potential charging decision virtually compels self-reporting, in the view of some commentators.

In some instances, a business organization may have an obligation to self-report. Section 10A(3) of the Securities Exchange Act of 1934 for example, requires that after receiving a report from its auditors under Section 10A(2) of illegal acts, the issuer “shall inform the Commission by notice not later than 1 business day after the receipt of such report …”

In other instances, there may be a practical obligation which effectively compels self-reporting. If, for example, an issuer discovers a material error in its financial statements, a restatement may be required under SFAS 154, Accounting Changes and Error Corrections. That, in turn, will require the issuer to file amendments to its periodic filings made with the SEC. Under these circumstances, self-reporting is virtually required.

In other instances, the broad liability faced by a business organization coupled with the obligations imposed by the Sarbanes-Oxley Act and the severe consequences of a charging decision virtually compel self-reporting:

• Corporate liability principles have created virtually open-ended liability for business organizations since the Supreme Court’s decision in New York Central and H.R.R. v. U.S., 212 U.S. 481 (1909), which gives prosecutors almost unfettered charging discretion;

• SOX requires corporate mangers to monitor and certify organizational systems and information in Sections such as 302 (CEO, CFO certifications), 906 (certifications), 404 (internal controls), 301 (audit committee authority and obligations) and 307 (counsel), thereby imposing a duty of detection and knowledge; and

• Being named as a defendant in a DOJ criminal or SEC civil enforcement action can have debilitating, if not draconian consequences, for a business organization.

Collectively, these principles and obligations have led some commentators to conclude that there is a fiduciary duty to self-report. As one commentator noted: “Under current federal law and Department of Justice Policy, it would be irresponsible for management to attempt to defend the corporation or its employees.” John Hasnas, Department of Coercion, Wall Street Journal, March 11, 2006. At a minimum, there is significant compulsion to take the step. In this context, the choice is not whether to self-report, but when, and not if to cooperate, but what steps to take to try and earn cooperation credit.

Next: Ill-defined prosecution and cooperation standards