SEC Turns Up the Heat on Lazy Directors

March 6, 2011

Since Sarbanes-Oxley’s 2002 enactment, boards of directors have had to face new accountability standards.  The NY Times has a good story about how the SEC, normally, lets board members escape unscathed unless they directly participate in a fraud, but are making an exception in a case against DHB Industries, stating that:

“We will not second-guess the good-faith efforts of directors,” said Robert Khuzami, the commission’s director of enforcement. “But in stark contrast,” he added, those directors “repeatedly turned a blind eye to warning signs of fraud and other misconduct by company officers.”

This is not a situation where the board of directors participated in any wrongful conduct, just ignored red flags while executives defrauded DHB’s shareholders. 

Like I explained in an earlier post, directors acting in good faith are presumed to be complying with their fiduciary duties.  Here, the SEC is setting a standard to make sure that “good faith” includes acting on red flags.

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