- SEC Sanctions Demonstrate Broad Reach of Internal Controls and Books and Records Requirements
- December 21, 2016
- Law Firm: Greenberg Traurig LLP - New York Office
On Dec. 2, 2016, the SEC announced an agreement with a major airline to settle charges in connection with the company’s reinstatement of an unprofitable flight route to curry favor with a senior public official. The SEC alleged that the company violated Sections 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934, as amended. Section 13(b)(2)(A) of the Exchange Act requires issuers to make and keep books, records and accounts, that accurately and fairly reflect the transactions and dispositions of the assets of the issuer. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal accounting controls that, among other things, is sufficient to provide reasonable assurances that assets are used, and transactions are executed, only in accordance with management’s general or specific authorization.
In the cease-and-desist order, the SEC alleged that the issuer’s then CEO approved the new route outside of the airline’s normal processes and that the route was based on the wishes of a public official, despite poor financial projections for the profitability of the route. The SEC alleged that the issuer violated Section 13(b)(2)(B) because, despite the significant potential corruption risks surrounding its dealings with public officials, the issuer failed to design and maintain a system of internal accounting controls sufficient to prevent the violation of its policies, which prohibited the use of company assets for corrupt purposes.
Additionally, the issuer’s ethics code provided that employees wishing to act in ways prohibited by the ethics code could request approval for an exception. The SEC alleged that the failure to seek such an exception by prior written authorization for reinstatement of the route also caused the issuer to violate Section 13(b)(2)(A) because its books and records did not, in reasonable detail, accurately or fairly reflect the route reinstatement.
Without admitting or denying the SEC’s findings, the issuer agreed to pay a $2.4 million penalty and to cease and desist from committing or causing any further violations of Sections 13(b)(2)(A) and (B) of the Exchange Act. The issuer had previously entered into a non-prosecution agreement with the U.S. Attorney’s Office for the District of New Jersey and paid a $2.25 million penalty.