Duty Of Oversight And Candor When Filing Reports

The investigator/whistleblower who reported Bernie Madoff's Ponzi scheme to the U.S. Securities and Exchange Commission, which resulted in Madoff's conviction for swindling investors out of $65 billion dollars and put him in jail for 150 years, has a new target.

The investigator/whistleblower has issued a report accusing General Electric (GE) of hiding massive losses by engaging in a $38 billion accounting fraud, which he alleges will be "bigger than Enron".

The whistleblower states that GE's $38 billion in accounting fraud amounts to over 40 percent of GE's market capitalization, ranking it worse than either the Enron or WorldCom accounting frauds.

GE denies the allegations, saying the 175-page report contained false statements, which could have been corrected had the investigator contacted GE before issuing the report. GE accused the investigator of issuing his report in order to manipulate the market so as to benefit a hedge fund in which the investigator is a participant.

The whistleblower used information from the public filings made by GE to the eight largest Long-Term Care (LTC) insurance contracts to which GE is a party. The investigator alleged that, either all eight LTC companies filed false financial declarations with their respective state insurance commissions, or their false financial declarations were made so because they were in turn based on GE's false financial statements. He claims GE is hiding massive loss ratios. Rather than GE's reported second quarter debt to equity ratio of 3:1, it is actually 17:1.

GE contends the report contains numerous "novel interpretations" and mistakes about the actual accounting requirements, which call into question the accuracy of his claims. "Whistleblower accuses GE on massive fraud" www.orissapost.com (Aug. 17, 2019).

Commentary

The Securities and Exchange Act of 1934 is a federal law governing the secondary trading of securities. It has been amended by various laws over the years.

The Securities Exchange Commission (SEC) has the power to compel compliance with the Act and other securities regulations. The SEC may sanction, fine, or otherwise discipline both organizations and individuals. The SEC may bring both civil and criminal actions. The Act also provides a private right of action against market participants who defraud investors.

It remains to be seen whether these allegations will be proven accurate.

Nevertheless, whether you are on the board of directors or in a corporate leadership position in any size of organization that is required to submit SEC filings, the requirements and penalties for false SEC disclosures should be foremost on your mind.

However, even if your organization is not required to submit SEC statements, a board member or senior management member must nevertheless remain cognizant of other duties outside the SEC's jurisdiction. Fiduciary duties arise in any financial matters regarding the corporation.

One duty imposed is that of candor. The fiduciary duty of candor requires that management and the board inform shareholders of all information that is important to their evaluation of the company and its management. The company's management is required in the first instance to provide accurate and timely information to shareholders, and the board is expected to oversee this process.

Another duty is that of oversight. This duty has been defined as one in which directors of a corporation are to take action to control activities of employees which, if not controlled, could lead to corporate liability. Put another way, a breach of the duty of oversight occurs if a board of directors knew, or should have known, that violations of law were occurring within the company, and yet took no good faith steps to prevent or remedy the decision, which proximally led to loss.

A violation of these, or other fiduciary duties, can lead to private actions, fines, or even imprisonment in especially egregious instances.

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