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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

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Campos On Backdating & Directors
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Posted by: Jack Ciesielski 8/28/2006 6:16 AM
There's an interesting article by Eric Dash about the Mercury Interactive board in the Sunday New York Times. Dash referred to a recent speech at Harvard by SEC Commissioner Roel Campos in which he declared, “If the facts permit, and I want to emphasize that all our enforcement cases are very fact-specific, it wouldn't surprise me to see charges brought against outside directors.” Campos' remarks have relevance the Mercury Interactive case because three of its directors have been notified that they may be sued by the SEC.

I'd missed the Campos speech when it was first posted to the SEC website around the middle of August. The title of his speech was "How to be an Effective Board Member" and he had two pointed suggestions for board members with regard to backdating: "(1) don't use "as of" dates unless you have carefully thought about the consequences and have explicit approval from legal counsel that it is acceptable to use an "as of" date; and (2) don't assign critical board functions to "committees of one." Not bad advice - but probably a little late for the directors who might be finding themselves in the SEC's crosshairs soon:

I bring all of these cases to your attention to demonstrate that the Commission is very cognizant of the unique role of directors. We look very carefully at what you do, bringing cases only in egregious situations where there has been a clear violation of a director's fiduciary duty to shareholders. But we do bring them. This alone should motivate you to do your job well, not just to do it. An effective director should not find himself the subject of an SEC inquiry.

While it's not a declaration of open season on directors, Campos' remarks intimate that there's been a lot of thought given to director culpability in these cases. If the dam ever bursts - that is, if the SEC ever finishes investigating and starts prosecuting many cases - maybe we shouldn't be surprised to see a director angle on developments as well as plenty of culpability at the finance and accounting department level.
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