SEC Enforcement Action Results in Five-Year Ban on Acting as Officer or Director in Any Public Company

541350_81353841.jpgA former chief financial officer (CFO) for a public corporation agreed to a judgment with the Securities and Exchange commission (SEC) that bars him from serving as a director or officer in a public company for five years. SEC v. Krishnan, No. 0:12-cv-02495, consent (D. Minn., Jul. 2, 2013). The SEC accused the defendant of failing to follow his employer’s internal controls, resulting in inaccurate expense reports and inappropriate payments to employees. Although the court case was civil in nature, not criminal, the issues involved fall under the category of “white-collar crime,” since the SEC alleged intentional or knowing financial misstatements and mismanagement.

The defendant worked as the CFO of Digi, Inc., a Minnesota-based public corporation, from February 9, 1999 until his resignation in 2010. Part of his job involved providing financial documents to an external auditor for purposes that included “implementing Digi’s travel and entertainment policy.” Krishnan, complaint at 4 (Sep. 28, 2012). From approximately March 2005 until his resignation, according to the SEC, the defendant allowed employees to use corporate funds for travel and entertainment purposes with “marginal, if any, business purpose.” Id. He allegedly approved employee expense reports that included charges for personal expenses, along with cash payments that lacked any supporting documentation. Because the defendant “personally drafted, authorized and approved” the company’s travel and entertainment policy, the SEC argued that he “knew or should have known” that the expense reports violated the policy. Id. at 5. The defendant allegedly represented to the auditor that he had “no knowledge of fraud or suspected fraud.” Id.

The SEC filed a ten-count complaint alleging that the defendant violated multiple provisions of the Securities Act of 1933 (SA) and the Securities Exchange Act of 1934 (SEA). This included allegations of “obtain[ing] money or property by means of untrue statements of material fact,” id. at 6-7, which allegedly violates both the SA and the SEA. See 15 U.S.C. ยงยง 77q(a)(2), 78j(b). These statutes prohibit various fraudulent activities conducted in the course of the “offer or sale of securities.” The SEC claimed jurisdiction over this case because Digi is a publicly-traded company, and the defendant’s actions therefore allegedly had a direct effect on securities offered or sold to the public. While the defendant’s alleged actions might seem to be an internal matter for the corporation, the company’s public status means that the SEC could assume jurisdiction over issues of corporate governance.

The defendant agreed to a final judgment, but did not admit or deny liability. Krishnan, consent at 1. Under the terms of the judgment, the defendant is permanently restrained and enjoined from violating various provisions of the SA and SEA. The defendant agreed to a prohibition on serving as a director or officer in any publicly-traded company for five years from the date the SEC filed its complaint, and agreed to pay a civil penalty of $60,000. Because the SEC filed the case as a civil matter, the defendant most likely did not risk jail or prison time.

For over twenty years, board-certified criminal defense attorney Michael J. Brown has fought for the rights of defendants in west Texas. He draws on his experience as an FBI agent and a prosecutor to assist clients charged with alleged offenses at the state and federal level related to drugs, white collar crime, and other matters. To schedule a confidential consultation to discuss your case, contact us today online or at (432) 687-5157.

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