Risk & Compliance

Court Clarifies CFO Liability for False Filings

An appeals court "ups the ante" for finance chiefs who certify that SEC filings include no material misstatements or omissions.
Matthew HellerSeptember 12, 2016
Court Clarifies CFO Liability for False Filings

The U.S. Securities and Exchange Commission has prevailed in a court fight over the liability of CFOs for the filing of false financial statements.

Reviving a case against the former chief executive officer and former CFO of a water purification company, the 9th U.S. Circuit of Appeals said the trial judge erred in finding the executives complied with Rule 13a–14 of the Securities Exchange Act by merely signing the certification that Basin Water’s financial reports were accurate.

The rule also allows the SEC to sue CEOs and CFOs for certifying false or misleading statements, the court said in a recent opinion, finding that “a mere signature is not enough for compliance.”

“Rule 13a–14 … includes an implicit truthfulness requirement,” a three-judge panel said. “It is not enough for CEOs and CFOs to sign their names to a document certifying that SEC filings include no material misstatements or omissions without a sufficient basis to believe that the certification is accurate.”

In December 2013, U.S. Judge Manuel Real found Peter L. Jensen, Basin Water’s ex-CEO, and former CFO Thomas C. Tekulve not liable on all of the SEC’s claims alleging they engaged in “sham transactions” to fraudulently boost the startup company’s revenues.

The 9th Circuit also said Real improperly denied the SEC a jury trial and erred in ruling that Jensen and Tekulve did not have to disgorge any incentive- or equity-based compensation as a result of Basin Water’s restatement of financial results because the restatement was not triggered by their own misconduct.

The disgorgement remedy authorized under the Sarbanes-Oxley Act is “merited to prevent corporate officers from profiting from the proceeds of misconduct, whether it is their own misconduct or the misconduct of the companies they are paid to run,” the court said.

“The Ninth Circuit has upped the ante for CEOs and CFOs — but by exactly how much remains to be decided in future cases,” attorney Bruce A. Ericson of the law firm Pillsbury Winthrop Shaw Pittman commented.

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