Plaintiffs began pleading Section 302 violations both as separate, substantive false statements and as evidence of scienter (see complaints here (Lattice Semiconductor) and here (Virbac)), and federal securities regulators and prosecutors have been making use of 302 certifications in bringing actions against CEOs and CFOs.
A recent article, Minding Your 302s: Assessing Potential Civil, Administrative and Criminal Liability for False Financial Statement Certifications, from a Practising Law Institute program of the same name (course information here) provides a good resource for practitioners seeking guidance on both civil and criminal liability for filing false or fraudulent Section 302 certifications.
The article was written by Timothy P. Harkness, a litigation partner at Kramer Levin Naftalis & Frankel LLP, Celiza P. Braganca, senior counsel at Sperling & Slater, P.C., and John Bessonette, a corporate associate at Kramer Levin Naftalis & Frankel LLP. While it was published before the 11th Circuit's recent decision in Garfield v. NDCHealth Corp., 2006 WL 2883238 (11th Cir. Oct. 12, 2006) (holding that SOX certifications are "only probative of scienter if the person signing the certification was severely reckless in certifying the accuracy of the financial statements"), it is still a good starting point for anyone researching in this area.
In the context of private securities litigation, the authors conclude that inaccurate Section 302 certifications:
do not give rise to independent private claims under the securities laws, nor do they appear to alter the fundamental standards that are applied in Section 10(b) actions.In the context of liability in government actions, the authors conclude that:
Rather, they are viewed by courts in the overall context of a case and only bear on civil liability when other pleaded facts create a strong inference of scienter against the 302 certifier.
302 certifications do not substantially change the potential liabilities of certifying CEOs and CFOs, with two important exceptions.The first exception:
a certifier who can prove a thorough [internal controls] evaluation done in good faith is more likely to avoid being charged with filing a false 302 certification than a certifier who cannot do so.The second exception:
certification of immaterial misstatements or omissions may subject a certifier to liability to the extent that they are part of a larger fraudulent scheme.Daily Trivia: NDCHealth Corporation (NYSE: NDC) merged in early 2005 with Per-Se Technologies, Inc. (NASDAQ: PSTI), which in turn announced this week that it was being acquired by McKesson Corporation (NYSE: MCK) in a transaction valued at approximately $1.8 billion.