THINGS CAN CERTAINLY CHANGE over time. It seems not so long ago that Fortune magazine was criticizing criminal prosecutors for a perceived unwillingness to take on fraudulent financial reporting. The reason, Fortune complained, was not a lack of evidence of wrongdoing but a lack of prosecutorial zeal. Even in the face of egregious misconduct, the magazine concluded that “hardly anyone ever went to prison.”
If that was a valid criticism, it is no longer. Today, almost anyone potentially caught in a web of deliberately falsified financial results has to consider the possibility of a criminal investigation. The reasons for the shift are many, but generally involve the increased profile of fraudulent financial reporting and a corresponding reallocation of governmental resources to criminal proceedings. One factor that should not have played a significant role in changing prosecutorial attitudes is the law. Fraudulent financial reporting has been a criminal violation of the federal securities laws since the 1930s.
This chapter examines the role of prosecutors in ferreting out and prosecuting misconduct based on public company fraudulent financial reporting. The chapter starts with the considerations potentially relevant to a prosecutor in evaluating whether to commence a criminal investigation. It then turns to the typical phases of a criminal investigation and possible company responses at each phase. Then it discusses the responsibilities of ...