Corzine and Sarbanes-Oxley

Yves Smith notes the same thing I did yesterday about Jon Corzine’s Congressional testimony:

Now as regular readers know, CEOs morphing suddenly from Masters of the Universe to empty 42 longs who are clueless as far as operational details are concerned was supposed to go the way of the dodo bird with Sarbanes Oxley. Sarbanes Oxley requires key corporate executives, typically at least the CEO and CFO, to certify the adequacy of internal controls. For a financial firm, that has to include risk controls, which were the big point of failure in the crisis and with MF Global. And the beauty of Sarbox is the criminal provisions track the civil, so if a prosecutor were to prevail in a civil suit and thought it had enough dirt to pass the “reasonable doubt” threshold, it could file the related criminal suit.

Knowing violations of Sarbanes Oxley certifications are subject to up to five years in jail; willful violations, up to twenty years. To my knowledge, only one executive has faced charges under Sarbox: HealthSouth’s Robert Scrushy. He won that case, but as someone who followed it off and on in the Birmingham press, it is not a stretch to argue that Scrushy had a position in the Birmingham area that would make him more difficult to prosecute than most CEOs. And it it also pretty typical for it to take a while to perfect cases when using new legal arguments, so losing an early case or two is often part of the learning process.

So a “know nothing” argument would not only be useless in defending against Sarbox charges, it might actually be damaging (“How can you say you know nothing about operations yet sign that certification?”). Note that for financial statements, the usual approach is to shed liability by relying on auditors. But there are no comparable players in the risk modeling/control world. The banks are typically on the bleeding edge in some areas, which often include very profitable new strategies, which works against third party validation.

I can’t help but wonder if while reducing the likelihood of fraud indictments Mr. Corzine’s testimony has increased the likelihood of indictment for Sarbox violations. As noted in comments yesterday something depends on how much grace those in Congress and the Justice Department are inclined to grant a former senator.