Tag Archives: Arthur Greenspan

Financial Reporting in Times of Economic Crisis: Minimizing Risk in Accounting Judgments and Estimates

by  Arthur Greenspan, James Walker, and David Massey, and Jakob Sebrow 

As a result of the COVID-19 pandemic, U.S. public companies face significantly increased challenges, and legal risks, relating to their accounting and financial reporting.[1] This is especially so when company management must make difficult accounting judgments and estimates in the face of great uncertainty. For most enterprises, the economic disruption and downturn caused by the pandemic have created unprecedented levels of uncertainty around their future business and financial prospects. This has led numerous listed companies, including General Electric, FedEx, IBM and Starbucks, to withdraw previously-announced financial guidance for 2020.

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Accounting Fraud 2.0: Increased Enforcement Activity Based on Non-GAAP Metrics

by Arthur Greenspan, James Walker, David Massey and Jakob Sebrow 

Accounting fraud has long been a staple of the enforcement program at the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ), as corporate officers and employees continue to engage in efforts to improperly enhance financial results.  Based on the widespread use of “non-GAAP” financial metrics by public companies and recent SEC and DOJ emphasis on such measures, we believe that non-GAAP metrics will feature prominently in the government enforcement priorities that are likely to follow the significant market correction caused by COVID-19.

As we discuss below, companies and their senior executives risk SEC and criminal fraud charges based on misuse of non-GAAP metrics, and audit committee members risk scrutiny for failure to maintain adequate internal controls concerning non-GAAP metrics.  United States v. Carroll, a criminal case currently pending before Chief Judge Colleen McMahon in the Southern District of New York, is an important example of the government’s expansive theories of materiality and the real risks faced by companies and executives who emphasize non-GAAP measures in their public disclosures and comments.  Indeed, a confluence of factors—including the prosecutors’ core theory that the defendants sought to “smooth” an ancillary non-GAAP metric, their reliance on qualitative materiality, and their willingness to bring criminal charges notwithstanding the conclusion of the outside auditors that the misstatements were immaterial—makes Carroll a striking and novel prosecution. Continue reading →

U.S. v. Connolly: “Outsourcing” a Government Investigation — And How to Avoid It

by David B. Massey, James Q. Walker, Lee S. Richards III, Shari A. Brandt,  Daniel C. Zinman, Arthur Greenspan, Rachel S. Mechanic, and Audrey L. Ingram

Summary

On May 2, in a widely-watched case, the U.S. District Court for the Southern District of New York found that the government “outsourced” a criminal LIBOR investigation to Deutsche Bank and its outside counsel, and thereby violated defendant Gavin Black’s Fifth Amendment rights when outside counsel interviewed the defendant under threat of termination from his employment.  United States v. Connolly, 16 Cr. 370 (CM), Memorandum Decision and Order Denying Defendant Gavin Black’s Motion for Kastigar Relief, ECF Document 432, slip op. at 19, 29 (May 2, 2019).  But because the DOJ did not use the defendant’s compelled statements at trial and the investigation was not otherwise tainted, the Court found no Kastigar violation and held that, even if there was, any error was harmless.  Connolly, slip op. at 40-41, 43-44.  

The Court’s exposition of the “outsourcing” issue has broad implications for internal investigations and corporate cooperation, but it need not end internal investigations or corporate cooperation as we know them.  By observing some basic precautions as described below, Government enforcement lawyers and corporate defense counsel can avoid similar rulings in the future.  At every stage of an internal investigation, companies should confirm and document that their major decisions are taken to satisfy their obligations to their shareholders to police and remediate their own activity, rather than to satisfy demands made by government lawyers.  The Government, for its part, should avoid instructing companies on the particulars of their internal investigations and not wait for the results of those investigations before beginning their own.  If both sides proceed in this way, internal investigations and corporate cooperation can continue  substantially in the way that they have for two decades.  Continue reading →