The Supreme Court recently ruled in Yate vs. United States – a case where a fisherman was prosecuted under Sarbanes-Oxley after he had successfully disposed of undersized fish which had been caught illegally – in a 5-4 opinion that Sarbanes-Oxley’s provision on document destruction applies strictly to ‘objects used to record or preserve information’. The specific provision in SOX reads:
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.
The government, when prosecuting the fisherman, argued that the term ‘tangible object’ can apply to any object destroyed during the course of a federal investigation, meaning the fish could be considered a ‘tangible object’. The Court’s majority opinion responded that Congress’ intent would have been to focus on objects strictly in the scope of objects used to store information, and that fish don’t count in that regard.
So what does this mean for Sarbanes Oxley? Not much, from a legal sense – there haven’t been any successful prosecutions under Sarbanes-Oxley since its inception, and only a handful of cases have actually been taken to trial. Plus, the Supreme Court has only ruled on the scope of one term (tangible object) in one statute of the Sarbanes-Oxley act. The law itself will still provide the government with a vehicle to prosecute executives and senior managers who willfully publish false financial information.
The Court’s focus on record-keeping and documents suggests that destruction of a specific type of evidence, objects (documents, hard-drives, phone records) preserving information that the federal government could use to prove management cover-ups and intentional misstatements, is where SOX comes in. The majority opinion even highlighted Arthur Andersen’s destruction of corporate documents at Enron as the context for which SOX was enacted.
This is a blow for federal agencies outside of financial regulation, who would be more likely to encounter management wrong-doing outside of informational records. Take this scenario – the FDA identifies a company that is illegally exporting hazardous chemicals, and an executive orders the chemicals to be destroyed before the FDA is able to collect it. The executive’s decision to impede the course of a federal investigation would not be prosecutable under SOX by this Court’s ruling (Note – this is definitely not legal advice. If you are reading this and are being prosecuted by the federal government for SOX violations, do not use this post as an excuse to destroy evidence of your wrongdoing). A prosecution under SOX would only be allowed in this hypothetical case if the executive were to tamper with any digital or paper record to hide the existence or sale of these chemicals.
Considering that management cover-ups do not have to be exclusive to altering paper and digital documents, the Supreme Court’s ruling could potentially weaken the effectiveness of Sarbanes-Oxley, though the ruling will hardly change the status quo.
Oh, a side note – Justice Kennedy joined the dissent in this case, which argued that the term ‘tangible object’ is both broad and clear. There’s no reason to think he wouldn’t feel the same way about the term ‘Exchanges estalished by the State’ in King vs. Burwell, notwithstanding his concerns over forced coercion.