Last month, the SEC charged a former the former audit committee chair and independent director of InfoUSA, a public company based in Nebraska, for failing to properly oversee an investigation into fraud by the company's CEO. The SEC based its charges against the company's former audit committee chair, Vasant H. Raval, on allegations that:
. . . Raval failed to respond appropriately to various red flags concerning [the company's CEO's] expenses and Info's related party transactions with [the company's CEO's] other entities. Two Info internal auditors raised concerns to Raval that [the company's CEO] was submitting requests for reimbursement of personal expenses, yet Raval failed to take meaningful action to further investigate the matter and he omitted critical facts in a report to the board concerning Gupta's expenses.
The SEC further alleged that, because Raval failed to act on "red flags" of wrongdoing, the company's financial disclosures were wrong, and Raval failed to live up his duty as a director to ensure the accuracy and completeness of the financial disclosures in the company's SEC filings. In settlement, Raval agreed to pay a $50,000 penalty and consented to an order barring him from serving as an officer or director of a public company for five years. He also consented to a final judgment enjoining him from violations of Exchange Act Sections 10(b) and 14(a) and Rules 10b-5, 14a-3, and 14a-9, and from aiding and abetting Info's violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20 and 13a-1.
Though it is rare for the Commission to pursue actions against independent directors of registrants, this case makes it clear that the SEC sees the role of the independent director and audit committee chair as critical to investor protection.
The full text of the SEC's press release on Raval is available at: http://www.sec.gov/news/press/2010/2010-39.htm
The full text of the SEC's complaint against Raval is available at: http://www.sec.gov/litigation/complaints/2010/comp21451-raval.pdf