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Alert No. 1: A number of director and officer liability insurers are offering policies which protect independent directors (including audit committee members) from the risk that the company's insurance application was false or fraudulent. Absent this special protection, the insurer may have the right to disclaim coverage on the grounds that the company's false or fraudulent application mislead them into issuing the policy. These new policies should be carefully reviewed by company counsel and a cost-benefit analysis should be performed before purchasing such policies.
Alert No. 2: Audit committee members should be concerned about the November 18, 2002 decision of the U.S. District Court for the District of Massachusetts entitled In re Lernout and Hauspie Securities Litigation1. The Court in Lernout imposed control person liability under Â§ 15 of the Securities Act of 1933 and Â§ 20(a) of the Securities Exchange Act of 1934 on audit committee members in connection with a massive financial fraud case while at the same time dismissing similar allegations against directors who were not audit committee members. The facts of this case occurred before the passage of the Sarbanes-Oxley Act of 2002. If the holding of this case is adopted by other courts, as is likely given the current public outrage over corporate corruption, audit committee members will have the burden of proving their "good faith" defense to avoid personal liability. The Association recommends that audit committee members should maintain a record of active due diligence in order to establish their "good faith" defense against personal liability. Suggested due diligence procedures are available to members of the Association on this website. 1: 286 B.R. 33 (D. Mass. 2002).
Alert No. 3: Under Section 104(g) of the Sarbanes-Oxley Act of 2002, the Public Company Accounting Oversight Board (PCAOB) cannot publicly reveal problems it uncovers at an accounting firm if the firm fixes the problems within 12 months. Two PCAOB members have now suggested a way to circumvent those restrictions. Kayla J. Gillan and Willis D. Gradison, Jr. are "urging corporate directors to force accounting firms to turn over their inspection reports in order to win or keep the companies' business," according to The Washington Post.
All further alerts will be provided only to the members of the Association.