Sarbanes-Oxley Opens Pandora Box for Personal Civil Liability

by Douglas J. Good and Lauren M. Gray

Much of the early attention to the Sarbanes-Oxley Act has focused on potential criminal liabilities of public company officers and directors who do not comply with certain requirements such as certifying SEC filings and financial statements or who improperly destroy documents. The penalties for these actions are substantial; but at least the road to ruin is clearly marked with the appropriate detour signs. Less heralded is the fact that other prohibitions in the Act may subject individual officers and directors to civil liability. Officers and directors may find the signposts more difficult to decipher; yet the potential liabilities can be enormous.

Sarbanes-Oxley virtually assures an increase in private securities fraud claims, and individual directors will likely find themselves defendants. Just a few years ago, Congress enacted laws designed to limit the number of class action security fraud claims, which were viewed as stifling corporate and business development. Sarbanes-Oxley moves in the opposite direction. Congress apparently now believes that securities class actions – or at least the threat of them – will help ensure proper corporate conduct. The Act expands the statute of limitations for securities fraud from 3 years to 5 years, or from 1 year to 2 years after discovery of the fraud.

Also, Sarbanes-Oxley expressly authorizes shareholders to sue in a corporation’s name for losses resulting from designated corporate mismanagement, including actions to recover profits made by officers or directors who engage in trading during pension fund “blackout” periods.
Individuals may also find themselves as defendants in damage actions by “whistle-blowing” employees. Sarbanes-Oxley protects “whistleblower” employees of public companies who report violations or assist in investigations of securities fraud. A “whistleblower” who is fired, demoted, suspended, threatened, harassed or otherwise discriminated against may now sue the company as well as individual officers responsible.

Less certain is what will happen when a public company makes loans to directors or executive officers or engages in certain other conduct prohibited by the Act. Plaintiffs’ lawyers will undoubtedly pursue the individuals involved, especially when the company has failed. The courts will then have to decide whether Congress intended to allow private investors to sue officers and directors for activities outlawed by the Act. This issue is a fertile ground for litigation until it is finally resolved by the courts; it is an issue that one day may reach the Supreme Court.
Because of current negative public opinion, officers and directors of public companies should exercise utmost caution and seek appropriate advice about their possible individual liability for money damages under the Act. Those who fail may find themselves at center stage in the first “test case” of expanded personal civil liability.

Douglas Good is a partner at Ruskin Moscou Faltischek, P.C., where he co-chairs the Litigation Department, chairs the Employment Law Group, and is a member of the Corporate Governance Practice Group. He can be reached at 516-663-6630 or

Lauren Gray is an associate in the Litigation Department and a member of the Corporate Governance Practice Group. She can be reached at 516-663-6670 or

The Corporate Governance Practice Group of Ruskin Moscou Faltischek, P.C. includes highly experienced general corporate, securities, white-collar crime, employment, litigation and alternative dispute resolution attorneys who are fully conversant with this complex landscape and will assist in your timely compliance with these new and difficult legal requirements.

You may contact any of us at 516-663-6600.