Court Holds Drafting Contracts Violates Sarbanes-Oxley

by Stinson Leonard Street - Dodd-Frank and the Jobs Act
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Section 802 of the Sarbanes-Oxley Act added the following provision to 18 U.S.C. § 1519:

“Sec. 1519. Destruction, alteration, or falsification of records in Federal investigations and bankruptcy

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.”

It’s proven to be a difficult provision to interpret. First, the Supreme Court held a fish was not a tangible object under this provision (the Yates case), and a later court held a SAAB was not a tangible object either.

Next comes the Second Circuit decision in United States v. Rowland.  John G. Rowland, the former governor of Connecticut, resigned that post in 2004 amid a corruption scandal, and later pled guilty to a federal charge of conspiracy to commit honest-services and tax fraud. After serving his sentence, Rowland sought to use his political experience by doing political consulting work on behalf of Republican candidates seeking federal office in Connecticut.

Political campaigns were understandably reluctant to use Mr. Rowland’s services because of the prior Federal charges. Not to be deterred, Mr. Rowland drafted contracts which stated he would provide services to entities other than a campaign, when in reality he intended to or did spend most of his time providing services to the campaign.  One contract was drafted, not signed and never implemented, while another contract was drafted, signed and implemented.

Rowland was convicted on two counts of falsification of records in a federal investigation in violation of 18 U.S.C. § 1519 based on the two contracts he drafted.

Rowland argued on appeal that the documents could not be “falsified” within the meaning of the statute because to “falsify” means only to tamper with a preexisting document, not to create a new document from whole cloth. The Second Circuit rejected the argument, and distinguished the Supreme Court precedent in Yates.  According to the Court, Yates was based on the notion that the title of the statute refers to “Destruction, alteration, or falsification of records in Federal investigations and bankruptcy,” and a fish was not covered because the caption contains no suggestion that the section prohibits spoliation of any and all physical evidence.  The Court found here, unlike in Yates, interpreting “falsify”—in accordance with its dictionary definition—to include the creation of a document fits comfortably within the general purview of the statute suggested by the title.

Rowland also argued, based on a court decision interpreting another statute, that the contracts were not falsified because “there are only two ways in which a contract can possibly be considered “false.” First, a contract is false if a person forges or alters it. . . . The only other way in which a contract can be “false” is if it contains factual misrepresentations.” The Court rejected this argument noting the jury was entitled to conclude that the contracts were “falsified” in the sense that they were created to misrepresent the true relationships among the parties.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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