SEC's first SOX 402 action

By: Cydney Posner

Corporate Counsel is reporting that the SEC has brought its first action for a violation of SOX 402 (Section 13(k) of the Exchange Act), which prohibits personal loans to executive officers and directors. The administrative proceeding was brought against the CEO and CFO of Stelmar Shipping Ltd., a foreign private issuer. The SEC order states that the CEO and CFO authorized, without Board approval, short-term interest-free loans from the Company of $169,400 to the CEO and $125,000 to the CFO, in violation of Section 13(k). At the time they authorized and received these loans, both were aware of the SOX 402 loan prohibition, but, in an attempt at corporate governance by euphemism, characterized the loans as "advances," which they believed would put them outside the prohibition. The SEC argued instead that "these self-authorized loans are precisely the kind of conduct that Congress sought to prevent in enacting Section 13(k)." The Company's outside auditors discovered the loans and advised the CFO of their view that the loans violated SOX 402. The CFO then advised the Company's audit committee of the problem. After the Board learned of the loans, the Company disclosed the loans and Section 13(k) violations in a Form 6-K (as part of its proxy disclosure) and imposed monetary sanctions of $50,000 on the CEO and $30,000 on the CFO. Interestingly, the SEC imposed only cease-and-desist sanctions upon the CEO and CFO.

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