What Happens When a Company Director Makes False Statements?
As a senior authority figure, a director or chief executive can face grave legal consequences for knowingly lying about the state of their company.
Laws governing financial crimes within the market haven’t always been as quick to catch up with the trend of crimes themselves, as has law regulating more traditional crimes such as larceny or robbery. However, when it comes to fraud, the law is fairly clear, and the penalties are steep.
A company director making a false or misleading statement is committing a federal offense that carries the threat of serious prison time .
Fraud can take a number of forms from the top of company leadership
A company director is the figurehead of corporate leadership, and speaks directly for the company. It is against the law to misrepresent information that is relevant to the company’s status in any way that may impact investment decisions, manipulate stock prices, or otherwise influence the course of business and the market.
A common instance of fraud is when a company’s directors mislead investors as to the real state of the company’s financial health. Another form of fraud may be presented internally, such as if a CEO sends a memo to their staff informing them that they are running a quarterly profit, when they are in fact running a deficit.
Whatever the means, the law itself is pretty clear-cut. The sentence for making false statements can increase when additional counts are involved, and corporate fraud also involves other financial crime elements.
Other common forms of fraud that may be included in a bundle of charges against a company director for making false statements include:
- Wire fraud
- Money laundering
- Conspiracy to commit fraud
- Accepting or soliciting bribes
- Market abuse and insider trading
- Falsifying documents
A company director is the figurehead of corporate leadership, and speaks directly for the company.
Regardless of the charges, however, any charge is bound to come on the heels of an extensive criminal investigation. This may start with a complaint or anonymous tip. It could also arise from suspicions on the part of competing firms or directly from regulators or legal investigators.
The criminal investigation
Just as there are a number of ways for company directors to commit fraud through the issuing or simple verbalizing of false or misleading statements, so too are there a number of ways to get caught. Some of the ways a company director may be exposed for illegally making a false statement include:
- Being caught lying directly to a law enforcement or regulatory agency representative (ex: the FBI)
- Being exposed by a whistleblower within the company for circulating false information internally
- Being investigated and exposed by a regulator for false information leaked or spoken to associates for the purposes of manipulating the market
- Being caught inflating numbers in company publications or company disclosures
Of this list, getting caught lying to investigators seems like an unlikely path to downfall for a chief executive, but it happens quite often. For example, former MiMedX CEO Parker Petit was convicted of fraud in November 2020 after the Securities and Exchange Commission (SEC) found that he had falsified the company’s actual financial situation in SEC filings, with the associated securities fraud charge carrying a maximum sentence of twenty years in prison.
While not the same as lying to police in the interrogation room, falsifying an SEC filing, while it seems a brazenly reckless move to make given the consequences, is a common cause for fraud charges.
Running a legal defence to prosecutorial offense
Unlike most criminals, guilty company directors in fraud cases tend to have some of the best legal representation available on the planet. There are a number of mechanisms and legal arguments that a good defense attorney or company’s general counsel can employ when their company director is charged with making false statements.
A primary line of defence is to attempt to argue that the company director did not know that what they were saying was false. This argument could be supported by evidence that another member of the company falsified the information. It could be chalked up to accounting error.
While a tried and not always true method of defense, a common approach is to simply deny that the company director did make a false statement. This is certainly a tougher argument to make if documented evidence suggests otherwise. Ultimately, these cases will come down to a combination of the strength of the respective legal teams involved and the truth itself.