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The New Sarbanes-Oxley Act: Will It Come To Your Mine?

Fall 2002

Co-Authors: Timothy M. Biddle and Tim Means.

If you were on the planet earlier this year, you know about the cratering of Enron, WorldCom, Global Crossing, and several other big publicly-held companies after their financial shenanigans were revealed. And, as you probably know, Congress reacted quickly by passing the Sarbanes-Oxley Act, a law that is intended to protect investors in public companies by imposing new requirements for accounting and audits, financial reports, and investor information and by severely punishing violations. But Sarbanes-Oxley might go much further than just protecting the investing public - it could reach all the way to your mine. Why? Because a few provisions of the new law are very broadly written and, read literally, could apply to all kinds of federal regulatory proceedings and investigations, not just those mounted by the SEC.

Remember how Arthur Andersen employees in Houston destroyed records of their audits of Enron shortly after they learned that the SEC and other federal agencies were preparing to investigate Enron? Congress didn't forget; it enacted a provision of the Sarbanes-Oxley Act that makes "Investigation? Quick! Run the Shredder" conduct a federal crime. Section 802 of the Act makes it a felony (a conviction brings a fine and up to 20 years imprisonment, or both) for anyone to knowingly alter, destroy, mutilate, conceal, cover up, falsify, or make a false entry in, any record, document, or tangible object with an intent to "impede, obstruct or influence" any federal investigation. This section obviously was intended by the drafters to net the likes of Enron's auditors. But, by its use of very broad language, Congress cast the § 802 felony net far beyond company accountants and outside auditors. That net covers publicly-held mining companies and employees, too.

Broad Prohibition on Destruction

When we think about the application to mining companies of the document, record, and tangible object destruction prohibition in the Sarbanes-Oxley Act, there is only one limitation that we see: the punishable conduct must have been "knowing" and intended to impede, obstruct, etc. This language should eliminate innocent conduct and simple mistakes. But before you relegate this provision to the "interesting, but not likely ever to bite me or my company" shelf, consider several important factors. One is that § 802 applies to any document, record, or "tangible object" even though the item record, or "tangible object" is not required by law to be created, maintained, or owned. Thus, for the first time, internal documents such as production reports, maintenance records, purchase orders, internal memos, minutes and notes of meetings, reports and notes made by supervisors, letters, and similar day-to-day records and communications (including e-mails) cannot be destroyed or even altered if there is reason to believe they might be relevant to a federal investigation - even if such an investigation has not been started. In short, if an agency decides or might decide to investigate something, all documents, reports, and tangible objects in the company's hands or in the possession of any employee that are or could be relevant must be preserved, even if an item is not required by any law or regulation in the first place.

Another section of Sarbanes-Oxley, § 1102, makes it a crime to tamper or attempt to tamper with a record, document, or other object with an intent to "impair its integrity or availability for use in an official proceeding." And, apparently worried that they might be leaving out some form of nefarious conduct, the drafters added a catch-all that punishes anyone who "corruptly" obstructs, influences, or impedes an official proceeding, or attempts to do so. (We cannot resist observing that, as lawyers, we often seek to "influence" official proceedings by advocating a client's position to a federal agency or in court. But we are protected from prosecution - we hope - because we don't do it "corruptly.") Like a conviction under § 802 for destroying records that might be relevant to a government investigation, a conviction under § 1102 also can result in a fine or up to 20 years in jail, or both.

Our bottom line is this: most of the federal statutes regulating mining operations - the Mine Safety Act, SMCRA, Clean Air Act, Clean Water Act, and the other environmental laws covering mining activities - require that myriad records be kept and that many reports be made. We're all well aware that most of those laws prohibit making intentional false statements in required records and reports under pain of criminal penalties. But Sarbanes-Oxley adds a new dimension. It makes it a criminal offense to alter or destroy any document that is relevant or could be relevant in any investigation by any department in the federal government. So now you'll have to be very careful - more careful than ever - with document management, and you should warn your fellow employees who create, handle, and normally decide what to do with documents. Said another way, to avoid violating the Sarbanes-Oxley Act, it will be advisable for companies to follow their record retention and other document management programs religiously, including document destruction policies. The two questions always to ask are: "Should we destroy (or change) this document? Why?" With Sarbanes-Oxley on the books, your answer better be a good one if a federal agency investigating your company's compliance with any of the federal laws regulating your company asks for (or demands) documents you destroyed or changed.

More Whistleblower Protection

If you think Sarbanes-Oxley is troublesome for document handling issues during the course of a federal investigation, another provision of that Act could send you around the bend. Section 1107 makes it a crime for anyone to knowingly take any harmful action against "any person" (employee or not) for "providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense." An offender ("anyone") under this section of Sarbanes-Oxley can be punished with a fine, or up to 10 years imprisonment, or both. If you're pondering how this might be applied in the regulatory context, you can join our club. We see a number of major issues: could this section be used to make certain conduct a crime when it was not before? For example, could Sarbanes-Oxley be used to bring criminal charges against a mine supervisor in a miner discrimination complaint case where (up to now) the Federal Mine Safety and Health Review Commission has exclusive jurisdiction (and only civil liability to impose)? Who is a "law enforcement officer"? That term appears broad enough to include employees of regulatory agencies who inspect for compliance with the law - after all, they are enforcing civil laws just as armed federal agents enforce criminal laws. Is violation of an environmental law, such as the Clean Water Act, a "federal offense" or does that term refer only to laws that carry criminal penalties? A literal reading of § 1107 opens up new vistas of potential liability for corporate employees. But it remains to be seen how broadly it will be applied outside the SEC context.

Our Perspective

All of that said, is Sarbanes-Oxley something you really need to worry about? That's a question which is reasonable, but hard to answer because the law is so new. Here's how we see it:

  • Sarbanes-Oxley is intended to require that publicly-held corporations and their outside auditors be truthful in reporting the company's financial status and to make securities fraud a crime. It could be that the Act will not be used in any other context - at least for the next couple of years - because the White House is currently taking the position that the Act only applies to SEC requirements, while Congress disagrees and contends that it applies broadly. Although on its face the Act seems to support Congress's view, it may take several years for the courts to interpret it one way or the other. It may become a problem, but the odds are that the victims of those first precedent-setting cases will not be from the mining industry. Still, do you want to play the odds?
  • Even if Congress's interpretation wins the day, federal prosecutors are unlikely to use Sarbanes-Oxley to seek indictments independent of more traditional violations of regulatory requirements, unless they are driven to it by public opinion and strong evidence of corrupt motives triggering knowing conduct. Most likely it will be used in conjunction with well-established criminal laws (like obstruction of justice, conspiracy, etc.) that prosecutors commonly use against regulatory violators.
  • You pretty well know the events that are likely to trigger investigations by federal agencies (like chemical spills, "releases," mine accidents, "knowing" safety or health violations, and events that put employees and the public at risk). If one of those events occurs you can figure out which documents, records, and tangible objects need to be preserved and who has them, although you will need to think more broadly now than before ("any document. . ."). As many of you know, we recommend that one person take custody of and exercise control over all relevant documents and tangible objects when a company becomes aware that an investigation is underway or is expected.
  • A rational and carefully administered document management program should protect your company and its employees from Sarbanes-Oxley exposure if documents are destroyed that later become relevant to an investigation or an official proceeding - as long as when the documents were destroyed there was no investigation or official proceeding underway or expected.
  • You have trained your supervisors - and we have taught this to hundreds of them over the years - that it is unlawful to take any adverse action against a miner on account of protected activity under the Mine Safety Act (safety complaints, work refusals, calling MSHA, etc.). Now, in our training programs, we all will need to broaden the concept of protected activity to include complaints or other reports of wrongdoing under any federal law, provided that the action is reported to a law enforcement officer and that it is truthful. In short, your supervisors need to be warned that § 1107 of Sarbanes-Oxley now makes it a criminal offense to retaliate against a "whistleblower" employee.

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It should by now be clear to you that Sarbanes-Oxley may not just stay on the pages of newspapers or be applied to punish misconduct in the plush executive suites of major publicly-held corporations. It applies to all levels of employees at every office, plant, or mine. The question of whether Sarbanes-Oxley will come to your mine is answered: it already has.

Thomas (Tim) C. Means
Retired Partner – Washington, D.C.
Email: tmeans@crowellretiredpartners.com