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Failure to Comply with Internal Corporate Processes and Policies May Violate Exchange Act Accounting Provisions
7 December 2016
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On December 2, 2016, the U.S. Securities and Exchange Commission issued a Cease and Desist Order against United Continental Holdings, Inc. for violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B), the books and records and internal control provisions added by the Foreign Corrupt Practices Act.
United’s former CEO approved an unprofitable flight route from Newark, New Jersey to Columbia, South Carolina, the hometown of then Port Authority Chairman David Samson, after the Port Authority had removed discussions of a high-value three-acre lease to United from its board meeting agenda. The lease was approved the same day the flight route was authorized, and Samson later pled guilty to bribery.
Although there was no written policy for flight route approval, the SEC found that the then CEO’s failure to follow standard internal practices for such approval and to seek a waiver of United’s Code of Business Conduct demonstrated insufficient internal controls under Section 13(b)(2)(B). United’s books and records were considered incomplete under Section13(b)(2)(A) because said lacking authorizations of this transaction were not documented in writing.
The SEC’s broad application of the Exchange Act accounting provisions beyond mere financial statements suggests companies should favor formalization of standard and expedited transaction and asset disposition practices such as written internal policies, call for strict compliance absent delineated circumstances and be vigilant in creating written documentation of such compliance.
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