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Copyright (c) 2005 Suffolk University
Suffolk University Law Review

NOTE: Misdirected? Potential Issues with Reliance on Independent Directors for Prevention of Corporate Fraud


38 Suffolk U. L. Rev. 641


Jonathan H. Gabriel


I. Introduction

The exchange above captures the frustration shared between a member of the House Financial Services Committee and an Enron director testifying about the problems that led to the corporation's catastrophic fiscal demise. 2 Yet aside from deterrence measures, it is largely the blind mice and absent-minded shopkeepers that Congress counts on to prevent future Enrons. 3 The reliance of the Sarbanes-Oxley Act of 2002 (SOX) on independent directors may introduce a new era of progress, but may just as likely represent the federalization of concepts proved inadequate by the very corporate debacles that occasioned the legislation. 4

The corporate scandals and bankruptcies of 2001 and 2002 received widespread media coverage, shaking public confidence in the capital markets. 5 The public outcry triggered a response by Congress that in some ways favored the immediacy of politics over long-standing policy. 6 The collapses eliminated 35,000 jobs and wiped out $ 1 billion in employee pensions. 7 Enron's bankruptcy alone represented a $ 29 billion loss to shareholders and former workers, while the failure of WorldCom cost shareholders a staggering $ 200 billion. 8 In each instance, corporate officers perpetrated frauds on company shareholders and the investing public by falsifying financial disclosure while supposedly independent auditors remained complacent. 9

Prior to the Enron crisis, the steady rise of the securities markets over the previous decade had reinforced public trust in America's corporate governance system. 10 Largely the province of the states, corporation law generally vests a company's board of directors ...
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