SEC v. DHB Industries (Point Blank) and its former outside directors
SEC civil action, S.D. Fla. (filed Feb. 2011); SEC litigation release
Body armor, a looting CEO and three directors who looked away
- In one lineEn una línea
- Outside directors who ignore obvious warning signs of management fraud can be charged by the SEC themselves; serving means reviewing and overseeing.Los consejeros externos que ignoran señales evidentes de fraude de la administración pueden ser demandados por la SEC; ser consejero es revisar y supervisar.
- RuleRegla
- Directors, and audit committee members above all, must actually review financial reporting and respond to red flags; willful blindness to management fraud exposes them to securities-law liability regardless of whether they personally cooked the books.
- Why this case is herePor qué está aquí este caso
- The casebook (p. 182) uses it to make one point: a director's seat is not an honor, it is a job. Outside directors who turn a blind eye to fraud, especially while profiting from the inflated stock, can be charged personally, and D&O insurance rarely covers fraud.
- Procedural posturePostura procesal
- An SEC civil enforcement action, not an opinion: the Commission sued the body-armor maker and three former outside directors (its audit committee) for accounting fraud and for ignoring red flags; the directors settled with penalties and bars.
Facts
DHB Industries (later Point Blank Solutions) made body armor for the military and police. Its CEO ran a multiyear accounting fraud and used company money for personal spending. The three outside directors formed the audit committee. The SEC alleged they were repeatedly warned of problems, failed to investigate, signed off on financial statements they had not reviewed, and sold stock at prices inflated by the fraud.
Procedural posture
SEC civil complaints in federal court in Florida against the company and the former outside directors; the directors settled with civil penalties and officer-and-director bars (confirm the terms).
Issue
Can outside directors face securities-law liability for fraud they did not commit but refused to see?
Holding
As a matter of enforcement practice, yes: the SEC charged the directors personally for their willful blindness, and the casebook treats the case as a warning about the oversight function.
Reasoning
Directors are the shareholders’ monitor. An audit committee that ignores warnings and profits from the inflated stock has not merely been careless; it has abandoned the function that justifies its independence.
Rule (own words)
If you sit on a board, read, ask and act when something smells wrong, or do not sit at all. Insurance will not cover what the law treats as fraud.
Say the answer out loud before revealing each part. Rate yourself honestly; the case comes back sooner when you miss.Di la respuesta en voz alta antes de revelar cada parte. Califícate con honestidad; el caso vuelve antes si fallas.
Panic kit: “Could you repeat the question, please?” · “Let me make sure I have the facts right: …” · “I'm not certain, but I'd argue … because …”Kit de pánico: “Could you repeat the question, please?” · “Let me make sure I have the facts right: …” · “I'm not certain, but I'd argue … because …”