20. Matthew Moral, the CFO of Stargem, Inc., a listed New York Stock Exchange me
ID: 370712 • Letter: 2
Question
20. Matthew Moral, the CFO of Stargem, Inc., a listed New York Stock Exchange media company, faced a dilemma: Should he have certified the reliability of the company’s financial statements in accordance with requirements imposed by the Sarbanes–Oxley Act, despite his deep-seated concern that the company’s internal controls did not function adequately? Or, should he have just been a team player and signed an officer certification under penalty of per- jury? Matthew knew that if he refused to certify the company’s financial statements, the stock market would push the company’s stock price down, which would hurt many of his friends and colleagues who owned the stock. Also, he would suffer too because his stock options would lose value or even become worthless. He also knew that his “days of keeping his job with the company as CFO would be comin’ to an end.”
After reflecting on this issue, Matthew reached a decision. He wrote a letter to the company’s Audit Committee and Board of Directors in which he described three items that he identified as material weaknesses in internal controls. He also stated that he “regretted that he would not be able to certify the company’s financial statements before the filing deadline until these weaknesses were corrected.” As he had feared, the Board of Directors immediately fired him. They even had a company security guard escort him out of the office and prevented him from packing up his personal belongings. Also, as expected, the company’s stock price fell by almost 20% within an hour of the news becoming public that he had refused to sign the company’s SEC filings.
Later, when he filed a whistleblower lawsuit, he was surprised to learn that the company had accused him of using a “stunt.” They also claimed that his refusal to sign was a “bargaining tactic” to get a pay raise and a generous new contract. The company self-righteously claimed that “it proudly stood up to this CFO’s failed blackmail attempts” and that the company’s internal controls function entirely properly.
a. Does Mr. Moral qualify as a whistle blower under federal securities law? Explain?
b. If Mr. Moral had signed the company’s SEC filing despite knowing that there were substantial internal control weaknesses, would he potentially have faced criminal penalties? Explain?
c. Is Mr. Moral entitled to antiretaliation protections under federal securities law? Explain?
d. If Mr. Moral’s case went to court and you were on the jury, what items would you award him? Explain?
e. By virtue of sending this letter, Mr. Moral suffered public ridicule, lost his job, and had to spend several years fighting for damages in court. Would you have done what he did? Explain?
Explanation / Answer
a. Mr. Moral does qualify as a whistleblower under the federal securities law. The SEC defines an eligible whistleblower as anyone who voluntarily provides original information about any violation of federal securities laws. Mr. Moral being the ex CFO must have provided the SEC with original information about the weak controls under SOx.
b. If Mr. Moral had knowingly signed the SEC filings, he would be facing criminal charges. The CFO is an important and responsible executive position and is directly accountable under SOx requirements. The investors in the stock markets rely upon the certification of the internal control by the CFO to analyse and interpret the financial statements of a company. Any wrong certification would breach the trust of the investors and other stakeholders who rely in their credibility of information filed with SEC.
c. Yes. Mr. Moral has a right to anti retaliation protections. Mr. Moral had taken internal actions by writing to the Audit Committee and Board of Directors that he would not certify. Despite this, the company has fired him. Under Sec 922 of Dodd-Frank Act, the whistleblower can file a private action in a federal court for protection against retaliation. Under the SOx Act, whistleblower can file a complaint with the US Department of Labour for protection against retaliation by employer.
d. Mr. Moral would be awarded with reinstatement, double back pay, reimbursement of litigation costs including expert witness fees and attorney fees under the provisions of Dodd-Frank Act.
e. Mr. Moral stood up for his principles and displayed high professional ethics by not certifying the SEC filings. Despite the challenges and hardships, truth and justice prevails in the end. Mr. Moral, by becoming a whistleblower will inspire others to stand up against future wrongdoings and ensure better compliance and transparency in business and society.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.