Control Person Liability: Are You Properly Supervising Your Staff?

There’s a lot of debate about control person liability and how much information or control a person must have regarding an incident in order to be prosecuted.

Posted by Joe Gerard in on March 17th, 2010

There’s a lot of debate about control person liability and how much information or control a person must have regarding an incident in order to be prosecuted. Loosely defined, a control person is anyone in the organization that holds significant decision making authority- mainly senior executives (CEOs, CFOs, CCOs, etc.), board members, and owners of broker-dealers. Under Section 20 of the SEC Act, a control person

“Is anyone that, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.”

The Case of Nature’s Sunshine

In many recent cases, control persons have faced charges for direct involvement in a scandal. However, in the case of Nature’s Sunshine, their CEO and CFO did not admit liability in the case, and were still faced with personal individual fines of $25 000 under the ruling of control person liability. In the article “SEC Trots Out a New Weapon: Control Person Liability” on, it states that Nature’s Sunshine Products Inc. is “a nutritional supplement manufacturer in Utah, and was brought to court after its subsidiary in Brazil allegedly bribed customs officials with more than $1 million in cash to get its unregistered products into the country.” The CEO and CFO were charged because of the fact they there were the control persons over the violators and they should have been supervising their actions. Even though they claimed to not have any knowledge or involvement in the bribery, they still had to pay. The SEC is developing stronger controls in order to better enforce the FCPA.

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If this means holding those in senior or supervisory positions liable even if they are unaware of a corrupt practice taking place at work, the SEC could do so because it should be believed that the person wasn’t upholding their responsibilities by properly reviewing and supervising the work that was being done- and making sure to question discrepancies or questionable expenses/payments. In the Nature’s Sunshine case in the article “SEC Trots Out a New Weapon: Control Person Liability“, it was brought up that a supervisor should have inquired about “why the payments to customs officials were so high. There were a number of red flags that rose to a sufficient level that created recklessness on behalf of senior officers that they didn’t follow up on.”

Senior Executives and Officials Beware

The article “New Exposure for Corporate Officials: Control Person Liability for FCPA Violations” reveals that these types of penalties will most likely become common conclusions as the SEC makes compliance to the FCPA a main priority.

“The possibility that directors and officers could be held liable for FCPA violations without any culpable involvement or even knowledge of the misconduct represents a disturbing new potential liability threat to corporate officials. This threat is all the more troublesome because the SEC, under pressure to reestablish its regulatory credentials, has made it clear that FCPA enforcement will be a high priority.”

I think it will be interesting to see if these types of risks actually end up changing the way executives govern and supervise their companies. It’s hard to hold someone accountable for some thing that they didn’t do, but at the same time, there are cases where claiming executives lacked knowledge is hard to believe because the issue is far too noticeable. These types of rulings will certainly keep executives on their toes, but I think the bigger picture is to see if control person liability and other tightly enforced regulations will clean up the management of particular industries. The i-Sight Investigation Software a workflow driven solution that’s configured to suit your company policies and alerts or notifications are sent to designated people in order to bring attention to cases. i-Sight also provide dashboard reporting so that executives can get a real time view of misconduct and internal investigations. This type of system makes it easier for higher level executives to be informed of situations that are taking place at the lower levels of the company that they may not have day-to-day contact with or oversee directly. With the ability to catch problems at the lower level, it also helps managers to take action and launch investigations, allowing them to have greater knowledge of employee actions at multiple levels.

Joe Gerard
Joe Gerard

CEO, i-Sight

Spend my days showing off the i-Sight investigative case management software and finding ways to help clients improve their investigations. Usually working with corporate security, HR & employee relations, compliance and legal teams.

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