Rich and Wealth

Generally Accepted Accounting Principles and the Securities and Exchange (4)

The antifraud provisions are broad and, taken at face value, could be construed to include almost all forms of misstatement made by a company’s management, whether within or outside its financial statements. However, through case law, it has been demonstrated that to violate the antifraud provisions of the Securities Acts, a defendant must act with scienter—an intent to defraud. Consider, for example, an interpretation of the antifraud provisions found in an administrative proceeding involving Waste Management, Inc.

The SEC alleged that Waste Management violated the antifraud provisions of the 1934 Act by publicly supporting projected results for the company’s second quarter in June 1999 at a time when the company was aware of significant adverse trends affecting its business that rendered its forecast unreasonable. The commission’s interpretation of the antifraud provisions is provided below. It states clearly the role of scienter in violating the antifraud provisions:

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit any person, in connection
with the purchase or sale of a security, from making an untrue statement of material fact or from omitting to state a material fact necessary in order to make statements made, in light of the circumstances under which they were made, not misleading. To violate Section 10(b) and Rule 10b-5, a defendant must act with scienter, . . . defined as a mental state embracing intent to deceive, manipulate, or defraud. . . . Recklessness also has been found to satisfy the scienter requirement. . . .

The mental states of a corporation’s officers may be imputed to the corporation for purposes of establishing its scienter. . . . A fact is material if there is a substantial likelihood that a reasonable investor would consider the information to be important.52

The SEC felt that Waste Management’s actions violated the antifraud provisions. Waste Management did not admit or deny these allegations. The company did make an offer of settlement to cease and desist its alleged actions, which the commission accepted.

Taken From : The Financial Numbers Game