SEC Ban on Loans and Advances: Precedent Established
January 10, 2006
On December 1, 2005, the United States Securities and Exchange Commission (SEC) settled the first enforcement action brought pursuant to the ban on loans to officers and directors under the Sarbanes-Oxley Act. Under Section 402 of Sarbanes-Oxley, which is codified at Section 13(k) of the Securities Exchange Act of 1934 “it shall be unlawful for any issuer … to extend or maintain credit … in the form of a personal loan to or for any director or executive officer or equivalent thereof of that issuer.” Section 13(k) contains no exceptions for “advances” and does not make any distinction between advances and loans.
The SEC commenced the enforcement action against Peter Goodfellow and Stamatis Molaris, the chief executive officer and chief financial officer, respectively, of Stelmar Shipping Ltd. Goodfellow and Molaris were also directors of Stelmar. Stelmar is a foreign private issuer whose securities are registered pursuant to Section 12(b) of the Exchange Act; the company is listed on the New York Stock Exchange.
In the fall of 2003, Goodfellow and Molaris each authorized an interest-free loan to the other from Stelmar. At the time that they took these loans, Goodfellow and Molaris were aware of the prohibition on loans established by Sarbanes-Oxley, but claimed that they regarded these loans as advances that were not prohibited by the statute. In addition, neither Goodfellow nor Molaris consulted with counsel or Stelmar’s outside auditors before taking the loans and took no other steps to determine whether such advances were permitted. Also, neither Goodfellow nor Molaris sought approval from Stelmar’s board of directors (nor did they even inform the board of the existence of the loans until mid-February 2004).
In release number 52865 dated December 1, 2005 (In re Goodfellow, SEC, admin. proc. file no. 3-12117), the SEC found that both Goodfellow and Molaris had caused Stelmar to violate Section 13(k) of the Exchange Act and commenced an administrative proceeding against the two. The SEC imposed a cease and desist order pursuant to Section 21C of the Exchange Act on Goodfellow and Molaris, with respect to any future violations of Section 13(k) of the Exchange Act.
Prior to this case, the SEC had not pursued enforcement actions for any alleged violations of Section 13(k) of the Exchange Act. In its order, the SEC pointed out that Goodfellow and Molaris did not take any action with either Stelmar’s lawyers or accountants to determine if their loans were permissible.
This case may signal a willingness on the part of the SEC to prosecute alleged violations of Section 13(k) of the Exchange Act. Public companies should pay particular attention to any outstanding loan, advance, or other similar arrangement with executive officers and directors. Arrangements such as salary advances and allowing personal use of company credit cards may draw scrutiny from the SEC. Private companies, to the extent that they may be seeking to be acquired by a public entity, should also be mindful of terminating existing loans to persons who will be officers or directors of the acquiring entity.
For more information, please contact any of the following Holland & Knight attorneys:
Atlanta
Don Kennicott •
don.kennicott@hklaw.com 404 817 8500
Boston
Mark Tarallo •
mark.tarallo@hklaw.com 617 523 2700
Chicago
Anne Hamblin Schiave •
anne.schiave@hklaw.com 312 263 3600
Jacksonville
Jim Main •
james.main@hklaw.com 904 353 2000
Miami
Rod Bell •
rodney.bell@hklaw.com 305 374 8500
New York
Frode Jensen •
frode.jensen@hklaw.com 212 513 3200
Orlando
Tom McAleavey •
tom.mcaleavey@hklaw.com 407 425 8500
Portland
Mark von Bergen •
mark.vonbergen@hklaw.com 503 243 2300
Tampa
Bob Grammig •
robert.grammig@hklaw.com 813 227 8500
Washington, D.C.
Jonathan Wolcott •
jonathan.wolcott@hklaw.com 202 955 3000
West Palm Beach
David Perry •
david.perry@hklaw.com 561 833 2000