Government Gone Overboard With Sarbanes-Oxley

By: Austin Root 

               For most, it would be a stretch to compare the acts of a corporate executive who shredded company documents in order to cover up financial fraud with those of a fisherman who threw a few undersized red grouper fish back into the sea.  For the Department of Justice, it is not stretch at all as both are guilty of the same crime.  Should the Supreme Court agree with this comparison, there will surely be vast waves that disturb the business landscape.

Act One

In October of 2001, a scandal was revealed at the American energy company, Enron Corporation, which eventually led to the company’s bankruptcy, dozens of charges against its executives, and the dissolution of Arthur Anderson, one of the largest audit and accountancy partnerships in the world.[i]  Enron was able to hide billions of dollars in debt through misleading financial statements while portraying themselves to be a healthy, powerful business.[ii]  To this day, the Enron Scandal is considered one of most notorious in history.[iii]  Enron’s collapse, and the financial ruin it left in its remains, prompted the enactment of new regulations and legislation to promote accurate and reliable financial reporting practices in publicly held companies.[iv]  On July 30, 2002, President Bush signed into law a particular piece of legislation to “enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud,” entitled the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act” or “Act”).[v]

Act Two

            On August 24, 2007, commercial fisherman Captain John Yates (“Yates”) was fishing off the Florida coast when a suspicious officer, deputized by the National Marine Fisheries Service, boarded and inspected Yates’ boat.[vi]  The officer noticed three red grouper fish that did not appear to meet the minimum size limit of 20 inches in length.[vii]  After further investigation, the officer had determined 72 red grouper measured less than 20 inches and instructed Yates to return to shore.[viii]  Before returning to shore, Yates instructed his crew to throw the undersized fish overboard.[ix]  When Yates’ boat returned to shore for further inspection, 69 fish measured less than 20 inches in length; three less than the initial determination of 72 undersized grouper.[x]  Yates was issued a typical citation for his actions.[xi]  However, nearly three years later, Yates was charged with and ultimately convicted of violating 18 U.S.C. § 1519,[xii] the codification of Section 802 of the Sarbanes-Oxley Act.

Something’s Fishy

On Wednesday, November 5, 2014, the Supreme Court heard oral arguments on Yates v. United States, stemming from Yates’ appeal of an Eleventh Circuit Case where the Court of Appeals held that a fish is a “tangible object” within the meaning of 18 U.S.C. § 1519. [xiii][xiv]  Ultimately, the issue the Supreme Court will have to decide is whether the defendant, Yates, was deprived of fair notice that the destruction of fish would fall within the scope of 18 U.S.C.  § 1519.[xv]  The crux of the issue depends on how broadly, or narrowly, the court interprets the applicable statute.[xvi]

Could Section 802, better known as the “anti-shredding provision”, of the Sarbanes-Oxley Act have possibly been intended to apply to fish?  This provision punishes anyone who “knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation[.]”[xvii]  The federal government argued that the law was written and intended to be a broad anti-obstruction-of-justice law.[xviii]  Based on this premise, the federal government contended that Yates had destroyed a “tangible object” when he tossed the red grouper fish overboard.[xix]  Conversely, Yates argues the term “tangible object”, as used in the Act passed after the Enron scandal, “only applies to records, documents, or tangible items that relate to record keeping” and not red grouper fish.[xx]  Accordingly, Yates argues, he could not have received fair notice that a fish would be considered a “tangible object” for the purposes of the Act.[xxi] 

The statutory interpretation issue is classic in the sense that it strains the tension between purpose-driven and text-driven interpretation.  Accordingly, one could presume the Supreme Court’s decision will split along the Justice’s philosophies of interpretation. Some of the Justices scoffed at the Justice Department’s application of the Act on commercial fishermen.[xxii] Justice Antonin Scalia exclaimed, “He could have gotten 20 years! What kind of sensible prosecution is that?”[xxiii]  Other Supreme Court Justices were not so persuaded.  For instance, Justice Elena Kagan said it was possible to read the law to include more than just corporate fraud.[xxiv]  The Court must decide whether it will apply the law as written and leave Congress to fix it, or apply a principle to narrow the statute’s reach despite the text, for example, the rule of lenity.[xxv]

The Catch

The Supreme Court should take this opportunity to rein in the scope of the Sarbanes-Oxley Act by confining its application to those acts that it was intended.  Yates’ side has no shortage of supporters; the most notable being business groups given that the implications could cause turmoil in the business community.[xxvi]  Should the Court uphold this verdict, companies would have to shoulder the overwhelming effects.  One hypothetical that has been commonly used to exemplify the potential devastating implications is “the chemical spill”:[xxvii] A chemical company has a spill and will likely be subject to some environmental fines if they do not make immediate cleanup efforts.  However, the chemical company could face even larger penalties for cleaning up the spilled chemical for violating of the Sarbanes-Oxley Act, as it is destroying evidence.  Following this reasoning, BP violated the Act during their oil spill when the company used chemicals to dissolve oil on the floor of the Gulf of Mexico.[xxviii] 

A chemical spill is just one of many circumstances that would be adversely affected by anything but a Yates victory.  Companies would face predicaments over the handling of inventory with a major, unanticipated spike in storage costs.[xxix]  Corporations may stop throwing anything away and preserve inventory rather than face up to 20 years in prison for destroying evidence.  Not even people outside of the business sector would be safe from the Act.  Justice Stephen Breyer noted that applying this to undersized grouper fish would allow us to prosecute a hiker who picked a flower, knowing you’re supposed to let wildflowers blossom.[xxx]  It does not take a particularly vivid imagination to come with a myriad of undesirable scenarios that may occur, should the Court rule against Yates.

Understandably, a few of the Justices were puzzled by the prosecutorial discretion used to charge Yates with violating the Act.[xxxi]  Logic and reason will simply tell us that throwing red grouper fish overboard could not possibly have been one of the acts intended to be covered by the Sarbanes-Oxley Act.  However, navigating the sea of statutory interpretation will prove to be anything but simple for the Supreme Court, as they will have to grapple with the competing philosophies of text and purpose.  Encouragingly, the Justices did express objection to the federal government’s argument that the red grouper fish are “tangible object[s]”, within the meaning of the Act.  However, until the Court’s decision is handed down, hit the deck, because the outcome of Yates v. United States may have a ripple effect whose bounds are unknown.


[i] Market Failures: The Rise and Fall of Enron, University of Wisconsin Oshkosh (Sep. 18, 2010), http://www.uwosh.edu/llce/conted/lir/course-listings/Enron%20Scandal.pdf/vie-w.

[ii] Jean Folger, The Enron Collapse: A Look Back, Investopedia (Dec. 1, 2011), http://www.investopedia.com/financial-edge/1211/the-enron-collapse-a-look-back.aspx.

[iii] Easy Guide to Understanding ENRON Scandal Summary, Finance Laws, http://finance.laws.com/enron-scandal-summary.

[iv] Folger, supra.

[v] The Laws That Govern the Securities Industry, U.S. Securities and Exchange Commission, http://www.sec.gov/about/laws.shtml

[vi]United States v. Yates, 733 F.3d 1059, 1061 (11th Cir. 2013).

[vii] Id.

[viii] Id.

[ix] Id.

[x] Id. at 1062.

[xi] Dan Epstein, Fishy business at the Supreme Court: Florida Capt. John Yates’ sad saga, Fox News (Nov. 5, 2014), http://www.foxnews.com/opinion/2014/11/05/fishy-business-at-supreme-court-florida-capt-john-yates-sad-saga/.

[xii]Yates, 733 F.3d at 1065.

[xiii] Yates v. United States, SCOTUS Blog (Nov. 14, 2014), http://www.scotusblog.com/case-files/cases/yates-v-united-states/.

[xiv]Yates, 733 F.3d at 1064.

[xv] SCOTUS Blog, supra.

[xvii]18 U.S.C. § 1519 (2012).

[xviii] Nina Totenberg, The Supreme Court Takes Up The Case Of The Missing Fish, NPR (Nov. 5, 2014), http://www.npr.org/2014/11/05/361655397/the-supreme-court-takes-up-the-case-of-the-missing-fish.

[xix]Yates, 733 F.3d at 1064.

[xx] Id.

[xxi] Id.

[xxii] Brent Kendall, Supreme Court Objects to Application of Sarbanes-Oxley on Commercial Fisherman, Wall St. J. L. Blog (Nov. 5, 2014), http://online.wsj.com/articles/supreme-court-objects-to-application-of-sarbanes-oxley-on-commercial-fisherman-1415218271.

[xxiii] Id.

[xxiv] Id.

[xxv] Jonathan Keim, Yates v. United States: Angling for A Narrower Statute (and Other Fish-Related Worldplay), National Review Online (Nov. 6, 2014), http://www.nationalreview.com/bench-memos/392193/yates-v-united-states-angling-narrower-statute-and-other-fish-related-wordplay. [the Rule of Lenity is a doctrine requiring that ambiguities in a criminal statute relating to prohibition and penalties be resolved in favor of the defendant, and thus a more lenient punishment, if it is not contrary to legislative intent].

[xxvi] For Want of a Grouper, Wall St. J. (Nov. 6, 2014, 7:18 PM), http://online.wsj.com/articles/for-want-of-a-grouper-1415319486.

[xxvii] Id.

[xxviii]Jim McTague, The Supreme Court’s Fish Tale, Barron’s J. ( July 4, 2014, 2:38 AM), http://online.barrons.com/articles/SB50001424053111904248904580003230993933438.

[xxix] Id.

[xxx] For Want of a Grouper, Supra.

[xxxi] Keim, Supra.

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