A Whale of a Legal Tale

Supreme Court Decides If Sarbanes-Oxley Applies to Tossing Fish Overboard

2015 Volume 18 Issue 2

The Sarbanes-Oxley Act includes a broadly worded prohibition on obstruction of justice. But should that criminal statute apply to a commercial fisherman who improperly disposes of undersized fish? The Supreme Court ultimately decided that it did not, but only by the narrowest of margins. The unusual case provides several important lessons for business.

whale_flyingIs a fish a tangible object? A major court battle over that seemingly obvious question vividly demonstrates how the Sarbanes-Oxley Act, the federal law passed by Congress in 2002 after the collapse of Enron Corp., continues to confound both courts and businesses. The question has implications for the crime of obstruction of justice, as well as for how companies need to deal with business records and other potential evidence.

It might be surprising that a case about a fisherman and some undersized red grouper ever reached the U.S. Supreme Court. But in fact, it came close to splitting the nine justices right down the middle.

Four justices decided that the context and wording of Sarbanes-Oxley, or SOX, indicated that fish should not be counted as tangible objects under these circumstances. Four other justices vigorously disagreed, noting that the SOX obstruction of justice provision was intended to be worded broadly. The deciding vote was cast by a justice in the middle who agreed that the fisherman’s SOX conviction should be overturned, but did not concur in the opinion of the four other justices on the winning side.

Clearly, this dispute about fish and tangible objects turned out to be a more complicated legal issue than one might expect. It is also more than an amusing fish tale, as the case shows how a law prompted by only a few corporate bad actors may end up ensnaring many unwitting businesses and victims. Moreover, it should remind all businesspeople of the inherent dangers of treading even close to the line of improper or unethical behavior.

The Case of the Undersized Grouper

In 2007, commercial fisherman John Yates was cited for catching undersized red grouper in federal waters in the Gulf of Mexico. A government inspector had identified 72 red grouper that were under the 20-inch minimum set by law at the time. Those undersized fish were then placed in separate crates on Yates’ ship, and Yates was told not to disturb them before the fish could be seized by the National Marine Fisheries Service—when Yates returned to shore.[1]

After the official left, Yates was accused of having his crew throw those small grouper overboard and then replace them in the same crates with other grouper from the ship’s catch. That is how a minor civil citation for catching undersized fish turned into a criminal prosecution for violating Sarbanes-Oxley. Federal prosecutors charged Yates under a provision of SOX that prohibits concealing a “tangible object.” That broadly worded section of SOX provides:

Whoever 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 or proper administration of any matter within the jurisdiction of any department or agency of the United States…or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.[2]

At trial, Yates was convicted by a jury of violating that statute, as well as a separate federal law that prohibits destroying or removing property to prevent its seizure.[3] Yates could have faced up to 20 years in prison under SOX, but the trial judge sentenced him to only 30 days in jail and three years of supervised release. Nevertheless, Yates appealed his conviction all the way to the Supreme Court.

What Counts as a “Tangible Object”?

Congress passed the Sarbanes-Oxley Act in 2002 as a response to fraud and accounting scandals at major public companies. One portion of that wide-ranging law enhanced criminal penalties for a variety of offenses, including a significant toughening of federal laws prohibiting obstruction of justice. Senator Patrick Leahy, the Senate sponsor of that portion of SOX, explained the need for the new obstruction of justice provision. On the Senate floor, Leahy called it an attempt to “clarify and plug holes in the current criminal laws relating to destruction and fabrication of evidence.”[4]

Yet Sarbanes-Oxley as a whole was primarily intended as corporate reform legislation, prompted by the misconduct at major businesses such as Enron and WorldCom Inc. Thus Yates’ defense attorney, at his trial and throughout his appeals, contended that the “tangible object” terminology in SOX should be applied only to “records, documents, and tangible items that relate to recordkeeping.”[5]

Both lower courts disagreed with this contention. The trial judge, U.S. District Judge John E. Steele, noted that the “broad language” of the SOX provision “is not limited to corporate fraud cases, and ‘Congress is free to pass laws with language covering areas well beyond the particular crisis du jour that initially prompted legislative action.’”[6] The 11th Circuit Court of Appeals unanimously affirmed Yates’ conviction, relying on the ordinary meaning of tangible objects and ruling that the SOX provision “unambiguously applies to fish.”[7]

However, the outcome was far less obvious to the Supreme Court, which heard oral arguments on the case in November 2014. Some justices were concerned about the potential impact of an unlimited SOX obstruction statute. A related issue was whether it was really appropriate for federal prosecutors to charge a crime with a maximum 20-year sentence in a relatively minor case—disposing of undersized fish to avoid a potential civil citation. During oral arguments, Chief Justice John Roberts noted his concern about how that power could be used:

But the point is that…every time you get somebody who is throwing fish overboard, you can go to him and say: Look, if we prosecute you you’re facing 20 years, so why don’t you plead to a year, or something like that. It’s an extraordinary leverage that the broadest interpretation of this statute would give Federal prosecutors.[8]

Supreme Court Decision

Commercial Fishing Boat smWhen the Supreme Court decided Yates v. U.S. in February 2015, the case not only divided the court almost evenly. It also scrambled the typical conservative-liberal alliances of the justices. Three of the more liberal justices—Ruth Bader Ginsburg, Sonia Sotomayor, and Stephen Breyer—were joined by the usually conservative Roberts in rejecting the government’s argument and reversing Yates’ SOX conviction. The fifth vote for that result (though for somewhat different reasons) came from another conservative, Samuel Alito.

On the other hand, the dissenting opinion in favor of upholding the conviction was written by Elena Kagan, who normally is part of the court’s liberal bloc. But her dissent was joined by conservative justices Antonin Scalia and Clarence Thomas, as well as the more moderate Anthony Kennedy.

The written opinions in the case delved deeply into esoteric rules on how courts should interpret the wording of acts of Congress, and even basic principles of grammar involving nouns and verbs. Both sides also used the legislative history of SOX to support their view. Despite using these common guidelines, the two sides reached completely opposite results, with strong arguments on each side.

In Justice Ginsburg’s plurality opinion for four of the justices overturning Yates’ conviction, she acknowledged the obvious fact that fish are indeed tangible objects. But she concluded that including fish in the scope of this particular SOX obstruction crime would cut it “loose from its financial-fraud mooring to hold that it encompasses any and all objects, whatever their size or significance, destroyed with obstructive intent.”[9]

Rather, because “Congress trained its attention on corporate and accounting deception and cover-ups” in passing SOX, Ginsburg wrote, “we conclude that a matching construction…is in order.”[10] Thus a tangible object for this SOX obstruction crime “must be one used to record or preserve information.”[11]

The sweeping potential of a much broader interpretation of tangible objects provided Ginsburg’s final argument for limiting the provision’s scope. She invoked a general principle of criminal law—that ambiguity in criminal statutes should be resolved in favor of leniency to the criminal defendant. That is because, Ginsburg said, an unrestrained reading of tangible objects “exposes individuals to 20-year prison sentences for tampering with any physical object that might have evidentiary value in any federal investigation into any offense, no matter whether the investigation is pending or merely contemplated, or whether the offense subject to investigation is criminal or civil.”[12]

In truth, that may be the strongest argument for the outcome, as one could argue that charging Yates under SOX was prosecutorial overkill, especially when he was also convicted under another statute that carried only a five-year maximum sentence. Further, since that separate conviction was not challenged at the Supreme Court, the justices were able to reverse Yates’ conviction under SOX without leaving him completely unpunished for his attempt to avoid the civil penalty for catching undersized fish.

The dissenting justices, in an opinion written by Kagan, were just as certain of their reading of the statute as were the four prevailing justices. In fact, the opinion for each side managed to poke holes in the arguments of the other side.

The dissenters were opposed to tampering with the “catchall phrase” of tangible objects that had been included by Congress. On the question of whether tangible objects should mean the same thing in this statute as in everyday language, Kagan wrote, “The answer should be easy: Yes.…That fits with Congress’s evident purpose in enacting [the provision]: to punish those who alter or destroy physical evidence—any physical evidence—with the intent of thwarting federal law enforcement.”[13]

Kagan’s dissent identified the “real issue” as “overcriminalization and excessive punishment” in U.S. criminal law.[14] She acknowledged the potential danger of the SOX crime, but pointed out that this trial judge sentenced Yates to only 30 days—nothing close to the 20 years that were theoretically possible. Despite conceding that this SOX obstruction statute gives “prosecutors too much leverage and sentencers too much discretion,” Kagan concluded that “whatever the wisdom or folly” of the statute, “this Court does not get to rewrite the law.”[15]

Perhaps Alito’s middle-ground concurrence best represented the quandary facing the justices. He acknowledged that the case was a close call. But after weighing the varying considerations, Alito found that “John Yates has the better of the argument.”[16] Thus the fifth vote for reversing Yates’ conviction was not a ringing endorsement of the prevailing plurality opinion, but a half-hearted acceptance of the specific outcome in a difficult case.

Lessons for Business

What initially appeared to be a simple and even somewhat humorous question—whether a fish is a tangible object—actually provides several important lessons for businesses of all types. First, though the ruling in this case somewhat narrowed the specific obstruction of justice provision included in Sarbanes-Oxley, that is only one of many similar federal crimes addressing the destruction of evidence or other attempts to cover up criminal behavior. After this SOX crime came so close to applying to a fisherman throwing undersized fish off a boat, there should be little doubt that either this statute or other crimes clearly could apply to improperly disposing of business records used to record or preserve information, if done to impede a federal investigation.

It is also useful to note the remaining breadth of the SOX obstruction provision, which was not directly affected by this Supreme Court ruling. The SOX crime applies to altering, destroying, concealing, or falsifying records in “any matter within the jurisdiction of any department or agency of the United States…or in relation to or contemplation of any such matter or case.”[17]

The criminal penalties under SOX relate not only to disposing of records that are pertinent to pending litigation. They could also apply to any records of potential evidentiary value on issues that might in the future prompt litigation or a government investigation, so long as prosecutors could prove the improper intent to impede the matter. For example, once a business is aware of a potential governmental investigation into an allegedly defective product, or of the possibility of a lawsuit by a disgruntled current or former employee, altering or disposing of any records related to the issue, whether official company files or employees’ emails or text messages, might be a violation of the SOX obstruction of justice crime.

Second, although Sarbanes-Oxley is now 13 years old, several of its provisions continue to be both controversial and problematic for businesses. So it is worthwhile to remember the circumstances that led Congress to pass SOX in the first place—corporate misconduct and scandals at only a small number of businesses, which helped trigger a collapse in public and investor confidence in the corporate world in general. However, the remedy enacted by Congress applies not only to those specific companies with bad records—but to the business world as a whole.

The result is that the conduct of a limited number of bad actors has caused much greater regulatory oversight and costs to almost all major businesses in the United States. The regrettable fact that even upstanding companies and businesspeople can suffer from the misconduct of a few bad actors should give all businesspeople more interest in encouraging and supporting the highest legal and ethical standards throughout the business world—and greater willingness to report lapses in those standards when they become aware of them.

A corollary to that principle is the so-called “law of unintended consequences”—a law that even the Supreme Court cannot overrule. Congress is not always careful when passing major pieces of legislation. But even if Congress exercises the greatest of care, there are almost always going to be unintended results of comprehensive laws such as SOX or the more recent Dodd-Frank Act of 2010. Those unintended results can cause great expense and problems for businesses of all types, and may even occasionally catch a commercial fisherman in the wide net of the Sarbanes-Oxley Act.

Finally, the closeness of the Supreme Court’s decision on the fisherman’s case should remind all businesspeople that government prosecutors have many tools and statutes to use in prosecuting misconduct. Even though the government ultimately lost with this application of SOX, other prosecutors may not be overly discouraged by the outcome of this one case. After all, two lower courts had ruled in favor of the applicability of the SOX crime to these facts, and the Supreme Court came within one vote of agreeing with that result.

That demonstrates the importance of businesspeople not even treading close to the line of illegality—whether it involves obstruction of justice, or insider trading of stocks, or other misconduct that can and does occur in the business world. A rational and ethical businessperson will decide that the potential gain from conduct that falls too close to the line is simply not worth the overall risk to reputation and potential loss of one’s freedom. As long as no initial misconduct occurs, prosecutors will have no reason to go on what might be seen as a fishing expedition to find an appropriate crime to charge.

 

[1] U.S v. Yates, 733 F.3d 1059 (11th Cir 2013).

[2] 18 USC § 1519.

[3] 18 USC § 2232(a). That statute provides: “Whoever, before, during, or after any search for or seizure of property by any person authorized to make such search or seizure, knowingly destroys, damages, wastes, disposes of, transfers, or otherwise takes any action, or knowingly attempts to destroy, damage, waste, dispose of, transfer, or otherwise take any action, for the purpose of preventing or impairing the Government’s lawful authority to take such property into its custody or control or to continue holding such property under its lawful custody and control, shall be fined under this title or imprisoned not more than 5 years, or both.”

[4] 148 Cong. Rec. S7418 (daily ed. July 26, 2002) (statement of Sen. Patrick Leahy). As chairman of the Senate Judiciary Committee, Leahy was the sponsor of the proposed Corporate and Criminal Fraud Accountability Act (S. 2010, 107th Cong.), which became Title VIII of the Sarbanes-Oxley Act.

[5] U.S. v. Yates, supra note 1, at 1064.

[6] U.S. v. Yates, 2011 U.S. Dist. LEXIS 87413 (Mid. Dist. FL 2011). In the internal quotation, Judge Steele cited the precedent of a federal appellate court ruling in U.S. v. Hunt, 526 F.3d 739 (11th Cir. 2008). That case dealt with a police detective convicted under the Sarbanes-Oxley provision for making a false entry in a police incident report.

[7] U.S. v. Yates, supra note 1, at 1064.

[8] Oral argument transcript, Yates v. U.S. (Nov. 5, 2014), at 31, available at http://www.scotusblog.com/case-files/cases/yates-v-united-states/.

[9] Yates v. U.S., 135 S. Ct. 1074 (2015), at 1079.

[10] Id.

[11] Id.

[12] Id. at 1088.

[13] Id. at 1091 (Kagan, J., dissenting).

[14] Id. at 1100 (Kagan, J., dissenting).

[15] Id. at 1101 (Kagan, J., dissenting).

[16] Id. at 1089 (Alito, J., concurring in judgment).

[17] 18 U.S.C. § 1519.

About the Author(s)

Larry Bumgardner, JD, is an associate professor of business law at Pepperdine University's Graziadio School of Business and Management. Previously, he served as executive director of the Ronald Reagan Presidential Foundation and the Reagan Center for Public Affairs in Simi Valley, California. A graduate of Vanderbilt University School of Law, he has also taught political science, public policy, and communications courses at Pepperdine.

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