Management responsibility to outside 3rd parties 2597

  • Hi - I am a newbie to SOX site forum. I have a situation at work where we did a multi-year deal worth USD70M and the deal was based on false/misleading information on the potential the 3rd party has for B2B with us. We are both public companies. Our company knew the historical information provided to 3rd party on sales of product was grossly incorrect before the 3rd party signed the long-term agreement, but management decided not to tell them. The specific information is NOT in the agreement, just the promise to to give them preferred treatment when considering purchases of products they make. A year into the contract, the 3rd party is very unhappy with the deal and is asking for a reduction in the cash fee (millions) they provide to do business with us since the B2B is much lower than anticipated. Our company said ‘no’ since we made no promises on the amount of B2B in the contract, we just told them what had been purchased ‘historically’ (and this info was false). Is this a SOX issue?

  • Hi and welcome to the forums.
    This is probably not a SOX issue unless your filed financial reporting (i.e. your accounts) is mistated also - I didn’t pick up any suggestion of this from your post.
    That doesn’t mean that it’s not an issue though as knowingly providing false or misleading information can be a serious offence - i.e. fraud - and can have both civil and criminal consequences. You don’t provide enough information to say whether you’re in this situation or not - and this forum probably isn’t the right place to explore that too deeply either - but it may be worth taking legal counsel’s advice on what sort of case your supplier/partner might have.

  • If I were you, I would be extremely careful in reporting potential fraud in order not to damage your career, get fired or be subject to other retaliations by your employer. Obviously employees of your employer deliberately provided false information to a business partner in order to obtain a financial advantage for the company. This is at least unethical and probably criminal.
    If you work for a public company whose securities are listed on a national securities exchange in the U.S. (e.g. NYSE, NASDAQ or AMEX), then your audit committee has the obligation to install a whistleblower reporting mechanism (e.g. a hotline). I would even be extra careful and ask for confidential treatment to ensure that whoever decided to withhold the information does not know about your request and cannot retaliate against you. Ask them to run it with the legal counsel and to get back to you. Did the fraud involve the use of the mails (i.e. mail fraud) or other means of telecommunication in the U.S. (i.e. wire fraud)? Only then and only if it is at least a probable offense and if you are employed in the U.S., you will fall under the whistleblower labor law protection of section 806 of the Sarbanes-Oxley Act.

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