Enforcement Action under Section 402 of SOX

December 5, 2005

On December 1, 2005, the Securities and Exchange Commission instituted and simultaneously settled its first enforcement action under Section 402 of the Sarbanes-Oxley Act of 2002 (codified in Section 13(k) of the Securities Exchange Act of 1934). The action relates to extensions of credit to the CEO and CFO of an issuer that was a foreign private issuer at the time of the extensions (and that has since been acquired by a domestic issuer). The executives were advanced $169,000 and $125,000 for 90 and 60 days, respectively, in each case on an interest-free basis. No sanctions other than a cease-and-desist order were imposed by the Commission, although the issuer’s board of directors fined the executives $50,000 and $30,000, respectively, one of the executives was required to undergo additional corporate governance training and the issuer placed additional controls on all payments made by and on behalf of the executives. Attached is a copy of the Order.

Section 402 of the Act prohibits an issuer from extending or arranging for an extension of credit in the form of a personal loan to a director or executive officer of the issuer, with certain limited exceptions. The term “issuer” includes entities that have securities registered under Section 12 of, or that are required to file reports under, the Securities Exchange Act of 1934.

We note the following:

· The Order states that the executives claimed that the extensions were mere “advances” and not loans, and hence were not prohibited by Section 402. The Order states that Section 402 “draws no distinction between ’advances’ and loans.”

· The executives did not seek approval of the issuer’s board of directors to make the loans. The loans were, however, recorded on the issuer’s financial statements as “Loans/Advances to Personnel” and were discovered in the course of an annual audit and reported to the audit committee.

Please feel free to call any of your regular contacts at the firm or any of our partners and counsel listed under Corporate Governance, Employee Benefits or Securities Enforcement in the Our Practice section of our Web site if you have any questions.

CLEARY GOTTLIEB STEEN & HAMILTON LLP