Cheating Bosses May Face Snitching

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Legislation: A bill to make employees report illegal corporate fiscal practices wins panel’s approval. Business and oil interests oppose it.

The Los Angeles Times

SACRAMENTO — Over the objections of businesses and oil interests, an Assembly committee on Friday endorsed a bill requiring employees to report cases of fraud by their corporate bosses and imposing severe fines on executives for falsifying financial reports.

The bill by Sen. Martha Escutia (D-Whittier) squeaked out of the Judiciary Committee with no votes to spare and was sent to the Appropriations Committee for further screening. Democrats voted for it, but Republicans refused to vote.

The legislation advanced as a report circulated that Gov. Gray Davis, who is running for reelection but seldom signals his position on controversial bills, might sign the measure if it gets to him. A Davis spokesman said the governor had not taken a position on the bill (SB 783).

Polls show that the public strongly supports stiff punishment of chief executive officers, corporate directors and managers who misrepresent a business’ financial position in order to make it look more profitable.

Doug Heller, lobbyist for the Foundation for Taxpayer and Consumer Rights, said employees knew of financial irregularities at recently collapsed Enron but failed to blow the whistle, because “they had no safe way to get the information in the right hands.”

Spurred by disclosures of corporate corruption, President Bush and Congress recently clamped new reporting standards on businesses. But Escutia said tougher requirements were needed in California to police businesses.

Under the bill, an employee with “actual knowledge” that superiors had engaged in financial fraud would be required to report it to the state attorney general’s office, which would investigate or relay the information to regulatory authorities.

The legislation would target the top echelon of company executives. A maximum civil fine of up to $100,000 would be levied against officers, directors and members of a limited liability company who failed to report illegal actions that would harm investors, employees, pensioners or others.

Company managers would be subject to fines of up to $50,000 if they knew about the fraud but did not disclose it to the attorney general or other government officials. The company itself or a limited liability corporation also could be fined $1 million for the same violations.

Escutia charged that the new federal standards were weak and “designed to give corporations a chance to avoid criminal prosecution.” But lobbyists for the California Chamber of Commerce and the Western States Petroleum Assn., which represents virtually all the major oil companies, attacked the provision requiring employees who know fraud is occurring to report it. Such whistle-blowers would have to have “actual knowledge” of the illegal activity, not merely a suspicion.

The business and oil advocates called for voluntary programs that would “encourage” reporting but not mandate it.

Assemblyman Darrell Steinberg (D-Sacramento) asked why it would not be good public policy to “require an employee who has actual knowledge [of fraud] to report it.” In reply, Sher Gonzalez, representing the state Chamber of Commerce, said the bill suggested a revisit of “McCarthyism.”

“We do not think it is good public policy to require people to report to the government the conduct of others,” Gonzalez testified. “In general, we don’t require people to be the eyes and ears of law enforcement.”

Cassie Gilson, representing the oil companies, testified that damage could occur to the company if the attorney general publicly announced an investigation based on the incorrect suspicions of a whistle-blower. She warned that this would “cause the stock prices to go in the toilet.”

But Escutia insisted that the bill dealt only with an employee’s “actual knowledge” of an illegal act and not on hearsay or suspicions.

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