Outside Directors Fail To Heed Red Flags And Wind Up In SEC Hurricane

The SEC recently sued three former outside directors of DHB Industries, alleging that the three were "willfully blind" to the company's fraudulent accounting practices.¹ The SEC alleges the defendants were faced with numerous hurricane warnings—not just a red flag or two—and proceeded nonetheless to allow management to continue a fraud. It follows closely on the heels of another SEC action against an outside director of InfoGroup, filed in April 2010.² The SEC also sued two former outside directors of Chancellor Corporation in 2003.³ Taken together, these cases illustrate the SEC's increasing willingness to target outside directors who do not adequately discharge their duties as directors.