## Facts

- Shirley Kiang was a director of L&L Energy, Inc. and served as chair of its audit committee during the relevant period.
- From approximately August 2008 to June 2009, L&L’s public filings falsely stated that an individual served as the company’s Acting Chief Financial Officer, though she did not.
- In May 2009, the individual learned of the false designation and contacted Kiang, requesting an investigation.
- Kiang raised the allegation with L&L’s CEO, who told her the individual had not served as Acting CFO and instructed Kiang not to share the information with others, including the board and the public.
- In June 2009, the individual provided Kiang documentary support (an email declining the Acting CFO role), after which Kiang again confronted the CEO, who admitted the misrepresentation and repeated the instruction not to disclose it.
- Kiang did not ensure that L&L’s independent auditors or the audit committee were informed about the falsity in prior filings and the related disclosure and control issues.
- On August 12, 2009, L&L filed a Form 10-K that included a Sarbanes-Oxley certification stating that any fraud involving management had been disclosed to the auditors and the audit committee.
- The SEC found that certification was false because the management fraud concerning the Acting CFO misrepresentation had not been disclosed; Kiang signed the Form 10-K as a director and audit committee chair.

## Issues

1. Whether Kiang, as audit committee chair and director, caused the issuer’s violations of Exchange Act reporting and disclosure rules by failing to act after learning of management fraud affecting prior SEC filings.
2. Whether Kiang caused the issuer’s internal accounting controls violation by not ensuring that known management fraud was communicated to auditors and the audit committee.
3. What remedial sanctions were appropriate in an Exchange Act Section 21C administrative cease-and-desist proceeding based on settled findings.

## Decision

- The SEC instituted and resolved an administrative cease-and-desist proceeding under Exchange Act Section 21C based on Kiang’s offer of settlement, without admissions or denials (except jurisdiction).
- The SEC found that Kiang caused L&L’s violations of Exchange Act Section 13(a) and Rules 13a-1 and 12b-20, and Exchange Act Section 13(b)(2)(B).
- The SEC ordered Kiang to cease and desist from causing any violations and any future violations of Exchange Act Sections 13(a) and 13(b)(2)(B) and Rules 12b-20 and 13a-1.
- The SEC imposed a civil monetary penalty.
- The SEC ordered Kiang to permanently refrain from signing any SEC public filing that contains certifications required under the Sarbanes-Oxley Act of 2002.

## Legal Principles

- Exchange Act Section 13(a) and Rules 13a-1 and 12b-20 require issuers’ periodic reports to be accurate and not misleading, including through disclosure of information needed to make statements made not misleading.
- Exchange Act Section 13(b)(2)(B) requires issuers to maintain internal accounting controls reasonably designed to provide assurance that corporate reporting and controls function effectively, including in the handling and escalation of management fraud.
- A director or audit committee chair may be liable in an SEC administrative proceeding for “causing” an issuer’s reporting and internal-controls violations when, after learning of credible evidence of management fraud, the person fails to ensure appropriate investigation and communication to auditors and the audit committee.
- An audit committee chair’s responsibilities include ensuring that credible allegations of management misconduct relevant to financial reporting are brought to the attention of the auditors and the audit committee so that periodic reports and related certifications are not false.
- In an Exchange Act Section 21C settlement, the SEC may impose forward-looking, role-focused relief (including restrictions related to Sarbanes-Oxley certifications) in addition to cease-and-desist orders and monetary penalties.

## Conclusion

The SEC concluded that Kiang’s failure, as audit committee chair, to act on confirmed information that the issuer’s prior filings falsely identified an Acting CFO and that management had suppressed disclosure to auditors caused L&L’s reporting and internal-controls violations; it ordered a cease-and-desist, imposed a civil penalty, and permanently barred her from signing SOX-certified SEC filings.


In re Kiang, Exchange Act Release No. 71824 (Mar. 27, 2014)