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					                      CONNECTICUT CORPORATE ANTI-FRAUD ACT

                                    by Theodore P. Augustinos

                                            July 11, 2003

On July 9, 2003, Governor Rowland signed into law Connecticut’s corporate anti-fraud statute
(2003 Conn. Pub. Act 03-259, §§ 33-39) (the “Connecticut Corporate Anti-Fraud Act”). This
statute, which will become effective October 1, 2003, represents the state’s response to the
widely publicized corporate scandals of the past few years. The new law has important
implications for publicly held corporations, in some respects regardless of whether they are
incorporated or authorized to do business in Connecticut. Among its potential effects, the
Connecticut Corporate Anti-Fraud Act raises the specter of CUTPA claims for certain violations,
and increases risks to CEOs and CFOs. Although earlier drafts of the Connecticut law extended
far beyond the Sarbanes-Oxley Act to apply to all corporations, as enacted, the statute is limited
to public companies. This article compares the new state legislation to the federal Sarbanes-
Oxley Act of 2002.
Some of the provisions of the Connecticut Corporate Anti-Fraud Act apply to all publicly held
corporations and others apply to publicly held corporations organized under the laws of, or
authorized to do business in, Connecticut. Section 33 prohibits both individuals and publicly
held corporations (regardless of whether they are organized or authorized to do business in
Connecticut) from altering, falsifying, destroying or concealing documents, records or tangible
objects in order to obstruct or influence an investigation by the state once the investigation has
begun or after reasonable knowledge that an investigation is likely to begin. For this purpose,
“investigation” applies only to investigations pertaining to publicly held securities. The main
difference between this section and the comparable section of the Sarbanes-Oxley Act (18 U.S.C
§ 1519) is that the Connecticut Corporate Anti-Fraud Act refers to a state investigation and the
section in the Sarbanes-Oxley Act refers to an investigation by the federal government.
Section 34 of the Connecticut Corporate Anti-Fraud Act generally tracks the Sarbanes-Oxley Act
(18 U.S.C. § 1514A) and gives “whistleblower” protection to employees of publicly held
corporations. Under both statutes, employees, officers, contractors, subcontractors and agents
are prohibited from discharging, demoting, suspending, threatening, harassing or discriminating
against an employee who lawfully provides information or otherwise assists in an investigation
into mail, wire, radio, television, bank, or securities fraud, violations of SEC rules or regulations,
or federal or state law regarding fraud against shareholders. This section also protects employees
who file, cause to be filed, testify, or otherwise assist in a proceeding about to be filed, with any
knowledge of the employer, relating to the above violations. Under the Connecticut Corporate
Anti-Fraud Act, an employee who believes he or she was discriminated against by assisting a
government investigation may bring suit in Connecticut Superior Court for damages and
injunctive relief. The Connecticut statute provides for additional kinds of damages:
reinstatement at the same seniority, back pay with interest and compensation for other damages
(cost, attorneys fees, etc.), and a longer statute of limitations. The statute of limitations for these
employee claims under the Connecticut Corporate Anti-Fraud Act is one year after knowledge of
the specific incident giving rise to the claim from the date on which the alleged violation occurs;
the statute of limitations under the comparable provision of the Sarbanes-Oxley Act is 90 days.
Section 36 of the Connecticut Corporate Anti-Fraud Act mirrors one of the most important
sections of the Sarbanes-Oxley Act (18 U.S.C. § 1350) by requiring that the chief executive
officer and chief financial officer certify periodic financial reports as required by the Sarbanes-
Oxley Act and the rules and regulations promulgated thereunder. CEOs and CFOs of publicly
held corporations organized under the laws of Connecticut or authorized to transact business in
the state are required to certify that the corporation’s financial statements fairly and accurately
represent the corporation’s financial condition. Earlier drafts of the legislation did not specify to
whom the information should be certified, who will maintain the certificate, the length of time it
will be kept, or who will have access to it. However, as enacted, the Connecticut statute
provides that compliance with the certification requirements of the Sarbanes-Oxley Act, and the
rules and regulations promulgated thereunder, satisfy the certification requirements of the
Connecticut Corporate Anti-Fraud Act. Both the federal and state statutes punish a CEO or
CFO who certifies a financial statement knowing that it does not fairly represent, in all material
respects, the company’s financial condition and results of operations with a maximum of
$1 million in fines and/or 10 years in prison. If a CEO or CFO willfully certifies a financial
statement knowing that it does not fairly represent, in all material respects, the company’s
financial condition and results of operations, the penalty is a maximum of $5 million in fines
and/or 20 years in prison. Neither the Connecticut statute nor the Sarbanes-Oxley Act defines
the difference between signing a certificate with knowledge, and “willfully” signing it with
knowledge. This ambiguity increases potential risks for CEOs and CFOs,
Sections 35 and 37 of the Connecticut Corporate Anti-Fraud Act relate specifically to the
practice of accountants in relation to publicly held companies. While the Sarbanes-Oxley Act
prohibits an accountant who audits a publicly held company from altering, destroying or
concealing documents sent, received or created in relation to that audit for a period of five years
after the audit has been completed, the Connecticut Corporate Anti-Fraud Act extends this
records maintenance period to seven years. Section 37 of the Connecticut Corporate Anti-Fraud
Act prohibits registered public accounting firms from violating Section 10a(g) of the Securities
Exchange Act of 1934. According to the official bill analysis, this means that a violation by a
registered public accounting firm of the federal law restrictions on the activities accounting firms
may perform for a securities issuer while conducting the issuer’s audit would also constitute a
violation of state law.
In addition to provisions that nearly mirror the Sarbanes-Oxley Act, the Connecticut Corporate
Anti-Fraud Act has added sections that are unique to Connecticut law. Section 38 provides that a
violation of sections 33 or 35-37 is deemed to be an unfair or deceptive trade practice under the
Connecticut Unfair Trade Practices Act (“CUTPA”). This creates the opportunity for civil
claims by the Connecticut Department of Consumer Protection. Previous drafts of the bill also
created a private right of action for any person or entity suffering a loss due to an unfair or
deceptive trade practice, but this was removed from the statute. Courts will be allowed to award
actual and punitive damages and equitable relief. Section 39 deems a person guilty of filing a




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fraudulent report if the person knowingly or recklessly files an accounting report that he knows
has a material misstatement or omission.
The Connecticut Corporate Anti-Fraud Act mirrors, in many important respects the provisions of
the Sarbanes-Oxley Act. However, for many publicly held corporations, it increases the
potential risks and costs as a result of the addition of the CUTPA claims, and the ambiguity
between the use of the terms “knowing” and “willfully.”


Theodore P. Augustinos is a partner in the law firm of Edwards & Angell, LLP, residing in its
Hartford office. He has published many articles on topics related to financial services and
corporate law. He is also co-author of the Bank Insurance Sales Methods: Requirements,
Restrictions and Guidelines (CCH), a 50 state treatise on the sale of insurance products through
banking institutions. The assistance of Christine Blethen, a summer associate at Edwards &
Angell, LLP, in the preparation of this article is greatly appreciated.




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