Sarbanes Oxley and Legal Risk

The Act imposes a number of new disclosure requirements designed to enhance visibility...

*Disclosure of financial information prepared in accordance with (or reconciled to) generally accepted accounting principles... that reflect all material correcting adjustments that have been identified by a registered public accounting firm in accordance with GAAP and applicable securities laws.

*Disclosure of all material off-balance sheet transactions, arrangements, contingent obligations and other relationships with unconsolidated entities.

*Disclosure of codes of ethics for senior financial officers and, if a code of ethics has not been adopted, the reasons why the issuer has not done so.

*Real-Time Disclosure (§ 409). Under the Act, issuers will be required to disclose to the public, in plain English and on a “rapid and current basis,” such additional information concerning material changes in the issuer’s financial condition or results of operations as the SEC determines, by rule, is necessary or useful for the protection of investors and in the public interest.

And... (Sec. Act of 1934) disclosure of the legal risks...

Example: CISCO LEGAL PROCEEDINGS

"Beginning on April 20, 2001, a number of purported shareholder class action lawsuits have been filed in the United States District Court for the Northern District of California against the Company and certain of its officers and directors.

The lawsuits are essentially identical, and purport to bring suit on behalf of those who purchased the Company's publicly traded securities between August 10, 1999 and April 16, 2001. Plaintiffs allege that defendants made false and misleading statements, purport to assert claims for violations of the federal securities laws, and seek unspecified compensatory damages and other relief. The Company believes the claims are without merit and intends to defend the actions vigorously.

In addition, beginning on April 23, 2001, a number of purported shareholder derivative lawsuits have been filed in the Superior Court of California, County of Santa Clara, against the Company (as a nominal defendant), its directors and certain officers. At least one purported derivative suit has also been filed in the United States District Court for the Northern District of California, and another has been filed in the Superior Court of California, County of San Mateo.

The complaints in the various derivative actions include claims for breach of fiduciary duty, waste of corporate assets, mismanagement, unjust enrichment and violations of the California Corporations Code, seek compensatory and other
damages, disgorgement and other relief, and are based on essentially the same allegations as the class actions.

WE FACE CERTAIN LITIGATION RISKS

We are a party to lawsuits in the normal course of our business.

Litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, results of operations or financial condition."

WHY CISCO and all public companies explain things like that to the public?
Because they speak about profits... but they don't really know... they are not sure... because of the legal risks. Perhaps, they will have to pay MUCH money after a court decision... It is also a cash flow issue...

Even if you sell pizza, there are very important legal risks... and you have to disclose these risks to the public:

"We do not have long-term contracts with many of our suppliers, and as a result they could seek to significantly increase prices or fail to deliver.

We typically do not have written contracts or long-term arrangements with our suppliers.

Although in the past we have not experienced significant problems with our suppliers, our suppliers may implement significant price increases or may not meet our requirements in a timely fashion, if at all. The occurrence of any of the foregoing could have a material adverse effect on our results of operations.

We face risks of litigation from customers, franchisees, employees and others in the ordinary course of business, which diverts our financial and management resources. Any adverse litigation or publicity may negatively impact our financial condition and results of operations.

Claims of illness or injury relating to food quality or food handling are common in the food service industry. In addition, class action lawsuits have been filed, and may continue to be filed, against various quick service restaurants alleging, among other things, that quick service restaurants have failed to disclose the health risks associated with high-fat foods and that quick service restaurant marketing practices have encouraged obesity.

In addition to decreasing our sales and profitability and diverting our management resources, adverse publicity or a substantial judgment against us could negatively impact our financial condition, results of operations and brand reputation, hindering our ability to attract and retain franchisees and grow our business.

Further, we may be subject to employee, franchisee and other claims in the future based on, among other things, discrimination, harassment, wrongful termination and wage, rest break and meal break issues, including those relating to overtime compensation.

We have been subject to these types of claims in the past, and we are currently subject to a purported class action claim of this type in California relating to rest break and meal break compensation, and if one or more of these claims were to be successful or if there is a significant increase in the number of these claims, our business, financial condition and operating results could be harmed. "

In simple terms... we speak about profits... but nobody knows what will happen... because of the legal risks.

The Sarbanes Oxley Act immediately increased criminal penalties, including both fines and imprisonment, and provided new methods of enforcement against persons who are found to be in violation of securities laws.

Legal risks:

The “whistleblower” protection for employees who assist in investigations of securities fraud claims against their companies (§ 806)

An issuer may not discharge or discriminate against an employee who assists in an investigation, or participates in a proceeding against the issuer, regarding any conduct that the employee reasonably believes constitutes a violation of securities laws or constitutes fraud against the issuer’s shareholders.

Retaliation Against Informants (§ 1107)

It is unlawful to knowingly and intentionally retaliate against any person, including interfering with the person’s lawful employment, for providing a law enforcement officer with any truthful information relating to the commission or possible commission of a federal offense. A violation of this provision may lead to fines and imprisonment for up to 10 years.

The destruction, alteration or falsification of documents (§ 802)

The destruction of corporate audit records (§ 802)

The White-Collar Crimes (§ 903, 904)

The "mistakes" or "omissions" in the certification by corporate officers (§ 906)

It is a criminal offense for the chief executive or chief financial officer of an issuer to file certifications of periodic reports, as required by Section 906 of the Act, knowing that the periodic report accompanying the statement does not comport with all of the requirements of the securities laws, as attested to in the certificate.

A "knowing" violation of this provision carries a maximum punishment of a fine of up to $1,000,000 and imprisonment for up to 10 years. A "willful" violation of this provision carries a maximum punishment of a fine of up to $5,000,000 and imprisonment for up to 20 years.



(From my new web site www.legal-risk.com)