NEW YORK, Nov. 30, 2006 (PRIME NEWSWIRE) -- The last five years have borne witness to the greatest corporate frauds in United States history. Indeed, the most recent breed of scandal -- options backdating -- seems to implicate more and more corporations every week. It seems obvious that these events call out for greater scrutiny and transparency of corporations, in order to assure the integrity of our financial markets. Instead, however, a report issued today by the so-called "Committee on Capital Markets Regulations" seeks to reduce the accountability of corporations, their executives, accountants and others.
The purported justification for relaxing accountability standards is that foreign companies are increasingly resorting to foreign exchanges to issue new securities because those exchanges are less regulated and subject to less fraud-related litigation. Not only is this untrue as a matter of fact, its logic will create a race to the bottom that will serve no one's interests. The United States has the most dynamic and liquid financial markets in the world largely because our markets are viewed as transparent and stable.
A main portion of the "Report" deals with proposals to sharply curtail securities class action litigation alleging fraudulent misconduct. But Congress has already dealt with this issue. In 1995, Congress enacted the Private Securities Law Reform Act which was intended to redress certain perceived abuses in security class action litigation. In particular, the PSLRA raised obstacles to the commencement of such litigation making it more difficult to sue public accounting firms, among others, and limiting their exposure to damages when they engage in fraudulent conduct. Not long after the enactment of the PSLRA, a continuing stream of accounting improprieties were exposed at major corporations including the massive scandals at Enron and Worldcom.
These egregious financial frauds resulted in U.S. shareholders losing billions of dollars with a concomitant loss of integrity of our financial markets. John Coffee, Professor of Law at Columbia Law School, explained that a principal reason for this proliferation of accounting fraud was the failure of accounting firms to adequately perform their role as gatekeepers, and that the PSLRA had reduced those firms' incentives to perform that important function.
Following the Enron-type financial debacles, Congress once again took action and enacted the Sarbanes-Oxley Act. Among other things, this legislation imposed tighter internal accounting controls. Sarbanes-Oxley seems to have achieved positive results. Not only are fewer securities fraud class actions brought today than previously, but accounting firms are now less likely to be caught up in egregious financial scandals. Indeed, in 2005, major accounting firms were named in only five class action lawsuits. And in the first six months of 2006, there was only one case filed naming auditors as a defendant.
What the Committee -- whose members came largely from the corporate and financial communities -- is seeking is not protection from abusive lawsuits, but total immunization from liability to shareholders. James B. Cox, a Corporate Law Professor at Duke Law School, who has studied 600 security class action lawsuits filed over the last decade, has said he finds it is difficult to identify what may be considered to be "abusive" cases and credits the tight restrictions on such cases imposed by the PSLRA and by court decisions. Harvey J. Goldschmid, a former SEC commissioner and SEC General Counsel, stated:
"The checks and balances that we thought would be provided by independent directors, independent accountants, securities analysts, commercial and investment bankers, lawyers and compliance personnel too often failed. . . . (E)ven good rules are only of limited value unless they are enforced by public and private legal actions. Today, given the business backlash that is occurring and serious threats to SEC enforcement created by sharp limits imposed on SEC resources . . . right now private actions are more than, in traditional SEC words 'a necessary supplement to the Commission's efforts;' private actions are absolutely essential if our securities relation system is to work. The (recommendations) of the Committee on Capital Markets would dramatically diminish the effectiveness of the SEC, of criminal enforcement, of state attorneys' general enforcement and of private damage actions. The recent drive for accountability and deterrence would be replaced by a world in which almost anything goes."
And Arthur Levitt, Jr., former SEC Chairman and a former chairman of the American Stock Exchange, recently urged regulators and Congress to "resist those in the courts, in the SEC and in the halls of Capital Hill who want to lead us (backward)." Referring to the spectacular frauds perpetrated by Enron, Worldcom and other corporations, Mr. Levitt warned against a "return to how things were, as though the abuses of the 1990s were something to celebrate and the strong market of today happened by accident." In comments delivered May 5 at an Institute of Law and Economic Policy symposium co-sponsored by Columbia Law School, Mr. Levitt also warned that "powerful interests . . . unwilling to work with regulators and investors to improve disclosure, protect investors, and strengthen our markets" are pushing for a rollback of Sarbanes-Oxley reforms and other investor protections.
Private enforcement is a necessary supplement to the work that the SEC does. It is also a safety valve against the potential capture of the agency by industry. Moreover, the SEC hardly has the resources to deal with increased responsibilities. In each of the last three years, the SEC has brought fewer cases than in the preceding year. According to a SEC spokesman a hiring freeze and staff attrition is a result of a lighter case load.
There has been much discussion about the need to ease the burden of the Sarbanes-Oxley law on smaller companies because of costs of audits and internal controls. Christopher Cox, the Chairman of the SEC has stated that this issue will be addressed so that the attention of auditors will be only on those controls that could be important to assuring the accuracy of financial records. This kind of balanced approach is certainly the right direction. But if we are to learn anything from the events of the last decade, the last thing that is warranted -- if we are going to maintain the integrity of our capital markets -- is to relax the standards of corporate accountability.
The Pomerantz Firm, which has offices in New York, Chicago and Washington, D.C., is acknowledged as one of the premier firms in the areas of corporate, securities, and antitrust class litigation. Founded by the late Abraham L. Pomerantz, known as the dean of the class action bar, the Pomerantz Firm pioneered the field of securities class actions. Today, more than 50 years later, the Pomerantz Firm continues in the tradition he established, fighting for the rights of the victims of securities fraud, breaches of fiduciary duty, and corporate misconduct. The Firm has recovered numerous multimillion-dollar damages awards on behalf of class members. For more information about the Firm, visit our web site at www.pomlaw.com.