Let Loose Lawyers on Corporate Outlaws

Stopping corporations from cooking their books and having auditors bless their felonies will not be accomplished by increasing prison sentences. That’s fighting corporate fraud the way we have been fighting the war on drugs. Lots of talk but no action. We can get action by repealing the 1995 Private Securities Litigation Reform Act and turn loose the class action lawyers to go after the outlaws.

Before 1995 investors could use class action lawsuits to hold responsible executives who fraudulently reported sales and book-to-bill ratios, those who delayed reporting business reverses to inflate stock prices so they could exercise favorable stock options, and auditors who looked the other way, such as in the savings and loan association rip-offs.

In 1995, a Republican Congress passed the PSLRA to limit class actions. Republicans have long opposed class action lawyers’ efforts to represent consumers and investors. Even President Bush in a Texas gubernatorial race campaigned against class action lawyers who represented investors in security fraud cases, no doubt feeling the heat from his own questionable transactions. During the Clinton administration, Republicans screamed that private attorneys prosecuting securities frauds were bringing “frivolous cases,” and that enforcement should be solely in the hands of the SEC. The Contract with America proponents told us that the greediest of Wall Street were going to voluntarily follow the law when there were no private attorneys general in sight and the market would control any excesses.

The new statute placed onerous restrictions on shareholders efforts to hold corporate crooks accountable, limited the responsibility for accountants who were guilty of fraud and required defrauded investors to describe in detail all aspects of corporate fraud before taking depositions and learning how shysters had cooked the books. Damaged investors had to be able to explain the corrupt acts of corporate officers in order to stay in court even before they had conducted a full investigation. This new U.S. public policy restrained the private enforcement of laws, knowing that a strong plaintiff’s bar of private attorneys’ previously had played a significant role in the enforcement of securities laws. Private civil enforcement of the securities laws died. The effect was to reduce the probability that crooks would be held responsible for cheating.

President Clinton foresaw the decimation of private enforcement of the securities law. He vetoed it, but a Republican Congress over-rode his veto and we have seen the results.

Never before have there been as many financial frauds perpetrated on investors worldwide. Since 1995, Enron, WorldCom, ImClone, Global Crossing Ltd., Adelphia Communications, Xerox, Merck, Bristol-Myers Squibb, and Qwest cheated investors because there has been little fear of being sued. They have fabricated revenues, disguised expenses as investments and established off-balance sheet partnerships to inflate profits because the chances of being held accountable has been nil.

Investors were better off when the private securities bar could call out a posse of lawyers and bring in the desperadoes, make the shysters pay and scare would-be manipulators into being honest. Insurance companies, pension funds, unsophisticated investors, and retirees are more at risk today as a result of the PSLRA as current events have proven.

As waves of securities frauds hit the financial beach, confidence in the U.S. stock market has eroded worldwide. The dollar is approaching serious lows and soon the U.S. will have to raise interest rates to stem the tide of money leaving U.S. markets. Insurance companies, banks and a range of significant institutions have relied upon the integrity of our financial markets and the damage report is far from complete. We can increase investor confidence by insuring that wrongdoers will be under constant scrutiny and held accountable when they step out of line. It was a mistake to adopt the PSLRA and limit the private enforcement of our securities law. Repeal it now. Turn loose the class action lawyers.