25 January 2008

SEC: Trust Us

Paul S. Atkins, is one of three current members of the Securities and Exchange Commission. The two Democratic seats are vacant. He notes in a Wall Street Journal op-ed column that in the wake of the U.S. Supreme Court's decision in Stoneridge that the SEC can, but has the exclusive right to, bring claims against aiders and abetters of securities fraud.

Basically, his plea is for the public not to worry about the Stoneridge decision because we can trust the SEC to do the right thing much more than trial lawyers for individual securities plaintiffs. He also argues that the SEC should pull its punches even when it brings cases.

The trouble is that his column undermines any reason to trust him, and by association, that SEC which can't act without his vote which is necessary for the three votes it needs to act. This is a clearly anti-securities law member of the commission in a fox guarding the hen house situation. He states:

Although some have called Stoneridge "anti-investor," the Supreme Court's decision actually protects shareholders from creative and unpredictable new ways to extract large settlements, which always include an ample portion for the lawyers.

At issue was whether companies can be held liable in class actions for securities law violations committed by companies with which they do business, the primary violators. Because the law permits private plaintiffs to recover only against primary violators and not secondary violators, the Stoneridge plaintiffs attempted to portray the defendant-companies as primary violators under the theory that they participated in a "scheme" to defraud.

In Stoneridge,the Supreme Court held that investors in one company cannot sue other companies for securities fraud unless those other companies did something that the plaintiffs specifically relied on when making investment decisions. The court warned that if it adopted the plaintiffs' concept of reliance, the "cause of action would reach the whole marketplace in which the issuing company does business." In other words, had Stoneridge gone the other way, plaintiffs would be able to reach into the pockets of customers, vendors and other firms that simply do business with companies that defraud investors.

Regardless, Stoneridge sparked an outcry from those arguing that in the name of "fairness" and "justice" someone should be forced to pay if the primary wrongdoer cannot. This outcry could lead to demands on Congress to rewrite the securities laws to give plaintiffs like those in Stoneridge what they could not get in court -- the ability to reach into a deep pocket regardless of culpability. But justice is not merely finding someone who can pay. Exposing one company to class-action lawsuits because another company defrauded its investors is not fair or just to shareholders who shoulder the burden of class-action settlements.. . . .

The SEC has tremendous leverage to obtain settlements and assert novel bases of liability in court. But the SEC must resist efforts -- internal or external -- to broaden securities laws beyond their existing boundaries, even when those efforts are driven by a desire to see harmed shareholders recompensed. By respecting legal boundaries and not "pushing the envelope," the SEC provides predictability to investors, individuals and companies as to unacceptable conduct.

Atkin's is horribly dishonest about the nature of Plaintiffs' claim here and ends up arguing against a straw man. This is not about "ability to reach into a deep pocket regardless of culpability." Indeed, the U.S. Supreme Court did not argue that the Defendants were not culpable (instead, it suggested that they might be subject to liability by the SEC). What Stoneridge does is insulate parties who have demonstrated culpability from private liability, leaving enforcement to the whims and prejudices of a government agency currently controlled by those who want to coddle those who perpetrate corporate fraud (another key SEC initiative right now is to limit liablity for auditors who engage in securities fraud).

The Plaintiffs sought liability on the basis that parties that had not actually uttered a false statement were nonetheless liable because the have actively and with malice participated in orchestrating a scheme that culminated in the false statement. No one has every asserted that merely due business in the ordinary course with a securities fraud violator is itself a basis for liability. Neither aiding and abetting liability, nor scheme liability, poses any risk to a party who does not have an intent to help defaud the public.

The conservative argument that immunity for private liability for people who can be proven to be engaged in fraudulent activity simply because they aren't the spokesperson for the conspiracy to defraud is good for the economy and for the capital markets is piffle. Accurate information is absolutely essential to the good functioning of the markets, and any sign that the U.S. is backing away from a commitment to stamping out fraud hurts out markets.

No comments: