The Paulson Committee and Securities Regulation Reform
In an earlier post (here), I commented on the initative of the so-called Committee on Capital Markets Regulation to take a look at the impact of regulation on the competitiveness of the U.S. securities markets in the global marketplace. (The Committee has become known as the Paulson Committee because of the public support that Treasury Secretary Henry M. Paulson, Jr. has shown the Committee.) An October 29, 2006 New York Times article entitled "Businesses Seek Protection on the Legal Front," (here, registration required) takes a comprehensive look at the Committee’s efforts, and also reports some criticism that has already formed in anticipation of the Committee’s recommendations.
Although the Times article is a bit vague on the details, the article reports that the Committee is looking at a number of possible reforms, including proposals to limit the liability of accounting firms; to reduce the burdens of Sarbanes-Oxley; to limit "overzealous state prosecutions"; to curtail the ability of the Justice Department to force companies under investigation to withhold paying executives’ legal fees; and to limits abusive lawsuits by investors. The article reports that "to alleviate concerns that the new Congress may not adopt the proposals... many are tailored so that they could be adopted through rulemaking."
The article quotes one Committee member as saying that "the legal liability issues are the most serious…Companies don’t want to use our markets because of what they see as substantial and in their view excessive liability."
The article reports that among the issues under discussion is the possible revision or elimination of Rule 10b-5. The article says that Columbia Law Professor John Coffee (a member of the Committee) has recommended "that the SEC adopt an exception to Rule 10b-5 so that only the commission could bring such lawsuits against corporations."
In an October 30, 2006 Wall Street Journal op-ed piece entitled "Is the U.S. Losing Ground?" (here, registration required), two Committee members, R. Glenn Hubbard and John L. Thornton lay out their views of the Committee’s work. (Hubbard, who was Chairman of the Council on Economic Advisors under the current President Bush, is now dean of the Columbia Business School; Thornton, now chairman of the Brookings Institution, was President of Goldman Sachs). Among other things, the authors state:
The Committee’s report has not yet been released (according to Hubbard and Thornton, it will be released on November 30), but the Committee’s work is already the target of criticism. The Times article quotes former SEC Commissioner and Columbia Law Professor Harvey J. Goldschmid as saying "It would be a shocking turning back to say that only the commission can bring fraud cases. Private enforcement is a necessary supplement to the work that the S.E.C does. It is also a safety valve against the potential capture of the agency by industry." Professor Peter Henning of the White Collar Crime Prof blog (here) notes that the proposal to have the SEC as the sole agent to enforce against securities fraud "would be truly radical because private actions far outnumber the enforcement cases filed by the SEC and some signicifant recoveries in private securities cases have provided relief to investors." Both Henning and Professor Larry Ribstein on his Ideoblog (here) note that the inherent limitations on the SEC’s resources suggests that the agency alone could not be expected to enforce the securities laws.
Economist and pundit Ben Stein has a much less reserved attack on the Paulson Committee’s anticipated work in his October 29, 2006 New York Times column entitled "Has Corporate America No Shame? Or No Memory?" (here, registration required). Among other things, Stein asks "Is it really right for prominent American executives, amid a host of scandals involving other executives looting their shareholders blind, to have the best and brightest of academe and the Street lobbying for less accountability to shareholders?" (More about Stein below.)
The Paulson Committee has clearly succeeded in attracting attention to its work. As a result, it is fair to describe its planned November 30, 2006 report as "much anticipated."
At one level, it is perfectly understandable that leading academics and business people are focused on the competitiveness of the U.S. securities markets. But there is something more than a little bit "off" with the timing. The unfolding options backdating scandal does not exactly provide the best backdrop against which to contend that what corporate American really needs right now is less regulation. Moreover, the SEC’s hands are already pretty full. I would be surprised if anyone there were really excited about taking over the work of the entire plaintiffs’ securities bar. (I also wonder when we will start to hear from the plaintiffs' bar on these issues; I can't imagine they are too thrilled to see the possibility that their livelihood would be entirely eliminated.)
The timing may be "off" in another significant respect. While the Committee plans to propose reform through regulation rather than legislation, the Nov. 7 elections could put a very interesting context around all of these efforts. If one or both houses emerge from the election with a Democrat majority, one or both houses of Congress could well perceive the Committee’s proposals for regulatory rather than legislative change as an effort by a lame duck administration to end run Congress and the democratic process. The Paulson Committee cannot pass itself off as bipartisan, and it would face all the challenges in Congress of identification with the current administration. Perhaps the Committee will anticipate these concerns when it puts its recommendations forward (it will have the advantage of knowing the election's outcome before it releases its report).
But in any event, the Committee’s report will make interesting reading and could lead to some interesting developments. Stay tuned...
Update: An October 30, 2006 article on Reuters (here) contains the reactions of several promienent plaintiffs' attorneys to the proposals to reform the securities laws. Bill Lerach is quoted as saying, "Securities lawsuits have fallen off sharply in the last few years and yet they want to further cripple them. Why? Because its the one effective weapon that shareholders have." Sean Coffey of the Bernstein Litowitz firm is quoted as saying, "The body isn't even cold yet and they are already acting like there were no corporate scandals. It's mind boggling."
"The Curmudgeon's Guide to Practicing Law": We here at The D & O Diary were delighted to see the WSJ.com Law Blog post of a very favorable review (here) of The Curmedgeon's Guide to Practicing Law. The Guide was written by Jones Day partner Mark Herrmann, with whom I attended law school. (Not only that, his wife is my dentist.) The WSJ.com Law Blog describes the book as
Bueller? Ben Stein actually launched his acting career ad-libbing as a high school economics teacher in the movie Ferris Bueller's Day Off. A wave file of Stein's now famous line ("Beuller? Beuller?") can be found here. Stein's own parody of the Bueller scene can be found here.
Although the Times article is a bit vague on the details, the article reports that the Committee is looking at a number of possible reforms, including proposals to limit the liability of accounting firms; to reduce the burdens of Sarbanes-Oxley; to limit "overzealous state prosecutions"; to curtail the ability of the Justice Department to force companies under investigation to withhold paying executives’ legal fees; and to limits abusive lawsuits by investors. The article reports that "to alleviate concerns that the new Congress may not adopt the proposals... many are tailored so that they could be adopted through rulemaking."
The article quotes one Committee member as saying that "the legal liability issues are the most serious…Companies don’t want to use our markets because of what they see as substantial and in their view excessive liability."
The article reports that among the issues under discussion is the possible revision or elimination of Rule 10b-5. The article says that Columbia Law Professor John Coffee (a member of the Committee) has recommended "that the SEC adopt an exception to Rule 10b-5 so that only the commission could bring such lawsuits against corporations."
In an October 30, 2006 Wall Street Journal op-ed piece entitled "Is the U.S. Losing Ground?" (here, registration required), two Committee members, R. Glenn Hubbard and John L. Thornton lay out their views of the Committee’s work. (Hubbard, who was Chairman of the Council on Economic Advisors under the current President Bush, is now dean of the Columbia Business School; Thornton, now chairman of the Brookings Institution, was President of Goldman Sachs). Among other things, the authors state:
Clearly Hubbard and Thornton perceive securities litigation reform as a critical part of the Committee’s mission.The liability system can also affect the competitiveness of U.S. Markets. Firms are sometimes confronted with circumstances in litigation, including securities class action suits, where even a small probabability of loss, given the size of the claims, could result in bankruptcy. Consequently, companies often must agree to large settlements that result in reduced value for shareholders rather than pursuing a successful outcome on the merits of the case.
The Committee’s report has not yet been released (according to Hubbard and Thornton, it will be released on November 30), but the Committee’s work is already the target of criticism. The Times article quotes former SEC Commissioner and Columbia Law Professor Harvey J. Goldschmid as saying "It would be a shocking turning back to say that only the commission can bring fraud cases. Private enforcement is a necessary supplement to the work that the S.E.C does. It is also a safety valve against the potential capture of the agency by industry." Professor Peter Henning of the White Collar Crime Prof blog (here) notes that the proposal to have the SEC as the sole agent to enforce against securities fraud "would be truly radical because private actions far outnumber the enforcement cases filed by the SEC and some signicifant recoveries in private securities cases have provided relief to investors." Both Henning and Professor Larry Ribstein on his Ideoblog (here) note that the inherent limitations on the SEC’s resources suggests that the agency alone could not be expected to enforce the securities laws.
Economist and pundit Ben Stein has a much less reserved attack on the Paulson Committee’s anticipated work in his October 29, 2006 New York Times column entitled "Has Corporate America No Shame? Or No Memory?" (here, registration required). Among other things, Stein asks "Is it really right for prominent American executives, amid a host of scandals involving other executives looting their shareholders blind, to have the best and brightest of academe and the Street lobbying for less accountability to shareholders?" (More about Stein below.)
The Paulson Committee has clearly succeeded in attracting attention to its work. As a result, it is fair to describe its planned November 30, 2006 report as "much anticipated."
At one level, it is perfectly understandable that leading academics and business people are focused on the competitiveness of the U.S. securities markets. But there is something more than a little bit "off" with the timing. The unfolding options backdating scandal does not exactly provide the best backdrop against which to contend that what corporate American really needs right now is less regulation. Moreover, the SEC’s hands are already pretty full. I would be surprised if anyone there were really excited about taking over the work of the entire plaintiffs’ securities bar. (I also wonder when we will start to hear from the plaintiffs' bar on these issues; I can't imagine they are too thrilled to see the possibility that their livelihood would be entirely eliminated.)
The timing may be "off" in another significant respect. While the Committee plans to propose reform through regulation rather than legislation, the Nov. 7 elections could put a very interesting context around all of these efforts. If one or both houses emerge from the election with a Democrat majority, one or both houses of Congress could well perceive the Committee’s proposals for regulatory rather than legislative change as an effort by a lame duck administration to end run Congress and the democratic process. The Paulson Committee cannot pass itself off as bipartisan, and it would face all the challenges in Congress of identification with the current administration. Perhaps the Committee will anticipate these concerns when it puts its recommendations forward (it will have the advantage of knowing the election's outcome before it releases its report).
But in any event, the Committee’s report will make interesting reading and could lead to some interesting developments. Stay tuned...
Update: An October 30, 2006 article on Reuters (here) contains the reactions of several promienent plaintiffs' attorneys to the proposals to reform the securities laws. Bill Lerach is quoted as saying, "Securities lawsuits have fallen off sharply in the last few years and yet they want to further cripple them. Why? Because its the one effective weapon that shareholders have." Sean Coffey of the Bernstein Litowitz firm is quoted as saying, "The body isn't even cold yet and they are already acting like there were no corporate scandals. It's mind boggling."
"The Curmudgeon's Guide to Practicing Law": We here at The D & O Diary were delighted to see the WSJ.com Law Blog post of a very favorable review (here) of The Curmedgeon's Guide to Practicing Law. The Guide was written by Jones Day partner Mark Herrmann, with whom I attended law school. (Not only that, his wife is my dentist.) The WSJ.com Law Blog describes the book asa well-written and clear guide on how to be an effective law-firm associate. It’s also funny: Hermann writes as The Curmudgeon, a grizzled law-firm partner who has zero tolerance for such horrors as the passive voice, long string cites and sloppy billing records. Were this material covered in some big-firm internal handbook, it would surely bore us to tears. But Hermann’s cutting wit and lively writing bring to life such painful topics as how to write a brief, how to treat your assistant and how to take a deposition.The WSJ.com Law Blog has posted a book excerpt here, reviewing the book' s chapter on how to prepare a witness for a deposition.
Bueller? Ben Stein actually launched his acting career ad-libbing as a high school economics teacher in the movie Ferris Bueller's Day Off. A wave file of Stein's now famous line ("Beuller? Beuller?") can be found here. Stein's own parody of the Bueller scene can be found here.
posted by Kevin LaCroix at 8:47 PM
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