Tuesday, October 17, 2006

Securities Litigation Reform Redux?

When the soi-disant "Committee on Capital Markets" announced (here) on September 12, 2006 that it was forming an independent group of business and academic leaders to study how to improve the competitiveness of U.S. capital markets, the press coverage (here) generally presumed that the group would be focused on reforming the Sarbanes-Oxley Act. But in the Committee’s press release describing the study group’s mission, Sarbanes-Oxley was the second item on the list; the first item listed was "[l]iability issues affecting public companies and gatekeepers (such as auditors and directors) with a focus on securities class action litigation, criminal enforcement and federal versus state authority." (The Committee's press release included a statement of support from Treasury Secretary Henry Paulson, and so the Committee has come to be known as the "Paulson Committee.")

An October 16, 2006 post on the Securities Litigation Watch entitled "'Paulson Committee' May Soon Recommend Dramatic Limits on Securities Class Actions"(here) attributes a number of statements from Columbia Law School professor and Committee member John Coffee about the Committee's prospective suggestions to mitigate the threat of securities litigation. Coffee reportedly expects the group to make recommendations to "impose limits on securities class actions" and that the "SEC could take action to change the role of the securities class action" within 6 months.

According to the Securities Litigation Watch, Coffee has said that the possible alternative changes that could be proposed include the following:


1. The SEC could "dis-imply" a private cause of action under Rule 10b-5 against corporations, leaving enforcement of that rule to the government, not private plaintiffs. The SEC might also "dis-imply" such a private cause of action with respect to the corporation only when the SEC has sued the corporation. Coffee states… that "That idea does have some support."
2. "Stock drop" cases could be moved out of the courts and into the arbitration arena.
According to the Committee’s September 12 press release, the group plans to release recommendations to key policy makers for specific changes in regulation and legislation by the end of November.

The intervening Congressional election could have some impact on the Committee’s recommendations’ prospects for success. There is every possibility that after the election the Democrats could control one and possibly both houses of Congress. While the Committee’s membership of academics and corporate leaders gives it the air of independence and disinterest, the group is associated with the current Treasury Secretary and does include some Republican affiliation (e.g., former Secretary of Commerce Donald Evans), but lacks any obvious Democratic affiliation, so the Committee seems unlikely to be able to call itself bipartisan. Moreover, while the Committee’s membership is prestigious, it omits any representation of shareholder groups, labor unions or others who might oppose easing legislative or regulatory constraints. Any recommendations for radical change that could emerge from the group would likely face the prospect both a sharp reaction from other constituencies and could also face a hostile Congress. In any event, the prospects for securities reform while the options backdating scandal continues to play out on the front pages of the newspapers seems questionable.

Nevertheless, it will definitely be interesting to see what the Committee comes up with. Add this one to the list of "Things to Watch."

Adding Inquiry to Insult: A resource for just the right slight, here.

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