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FOR IMMEDIATE RELEASE |
CONTACT: |
IN
WAKE OF ENRON, CONSUMER GROUPS URGE CONGRESS
TO RESTORE INVESTOR CONFIDENCE
BY UPDATING 1995 PRIVATE SECURITIES LITIGATION LAW
WASHINGTON, DC -- In light of the Enron debacle, consumer groups today urged Congress to amend a 1995 law that restricted investors' ability to sue for securities fraud and undermined the accountability of accountants, lawyers, and others associated with Enron.
Consumers Union and Consumer Federation of America believe that the Private Securities Litigation Reform Act (PSLRA) may have helped pave the way for the Enron disaster.
"This law weakened the threat of liability for securities fraud to the point that it may have contributed to the lack of oversight of Enron," said Sally Greenberg, Consumers Union's senior product safety counsel.
When Congress approved the PSLRA in 1995, President Clinton vetoed it, but lawmakers voted to override the veto. At the time consumer groups said that the law would make it much harder for individuals and pension funds to recover their financial losses from fraud
"Congress was warned that this law would help protect financial swindlers from being held accountable," said Travis Plunkett, legislative director of Consumer Federation of America. "It diminished the legal threat that helped keep auditors honest (Note: A CFA white paper on a plan to overhaul public audits is online at www.consumerfed.org/enron_auditor_rpt.pdf)."
The groups today called on Congress to make changes in several specific provisions of the PSLRA. They said Congress should:
· Re-establish the previous
legal standard for "forward-looking statements."
Prior to the enactment of PSLRA, the Securities and Exchange Commission carefully
limited corporate predictions of future performance because such predictions
were prone to exaggerated claims of future successes. Claims had to be made
in "good faith" and with a "reasonable basis." But the PSLRA
permits such statements to be protected, notwithstanding that the SEC and investors
cannot evaluate their accuracy. With some minor disclaimers, the law also protects
statements made with "no faith" and with "no basis." Even
"reckless statements" are immunized.
Before Enron collapsed, company officials assured employees and stockholders that the company was in good financial order when these officials appear to have been privy to information indicating this was not so. If shareholders or employees challenge these statements in a lawsuit, Enron officials are likely to argue that they are protected by the very lax standards in the PSLRA covering "forward-looking statements."
Consumers deserve accurate and timely information. Congress should repeal the overly broad protections for "forward-looking statements."
· Deter bankers,
brokers, lawyers and accountants from participating in securities fraud and
allow victims to recover from any wrongdoing by restoring joint and several
liability.
The PSLRA sharply limited the doctrine of "joint and several liability,"
which insures that victims can recover full damages even if one or more of the
parties to the fraud cannot pay. Under PSLRA, those whose reckless misconduct
contributes to the fraud can be held responsible for only their proportionate
share of victims' losses. As a result, when the primary perpetrator of the fraud
is bankrupt, investors cannot fully recover their losses. Because of PSLRA's
restrictions on joint and several liability, even if investors succeed in proving
fraud in the Enron case, they are likely to recover only pennies on the dollar.
In addition to protecting defrauded investors ability to fully recover their losses, joint and several liability helps to deter fraudulent behavior. Under a system of joint and several liability, potential wrongdoers know that they can be held fully liability if they are found guilty of reckless misconduct that contributes to a fraud. As a result, each player serves as a check on the others. That deterrent effect is seriously diminished under a system of proportionate liability.
· Hold aiders
and abettors of fraud fully responsible.
The Enron collapse proves the importance of holding anyone who "aids and
abets" securities fraud responsible for their actions. Aiders and abettors
are those who substantially assist in perpetrating the fraud. In Enron's case,
the lawyers, securities brokers, investment bankers and outside accountants
will likely argue that they cannot be held accountable under current law for
aiding and abetting fraud, despite the part they played in helping Enron conceal
material information from the public. Holding these individuals fully accountable
would deter fraudulent acts and ensure that victims have the right to greater
compensation for their losses. An unfortunate 5-4 Supreme Court decision, Central
Bank of Denver v. First Interstate Bank of Denver, abolished aiding and abetting
securities fraud liability in private lawsuits. Congress had the opportunity
in the PSLRA to reverse the effects of Central Bank of Denver and restore liability
for aiding and abetting. But lawmakers rejected amendments aimed at doing so
(they did restore aiding and abetting liability for the SEC, but only for "knowing,"
not "reckless," conduct - the old standard.) Congress should tie up
this loophole.
· Extend the
statute of limitations for securities fraud.
Another unfortunate 5-4 Supreme Court decision -- Lampf, Pleva, Lipkind, Prupis
& Petigrow, Petitioner v. John Gilbertson -- endorsed a statute of limitations
for securities fraud widely regarded as too short - one year from discovery
of fraud, not later than three years after the fraud in any case. The SEC, state
regulators and other experts urged that the PSLRA modify the statute of limitations,
but Congress declined to do so.
Securities cases are often highly complex matters. If there is fraud involved, it is often artfully concealed from detection. In their dissent in the Lampf case, Supreme Court Justices Kennedy and O'Connor said, "By adopting a 3-year period of repose, the Court makes a §10(b) action all but a dead letter for injured investors who by no conceivable standard of fairness or practicality can be expected to file suit within three years after the violation occurred. In so doing, the Court also turns its back on the almost uniform rule rejecting short periods of repose for fraud-based actions."
The short statute of limitations is an invitation to wrongdoers to conceal their schemes long enough to escape private lawsuits. In the Enron case, even if it is proven that corporate officials defrauded investors in 1998 or before, these claims may be barred by the statute of limitations. Congress should extend the statute of limitations to allow securities fraud suits to be brought within three years from when the fraud is discovered.
· Return to
pre-PSLRA pleading rules.
PSLRA set up pleading rules to make it much harder to even state a cause of
action against a wrongdoer. The PSLRA requires that a victim's complaint, filed
at the beginning of the case, "state with particularity all facts giving
rise to a strong inference that the defendant acted with the required state
of mind." The PSLRA also changed the rules to delay the beginning of discovery
until after a court has decided whether to allow the case to go forward. Previously,
plaintiff's attorneys could begin to gather documents and interview witnesses
when the complaint was filed. As Columbia Law School Professor John Coffee has
said, "taken together, the two rules are a Catch-22: You can't get discovery
unless you have strong evidence of fraud, and you can't get strong evidence
of fraud without discovery." These pleading rules have been set up to shield
wrongdoers from accountability for fraudulent activity. Congress should repeal
them and return to rules that provided investors far stronger protections in
cases of fraud.
· Restore
investment fraud victims' right to recover under civil RICO.
Restoring investor confidence in securities markets depends in large part on
reforming industry practices and holding companies, accountants, lawyers, bankers
and brokers accountable for their actions. The PSLRA eliminated defrauded investors'
ability to bring suits under the Racketeer Influenced and Corrupt Organization
Act (RICO) and use the law's treble damages provisions in securities fraud actions.
Civil RICO serves as important tool to fraud victims in allowing them to protect
their own rights through private actions. Further, the potential for recovery
of treble damages and attorneys fees under RICO serves as an important deterrent
to securities fraud. With the elimination of RICO as a remedy, the law's ability
to deter fraudulent activity was severely weakened, as was investors' ability
to recover their losses under RICO. Congress should restore the right of investors
to use the RICO statute to deter fraud and recover their losses.
· Restore
investors' right to use state law to hold wrongdoers liable for investment fraud.
The Securities Litigation Uniform Standards Act of 1998 ("SLUSA")
eliminated state remedies for small investors suing as a class by forcing these
groups into federal court, where cases are governed by the restrictive provisions
of the PSLRA. SLUSA also eliminated important state statutory and common law
remedies, like aiding and abetting liability, punitive damages, and longer statutes
of limitations. We urge Congress to amend SLUSA and restore defrauded investors'
access to state remedies.
***
Consumers Union, publisher of Consumer Reports magazine, is an independent and nonprofit testing, educational and information organization serving only the consumers. We are a comprehensive source of unbiased advice about products and services, personal finance, health, nutrition and other consumer concerns. Since 1936, our mission has been to test products, inform the public and protect consumers.
The Consumer
Federation of America is a non-profit association of more than 285 organizations
that, since 1968, has sought to advance the consumer interest through advocacy
and education.
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