Monday, October 30, 2006
A New York Times article (here) discusses growing efforts to cut back on investigations and enforcement actions against corporations and related professionals on both the civil and criminal front. While vague about any actual proposals, the article discusses various groups that are looking to adopt changes in the Sarbanes-Oxley Act, particularly the internal controls provision in Section 404, and issues related to the Thompson Memorandum concerning waiver of the attorney-client privilege and payment of attorney's fees for individual officers and directors. In a sense, none of this is particularly new. The push-back against Section 404 has been going on for the past two years as companies experience the costs of the internal controls required to meet the regulatory requirements and encounter problems with auditors who will fly-speck corporation books to limit their own potential liability. The Thompson Memorandum has been attacked on a number of fronts, and an earlier post (here) quotes Senator Arlen Specter that he plans to introduce legislation to prohibit consideration of waiver of the attorney-client privilege and attorney's fee payments when prosecutors decide whether to charge a corporation with a crime.
The Times article sheds light on new efforts to constrain the ability of state Attorney Generals -- read Eliot Spitzer -- to bring broad charges against large businesses under state law. Much like the cut-backs in private securities litigation (PSLRA and SLUSA), this would likely involve federalizing certain areas that would deprive the states of their jurisdiction over certain industries or transactions. The problem with such an approach is that the states and their AGs could find ways around federal laws, and it's not clear whether such legislation could pass without expanding the federal law enforcement bureaucracy, which seems to run counter to the proposal's goal. Another issue mentioned in the article is a recommendation to prohibit private parties from filing Section 10(b)/Rule 10b-5 securities fraud actions, leaving only the SEC to enforce the broad antifraud provision. This would be truly radical because private actions far outnumber the enforcement cases filed by the SEC, and some significant recoveries in private securities fraud actions have provided relief to investors (and the lawyers, too). Given the Commission's limited resources, many cases would never end up in court, and perhaps never even be investigated. As I recall, the Commission has fairly consistently supported the private right of action under the securities laws, so it would likely oppose such a move. Moreover, as discussed in earlier posts (here and here), Congress has harped on the SEC's failure to police hedge funds and pursue insider trading cases with sufficient vigor, so adding to the agency's workload by giving it exclusive power over Rule 10b-5 cases without a commensurate expansion of its budget might not be politically palatable.
No specific recommendations have appeared, and legislative or administrative proposals have not been unveiled, so there is no way to know what will be offered in the name of reform. One problem for any set of proposals is that they must avoid being labeled the "Corporate Crime Relief Act of 2007" or, worse, the "CEO Get-Out-Of-Jail-Free Act" if they appear to be too favorable to companies and executives. With soaring CEO pay in the news amid options-timing cases that are starting to pop to the surface, this might not be the best time to recommend changes that make it significantly more difficult to investigate corporate misconduct. (ph)