How much do you blame the 1995 law for where we are today?
A lot. I’ve known the lawyers for many of these big companies for many years. And privately, they have told me that there is no question that the ’95 act emboldened executives to think they could do whatever they wanted.
You actually have called it the Corporate License to Steal Act.
“License to Lie.” The safe harbor is actually a license to lie. Can you imagine that we went from a rule that originally said public companies could not make any forecasts–because it was viewed as so potentially misleading–to a situation now where apparently they can lie about forward-looking information and not be held accountable legally? That’s an intolerable situation.
The 1995 act was supposed to rein in securities lawyers–specifically you–but in the past three to four years, we’ve seen a proliferation of shareholder suits.
How do you explain that?
You have to be careful. If you back out the IPO cases, the cases related to “laddering” [whereby investors were required to accept shares at higher prices in the aftermarket as a condition for receiving IPO shares] and the like, it drops the numbers dramatically. In addition, many cases simply can’t be brought, because there isn’t enough detail. And the statute of limitations–although this wasn’t done in the ’95 act–is only one year for a fraud claim. [The Sarbanes-Oxley Act lengthened that time to two years.] That’s an extraordinarily short statute of limitations. Most states provide five or six years for fraud claims because they know that it takes years for the frauds to come out and for the victims to be able to sue.
But do you consider it a bad act entirely? After all, because of it, you have the University of California Regents as the lead plaintiff in the Enron case.
Other than the lead-plaintiff provision, which encouraged institutional investors to come forward, there was nothing good about the 1995 act. It was written almost entirely by corporate and accounting firm lobbyists. And I don’t think the people who passed the lead-plaintiff provision had any idea what it would end up doing. [The provision authorizes courts to name investors seeking the greatest financial relief as plaintiffs in class-action suits.]
What has happened, though, is that it has encouraged institutional investors to come forward. And when you combine that with the massive upsurge in fraud and the resulting interest in improved corporate governance, you are going to see almost all of these cases going forward prosecuted by institutional investors.
As the lead lawyer in Enron, how much pressure is there to maximize recovery for everyone? So much–$20 billion–was lost overall.
This represents the professional challenge of a lifetime. We’ve got a bankrupt company; we have $350 million in D&O insurance that carriers are going to try to rescind; we have an accounting firm that is a wisp of smoke; and even if we were to get precedent-breaking recoveries from individuals, it is still going to be small compared with the overall loss. So you really come down to pursuing these big Wall Street banks.