What do you think are the worst accounting abuses?
For the most part, we’ve focused on bogus revenue recognition. But I think companies also mess with the amortization and depreciation rates of their assets, and there’s no question that the mergers-and-acquisitions boom gave companies an opportunity to bury all kinds of things in one-time charges.
Are there any easy fixes?
If the SEC really wanted to clean up accounting, they’d make companies, in their quarterly results, reveal the five largest reserve adjustments that they made.
What’s the status of the Enron case?
The case is tied up in a procedural phase whereby the consolidated complaint [is reviewed]. The defendants have all come forward and said the complaint isn’t specific enough or the complaint is too long or one thing or another. So the judge will have to decide if it is sufficient, and she’ll do that very shortly.
Those defendants–Jeff Skilling, Andy Fastow, et al.–claim they have protections under the 1995 Private Securities Litigation Reform Act.
Absolutely. There’s no question that the 1995 act made it much more difficult for victims of securities fraud to adequately plead their case. It provides all kinds of protections against joint and several liability. Its safe-harbor provision provides immunity from false forecasts under some circumstances. And the defendants in Enron are invoking every single one of those protections. I don’t think they will be successful. But a lot of people have been able to hide behind the ’95 act, including Bernie Ebbers and WorldCom in a case we filed in 2001 that was thrown out in March. Had that case been allowed to go forward, I don’t think the scandal would have been nearly as bad.
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.