It's Now Time to Resurrect Our Investor Protection Laws

The National Association of Securities and Consumer Law Attorneys has long fought for the protection of investor rights. But back in 1994, Christopher Cox, our current SEC chairman....the chairman under whose watch this current financial fraud crisis occurred, helped lead the charge to make it nearly impossible to bring a suit against big corporatations who were committing securities fraud. That law was innocently called the Private Securities Litigation Reform Act, or PSLRA.

Again,  in 1998, Mr. Cox was part to the Congress who struck down state laws protecting investors with the passage of the the Securities Litigation Uniform Standards Act, or SLUSA.

One needs ask whether the current crisis is based on lax standards permitting fraud, misrepresentations and omissions to go unanswered as a result of these laws. Like the bust of the dot.com bubble a few years earlier (and the failures of Enron, Worldcom and Tyco ) which Wikepedia ( http://en.wikipedia.org/wiki/Dot-com_bubble  ) defines as having been caused by a "canonical "dot-com" company's business model [which] relied on harnessing network effects by operating at a sustained net loss to build market share (or mind share)," the investment banks, General Electrics, etc. all relied on a similarly "comical" business model of lending (at unrealistic rates, or with cheap introductory rates) at a net loss to build assets whidh they could then sell or pawn off on cash rich investors. As with the dot.com's the "motto "get big fast" reflected this strategy." And also like the dot.coms, where "companies relied on venture capital and especially initial public offerings of stock to pay their expenses," and the "novelty of these stocks, combined with the difficulty of valuing the companies, sent many stocks to dizzying heights and made the initial controllers of the company wildly rich on paper, ' in the investment banks and other asset lenders relied on the Schwabs and Ameritrades, to funnel investor's hard earned cash into novel derivatives (mortgage backed securities and asset-back securities) which were impossible to value, and whose credit risk was unsupported.

Everyone recognizes the need to regulate such out-of-control activity. A need to go back to the days of accountablity. But we cannot do this with big corporations being protected from decieving the public and immune from lawsuit. NASCAT has a recommendation. In a press release dated September 22, 2008, NASCAT states:

“During the past two years, even while Wall Street firms were handing out tens of billions of dollars in bonuses to executives, many of these same firms had misrepresented the value of mortgage backed securities (MBS) and collateralized debt obligations (CDOs) held on their own books and sold to other investors.  At the same time, the actual subprime mortgage loan originators misrepresented the strength and integrity of their lending policies and procedures.  On Friday, Federal Reserve Chairman Bernanke said our problem stems from what in fact were ‘lax underwriting practices’ that were not truthfully disclosed.  Had these corporations been honest about their practices and the true value of, and risks inherent, in these securities, the current crisis may never have developed as it did.

“These practices were not victimless excesses stemming from market exuberance. The calculated wrongdoing of many financial executives has now placed the hard won savings and retirements of the majority of Americans at risk.  At risk are the pensions covering many of NASCAT’s clients including public school teachers, firemen, policemen, union workers and the individual retirement accounts and plans of tens of millions of more Americans. 

“Recognizing this wrongdoing for what it was, state attorneys general, our frequent allies in the fight to uphold investor protection and recover fraud losses, had begun in 2003 to investigate the abusive and misleading practices of subprime mortgage lenders that they believed violated state laws.  Had the efforts of state attorneys general not been halted by the Bush Administration’s federal preemption of the authority of state consumer protection law and law enforcement officers, the subprime mortgage based crisis now upon us might well have been averted.  Certainly, there would be far fewer ‘bad’ sub-prime mortgages sold by loan originators to packagers and marketers of mortgage-backed securities that taxpayers are now being asked to buy.

“Given these facts, as Congress weighs the proposal to federalize vast parts of our financial system and give the executive branch unbridled authority over our markets, law makers should be mindful of the hard-taught lessons of post-Depression American history.  In addition to this bailout plan, the next Administration and Congress will be considering regulatory reforms to ensure such a crisis is not repeated.  As Congress moves forward on all fronts, NASCAT urges it and the next Administration to consider these lessons of experience:
 
-- The authority of federal and state regulators and state attorneys general should neither be diminished nor curbed by any new actions by the legislative or executive branches of our federal government in its effort to address this financial crisis in our capital markets.

-- As we face and work through a financial crisis of unknown magnitude, the SEC should halt its reckless push to shift America’s corporate accounting system from our proven U.S. rule-based Generally Accepted Accounting Standards and regulatory oversight to the more lax and less regulated International Accounting Reporting Standards.  This is no time to endanger investor protection by giving corporate and financial institutions  greater latitude in reporting their financial results. 

-- Investor civil actions remain, in the Securities and Exchange Commission’s traditional words, ‘a necessary supplement to the Commission's efforts.’ In addition to helping police securities markets, private law suits provide the primary method for defrauded investors to recover their losses. It would be a tragic error to further dilute the rights of private investors to take actions against those who perpetrate fraud and abuse.

-- The shields against corporate and financial institution accountability erected by the Supreme Court that protect from liability those who knowingly aid and abet securities fraud and otherwise knowingly engage in schemes to defraud and mislead investors should be removed by Congress.  There is little doubt that these shields against liability helped embolden corporate and financial players to engage in massive wrongdoing and take trillion dollar risks at the expense of investors, homeowners and, now, taxpayers.”

I would add to this list, to reform the PSLRA by dropping the pleading standard that requires evidence to be pled when it is secretly held by the corporation, bringing back aiding and abetting liability, creating private rights of action to sue mutual fund investment advisors under the provisions of the Investment Company Act of 1940, adding a private cause of action against conspirators, and eliminating SLUSA preemption of state law claims which touch upon fraud or misrepresentation....just as a start.