SEC Chief Under Fire for Backing Lawsuit Reform
Securities and Exchange Commission Chairman Arthur Levitt, generally considered an investor advocate, is drawing heavy criticism for backing part of a bill that would limit an investor’s ability to file securities fraud lawsuits.
“Levitt has reversed his position and sold out retirees and small investors to buy some protection for his agency’s budget,” said Michael Calabrese, director of Public Citizen’s Congress Watch, a consumer group. He said the agreement would give companies and executives “a license to lie” in earnings forecasts and other corporate predictions.
A spokeswoman for Levitt denied charges that the SEC backed the forward-looking statements compromise amid Senate threats of budget cuts. In fact, the SEC has pointedly withheld an endorsement of the entire bill.
Calabrese’s assessment is shared by congressional aides and securities law experts who have heretofore usually backed the SEC chief’s efforts to reach out to individual investors.
“Seriously, since the laws were enacted in 1934, this is the most significant erosion of investor protections,” said an aide to Sen. Richard H. Bryan (D-Nev.), an opponent of the bill. “And it’s going to happen on Arthur Levitt’s watch, and it’s going to happen on Alfonse D’Amato’s watch.” D’Amato (R-N.Y.) is chairman of the Senate Banking Committee and a major player in shaping the compromise bill.
Senior SEC officials in interviews Friday said these critics fail to give Levitt and SEC Commissioner Steven M.H. Wallman credit for moderating the most extreme elements of the private securities litigation reform act, now pending before a House and Senate conference committee. They suggest critics are exaggerating.
The bill’s scope is much narrower than before. It would give investors and the SEC power to pursue the most common fraud cases, which involve faked financial statements and lies about historical information, according to senior SEC officials who did not want to be identified further.
The bill is aimed at eliminating frivolous class-action securities fraud lawsuits. Business leaders say such suits are responsible for wasting millions of dollars in legal fees, money that they argue could more productively be used for research or job creation.
Many state securities regulators, consumer groups and state law enforcement officials fear that the bill, in undercutting private class-action securities fraud lawsuits, could eliminate an important supplement to the SEC’s policing of Wall Street.
At issue is a so-called “safe harbor” for those who provide forward-looking information that would prevent investors’ suing an executive based only on a prediction such as an earnings forecast that later proved wrong.
A goal of the measure is to allow executives some freedom to speak publicly about corporate goals without fear of later becoming lawsuit targets.
Proponents of the bill say it will give investors more information about a company’s prospects. But there would be a catch: If the bill becomes law, investors will have to listen very carefully when executives or companies make a forecast.
To qualify for the immunity, executives must have made “meaningful cautionary statements identifying important factors that could cause actual results to differ.” For example, a company would have to warn investors that labor troubles could shut down a factory, which in turn would negate an optimistic earnings forecast.
Some legal experts expressed astonishment that SEC leaders would endorse such legal immunities.
“Protecting knowingly false statements or omissions of material fact is not consistent with the purposes of federal securities laws and encourages exactly the kind of conduct those laws were designed to eliminate,” says a Nov. 15 letter from the Assn. of the Bar in New York City to President Clinton.
Congressional aides say Levitt and Wallman’s endorsement of the safe-harbor provision is a dramatic departure from the SEC’s previous positions as well as from current law.
