A Novel Idea: Hold the CEO Responsible
I casually mentioned Proposition 211 to a high-tech executive the other day and his face turned the color of one of those lovely sunsets you get in Riverside as the sun filters purple through 70 miles of smog. I remarked that I couldn’t see much wrong with a measure that would hold business honchos, lawyers, accountants and investment counselors responsible for their actions. Isn’t that what the ‘90s are meant to be all about? And, I added, what was so wrong with trying to protect people, many of them elderly, against fraud?
As his face slowly recovered its composure, my pal said all the things business folk usually come up with when some restraint upon their untrammeled power to make money is proposed. He drew a lurid picture of what will happen if Proposition 211 passes. Silicon Valley will empty as CEOs and their top management file east in their BMWs over the Donner Pass and into the safety of Nevada. Meanwhile, California, its legal system blown apart by frivolous lawsuits, will be shunned by the rest of the nation’s businesses.
In fact, Proposition 211 aims to recover some of the ground lost when the high-tech czars and Fortune 500 CEOs who warmly endorsed Bill Clinton earlier this week threw enough money at Congress to win federal “securities reform” earlier this year, which made life a lot safer for Wall Street, venture capitalists and the accounting and law firms that fix their books.
Proposition 211 allows defrauded investors (now losing about $1 billion a year nationally, according to the Federal Trade Commission) to go after all the folks--brokers, CEOs, lawyers, accountants--involved in stealing their savings. It allows defrauded individuals (one in three of whom are over 65) to go to court, which helps explain why organizations like the American Assn. of Retired Persons back 211. The punitive damages it allows would be paid into California’s general fund.
Under current law, defrauded investors have to prove that they relied on deceptive information. This can be a very hard thing to do. Proposition 211 holds accountable those putting forth duplicitous material and assumes investors relied on it, even if it was shrunk into microscopic type in footnote No. 99 of the prospectus. And, most terrifying of all for the business execs, it holds them personally accountable for their fraudulent behavior: “Any executive of a business found liable for the fraudulent actions must pay the costs.” The execs who threaten to flee California if 211 passes invariably omit the next sentence in the initiative: “A business, however, could purchase insurance on behalf of those executives to cover such potential liability.”
Most of the tirades against 211 dissolve at the first prod of reality. High-tech firms won’t quit the largest, deepest market in the world. For one thing, even if they are headquartered in Chicago and incorporated in Delaware, they still will be liable in California courts if they defraud residents of the state. The state’s legislative analyst says the impact on the court system will be negligible. There is, in fact, a penalty installed in the initiative against frivolous investor suits; those filing such suits would have to pay the other side’s legal fees.
The federal “securities reform” passed earlier this year most certainly needs to be corrected, and not just in California. As things now stand, the people defrauded by Charles Keating (currently free on a technicality) would have gotten virtually nothing. Opposing 211 is a coalition of high-tech firms, Wall Street houses, accounting and law firms that is pouring $25 million into the fight, outspending 211’s supporters 3 to 1. The opponents rely on the usual number faking. They claim that the lawyers prosecuting securities fraud get rich while the victims only get a fraction of what they hoped (ususally much more than they actually lost.) Sure, good securities fraud lawyers get rich. So what? At least they make their money by doing something for the little folk. High-tech CEOs get a lot richer.
As Bill Lerach, the securities lawyer who fathered 211, puts it, “Currently, business execs lead charmed lives. They pay themselves millions. They give themselves stock options which dilute shareholder equity. They get indemnification when they do wrong. They’re the only people in the world who can violate the law and get someone else to pay the bill.”
So make the big-shot CEOs responsible. The whole country needs something like 211. Let California lead the way.
