Tort Reform for Wall Street
Senator Chris Dodd harvested nearly half a million dollars from the accounting industry alone, and he earned it. Dodd led the charge for the Public Securities Litigation Reform Act of 1995 (PSLRA), an item in Newt Gingrich's "Contract With America" that was supposed to liberate the New Economy from frivolous investor lawsuits. SEC chairman Levitt lent his prestigious endorsement, but later recanted as the legislation became laden with elaborate legal protections for auditors, corporate executives, financiers and insurance companies. The idea was to make it much more difficult for misled investors to recover losses, but the principal target was a single West Coast law firm, Milberg Weiss Bershad Hynes & Lerach, and its lead partner, William Lerach, who were bombarding high-tech firms and their investment bankers and accountants with multimillion-dollar lawsuits. The firm was accused of recruiting dummy shareholders as "plaintiffs," while creaming the settlements for itself, so various provisions in Dodd's bill were designed to punish it. Lerach called it "the Corporate License to Steal Act."
On one level, the legislation was quite ineffective. Investor lawsuits declined for a year or two, but have since exploded. That is because corporate fraud exploded too. The corporate settlements run into the hundreds of millions, even reaching low billions. On another level, the PSLRA produced perverse unintended consequences--actually stimulating the fraudulent behavior. Corporate auditors and executives were evidently convinced the new law insulated them from legal liability. "The PSLRA encouraged securities fraud because it made it much more difficult for defrauded investors to hold the perpetrators responsible," Lerach wrote. Objective observers agree. Richard Walker of the SEC: "The current increase in financial fraud...is partially attributable to court rulings limiting corporate liability for financial fraud and the [PSLRA]." Harvey Goldschmid, former SEC general counsel: "Now that many of the more grandiose projections of the 1990s have fizzled, some people are wondering whether Congress gave Silicon Valley a little too much protection."
Meanwhile, Milberg Weiss is booming, despite the snares set for it by Congress, and handles 70 percent of the investor-fraud cases, according to Lerach. Indeed, Congress may have inadvertently helped the firm attract a better class of plaintiffs. The PSLRA empowers a "lead plaintiff" with substantial holdings to take control of the case instead of entrepreneurial lawyers. Lerach is now suing Enron, and the lead plaintiff is the University of California Regents, with a $55 billion investment portfolio (and $144 million in Enron losses). The real losers in this scandal, aside from mom-and-pop investors, are the mammoth pension funds holding the savings of working Americans.
While the PSLRA was enacted over Clinton's veto, don't get the impression that the former President was standing with the folks on most of these issues. Clinton pushed through the repeal of the Glass-Steagall Act, enabling Citigroup, J.P. Morgan Chase and others to form the mega-conglomerates that financed Enron and other disasters. Clinton's leadership also insured that financial derivatives remain an unregulated time bomb at the center of the banking system.
In 1998, when Long Term Capital Management collapsed from its out-of-control derivatives speculation, three or four of the largest banks and brokerages were threatened. Brooksley Born, chair of the Commodity Futures Trading Commission, announced plans to tighten derivatives regulation as a safeguard against a larger crisis. That's not what Wall Street banks or the Chicago commodities exchange had in mind, and they swiftly buried their historic differences. Born was stomped, quite publicly, by Treasury Secretary Rubin, Fed chairman Alan Greenspan and SEC chairman Levitt. She resigned. Congress enacted the Commodity Futures Modernization Act of 2000, which, as you might expect, went in the opposite direction. Enron and other derivatives players were relieved of genuine accountability, freed to work their money-making magic in obscure financial transactions that are a danger still ticking.