Securities Legislation

The selling of White House coffee hours and overnights in Lincoln’s bedroom to political contributors, looking for special favors and policies from the Clinton Administration, is headline news these days. Clinton repeatedly says that no changes in government policy have resulted from these soirees. Gee, what a waste of money but not one of the donors seems to be complaining.

Well here is an example of how big money in politics works -­money coming from Silicon Valley in California, global accounting firms in New York and the computer–mutual fund industry in the Boston area.

Despite regular stories in the Wall St. Journal and other financial pages about massive frauds on holders of securities and other investments, Clinton, Gore, Rep. Joseph Kennedy, and Senator Chris Dodd are pushing to federalize the laws of the states that give the fleeced and the swindled — many of them elderly investors — the remedies to file state class actions against the wrongdoers and swindlers.

Before the November election, Clinton huddled with the Silicon Valley billionaires in California and, against the advise of four White House advisors, dashed out of the secluded meeting to tell the press he was against a California initiative (Prop. 211) that would have put teeth in the state’s law enforcement against securities fraud and its company executives. He declared in favor of federalization. So did Al Gore right after a meeting with executive computerites this month.

A letter signed by Reps. Vic Fazio and Joe Kennedy is circulating in the House of Representatives asking the President to work with them to pass federal legislation that would supplant state private remedies for investors who want their full day in court, undiminished by legislation greased by political money.

The letter innocently states that “we want only to ensure that private securities class actions are governed by fair and consistent rules that will ensure stability in the legal environment.” Rephrase that to mean “will ensure that crooks escape responsibility under the law to compensate the defrauded and clean up their act.”

The attack on federalism, explicit in this legislation (designed to concentrate power in a one stop injustice called Congress), is based on mere assertions that lawyers are now resorting unfairly to state courts to pursue their case. Not surprisingly, the Clinton-Gore-Dodd-Fazio-Kennedy approach, rooted in political cash and political ambitions, ignores the fact that state judges, mostly former business attorneys, are in charge of their courtroom, not the plaintiffs’ attorneys. More importantly, there are no facts to support their anti-small investor proposal.

The absence of facts is typical of assaults on the rights of the defrauded. Any increase in case filings, for example, are not assumed to be a reflection of increased fraud but of increased harassment of their corporate patrons. In fact the filings of class actions in securities fraud class action cases have been around 225 cases a year — a tiny amount of legal action against the torrent of corporate economic crime in this country. Just read the articles by Ben Stein over the years in Barrons Financial Weekly if you want more details.

In 1994, Cong. Edward Markey held hearings on proposals to weaken the federal securities laws against fraud. The vast majority of eminent law professors testifying, including Arthur Miller of Harvard and Joel Seligman of Arizona, opposed any weakening and decisively debunked the claim that too many frivolous suits were being filed or that there were abuses sufficient to warrant this taking away of rights.

As if it wasn’t enough that the passage in 1995 of the federal “Crooks and Swindlers Act” (formerly named the Private Securities Litigation Reform Act) let escape accounting and law firms that are complicit in these schemes and made it more difficult for victims like those of the notorious Savings and Loan scandals to recover their losses in the future, the super-profitable and burgeoning Silicon Valley-type companies want further immunities and limited liabilities at the state level.

They have their champion in Dan Lundgren, the Republican Attorney General of California and forthcoming candidate for Governor of that state. After delivering a rip-roaring speech last October in San Diego before a mainly business audience, where he blamed large job losses and economic wreckage on these frivolous law suits, I asked him two questions.

Could he tell me how many of these lawsuits have been filed annually in the securities fraud area and how much money in verdicts and settlements have passed hands from the defendants to the plaintiffs?

The Attorney General, chief of a large data-gathering state agency, could not even hazard a guess. The reason: the number of lawsuits and moneys returned to the defrauded are so small that it would undermine his jeremiads. One company, Intel, reporting over $5 billion in profits last year, made far more money than all the monies paid out from these lawsuits against all the high tech companies in ten years.

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