[Dialogue] Businesses Seek Protection on Legal Front

[Harry Wainwright]

 <http://www.nytimes.com/>  <http://www.nytimes.com/> The New York Times
<http://www.nytimes.com/> 

 




  _____  

October 29, 2006

Businesses Seek Protection on Legal Front 

By STEPHEN LABATON
<http://topics.nytimes.com/top/reference/timestopics/people/l/stephen_labato
n/index.html?inline=nyt-per> 

WASHINGTON, Oct. 28 - Frustrated with laws and regulations that have made
companies and accounting firms more open to lawsuits from investors and the
government, corporate America - with the encouragement of the Bush
administration - is preparing to fight back. 

Now that corruption cases like Enron and WorldCom are falling out of the
news, two influential industry groups with close ties to administration
officials are hoping to swing the regulatory pendulum in the opposite
direction. The groups are drafting proposals to provide broad new
protections to corporations and accounting firms from criminal cases brought
by federal and state prosecutors as well as a stronger shield against civil
lawsuits from investors.

Although the details are still being worked out, the groups' proposals aim
to limit the liability of accounting firms for the work they do on behalf of
clients, to force prosecutors to target individual wrongdoers rather than
entire companies, and to scale back shareholder lawsuits.

The groups hope to reduce what they see as some burdens imposed by the
Sarbanes-Oxley Act, landmark post-Enron legislation adopted in 2002. The
law, which placed significant new auditing and governance requirements on
companies, gave broad discretion for interpretation to the Securities and
Exchange Commission. The groups are also interested in rolling back rules
and policies that have been on the books for decades.

To alleviate concerns that the new Congress may not adopt the proposals -
regardless of which party holds power in the legislative branch next year -
many are being tailored so that they could be adopted through rulemaking by
the S.E.C. and enforcement policy changes at the Justice Department. 

The proposals will begin to be laid out in public shortly after Election
Day, members of the groups said in recent interviews. One of the committees
was formed by the United States Chamber of Commerce and until recently was
headed by Robert K. Steel.

Mr. Steel was sworn in last Friday as the new Treasury undersecretary for
domestic finance, and he is the senior official in the department who will
be formulating the Treasury's views on the issues being studied by the two
groups.

The second committee was formed by the Harvard
<http://topics.nytimes.com/top/reference/timestopics/organizations/h/harvard
_university/index.html?inline=nyt-org>  Law professor Hal S. Scott, along
with R. Glenn Hubbard, a former chairman of the Council of
<http://topics.nytimes.com/top/reference/timestopics/organizations/w/white_h
ouse_council_of_economic_advisers/index.html?inline=nyt-org>  Economic
Advisers for President Bush, and John L. Thornton, a former president of
Goldman Sachs
<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.m
arketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=GS> , where he
worked with Treasury Secretary Henry M. Paulson Jr.
<http://topics.nytimes.com/top/reference/timestopics/people/p/henry_m_jr_pau
lson/index.html?inline=nyt-per>  

That group has colloquially become known around Washington as the Paulson
Committee because the relatively new Treasury secretary issued an
encouraging statement when it was formed last month. But administration
officials said Friday that he was not playing a role in the group's
deliberations. 

Its members include Donald L. Evans
<http://topics.nytimes.com/top/reference/timestopics/people/e/donald_l_evans
/index.html?inline=nyt-per> , a former commerce secretary who remains a
close friend of President Bush; Samuel A. DiPiazza Jr., chief executive of
PricewaterhouseCoopers, the accounting giant; Robert R. Glauber, former
chairman and chief executive of the National Association of Securities
Dealers
<http://topics.nytimes.com/top/reference/timestopics/organizations/n/nasd/in
dex.html?inline=nyt-org> , the private group that oversees the securities
industry; and the chief executives of DuPont
<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.m
arketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=DD> , Office
Depot
<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.m
arketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=ODP>  and the CIT
Group
<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.m
arketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=CIT> .

Jennifer Zuccarelli, a spokeswoman at the Treasury Department, said on
Friday that no decision had been made about which recommendations would be
supported by the administration.

"While the department always wants to hear new ideas from academic and
industry thought leaders, especially to encourage the strength of the U.S.
capital markets, Treasury is not a member of these committees and is not
collaborating on any findings," Ms. Zuccarelli said.

But another official and committee members noted that Mr. Paulson had
recently pressed the groups in private discussions to complete their work so
it could be rolled out quickly after the November elections.

Moreover, committee members say that they expect many of their
recommendations will be used as part of an overall administration effort to
limit what they see as overzealous state prosecutions by such figures as the
New York State attorney general Elliot Spitzer
<http://topics.nytimes.com/top/reference/timestopics/people/s/eliot_l_spitze
r/index.html?inline=nyt-per>  and abusive class action lawsuits by
investors. The groups will also attempt to lower what they see as the
excessive costs associated with the Sarbanes-Oxley Act.

Their critics, however, see the effort as part of a plan to cater to the
most well-heeled constituents of the administration and insulate politically
connected companies from prosecution at the expense of investors.

One consideration in drafting the proposals has been the chain of events at
Arthur Andersen, the accounting firm that was convicted in 2002 of
obstruction of justice for shredding Enron-related documents; the conviction
was overturned in 2005 by the Supreme Court. The proposals being drafted
would aim to limit the liability of auditing firms and include a policy
shift to make it harder for prosecutors to bring cases against individuals
and companies.

Even though Arthur Andersen played a prominent role in various corporate
scandals, some business and legal experts have criticized the decision by
the Bush administration to bring a criminal case that had the effect of
shutting the firm down. 

The proposed policies would emphasize the prosecution of culpable
individuals rather than corporations and auditing firms. That shift could
prove difficult for prosecutors because it is often harder to find
sufficient evidence to show that specific people at a company were the ones
who knowingly violated a law. 

One proposal would recommend that the Justice Department sharply curtail its
policy of forcing companies under investigation to withhold paying the legal
fees of executives suspected of violating the law. Another one would require
some investor lawsuits to be handled by arbitration panels, which are
traditionally friendlier to defendants.

In an interview last week with Bloomberg News, Mr. Paulson repeated his
criticism of the Sarbanes-Oxley law. While it had done some good, he said,
it had contributed to "an atmosphere that has made it more burdensome for
companies to operate." 

Mr. Paulson also repeated a line from his first speech, given at Columbia
Business School last August, where he said, "Often the pendulum swings too
far and we need to go through a period of readjustment."

Some experts see Mr. Paulson's complaint as a step backward.

"This is an escalation of the culture war against regulation," said James D.
Cox, a securities and corporate law professor at Duke Law School. He said
many of the proposals, if adopted, "would be a dark day for investors."

Professor Cox, who has studied 600 class action lawsuits over the last
decade, said it was difficult to find "abusive or malicious" cases,
particularly in light of new laws and court decisions that had made it more
difficult to file such suits.

The number of securities class action lawsuits has dropped substantially in
each of the last two years, he noted, arguing that the impact of the
proposals from the business groups would be that "very few people would be
prosecuted."

People involved in the committees said that the timing of the proposals was
being dictated by the political calendar: closely following Election Day and
as far away as possible from the 2008 elections.

Mr. Hubbard, who is now dean of Columbia Business School, said the committee
he helps lead would focus on the lack of proper economic foundation for a
number of regulations. Most changes will be proposed through regulation, he
said, because "the current political environment is simply not ripe for
legislation."

But the politics of changing the rules do not break cleanly along party
lines. While some prominent Democrats
<http://topics.nytimes.com/top/reference/timestopics/organizations/d/democra
tic_party/index.html?inline=nyt-org>  would surely attack the pro-business
efforts, there are others who in the past have been sympathetic. 

People involved in the committees' work said that their objective was to
improve the attractiveness of American capital-raising markets by scaling
back rules whose costs outweigh their benefits.

"We think the legal liability issues are the most serious ones," said
Professor Scott, the director of the committee singled out by Mr. Paulson.
"Companies don't want to use our markets because of what they see as the
substantial, and in their view excessive, liability."

Committee officials disputed the notion that they were simply catering to
powerful business interests seeking to benefit from loosening regulations
that could wind up hurting investors.

"It's unfortunate to the extent that this has been politicized," said Robert
E. Litan, a former Justice Department official and senior fellow at the
Brookings Institution
<http://topics.nytimes.com/top/reference/timestopics/organizations/b/brookin
gs_institution/index.html?inline=nyt-org>  who is overseeing the committee's
legal liability subgroup. "The objectives are clearly not to gut such
reforms as Sarbanes-Oxley. I'm for cost-effective regulation."

The main Sarbanes-Oxley provision that both committees are focusing on is a
part that is commonly called Section 404, which requires audits of
companies' internal financial controls. Some business experts praise this
section as having made companies more transparent and better managed, but
many smaller companies call the section too costly and unnecessary. 

Members of the two committees said that they had reached a consensus that
Section 404, along with greater threat of investor lawsuits and government
prosecutions, had discouraged foreign companies from issuing new stock on
exchanges in the United States in recent months. 

The committee members said that an increase in stock offerings abroad was
evidence that the American liability system and tougher auditing standards
were taking a toll on the competitiveness of American markets. But others
see different reasons for the trend and few links to liability and
accounting rules.

Bill Daley, a former commerce secretary in the Clinton administration who is
the co-chairman of the Chamber of Commerce group, expects proposed changes
to liability standards for accounting firms and corporations to draw the
most flak. But he said that the changes affecting accounting firms are of
paramount importance to prevent the further decline in competition. Only
four major firms were left after Andersen's collapse.

Another contentious issue concerns a proposal to eliminate the use of a
broadly written and long-established anti-fraud rule, known as Rule 10b-5,
that allows shareholders to sue companies for fraud. The change could be
accomplished by a vote of the S.E.C. 

John C. Coffee, a professor of securities law at Columbia Law School and an
adviser to the Paulson Committee, said that he had recommended that the
S.E.C. adopt the exception to Rule 10b-5 so that only the commission could
bring such lawsuits against corporations.

But other securities law experts warned that such a move would extinguish a
fundamental check on corporate malfeasance. 

"It would be a shocking turning back to say only the commission can bring
fraud cases," said Harvey J. Goldschmid, a former S.E.C. commissioner and
law professor at Columbia University
<http://topics.nytimes.com/top/reference/timestopics/organizations/c/columbi
a_university/index.html?inline=nyt-org> . "Private enforcement is a
necessary supplement to the work that the S.E.C. does. It is also a safety
valve against the potential capture of the agency by industry."

Copyright <http://www.nytimes.com/ref/membercenter/help/copyright.html>
2006 The New York Times Company <http://www.nytco.com/>  

 

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