Dodd's Balancing Act to Get Tougher; Economic Hot Seat Atop Bank Panel
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November 22, 2006, Wednesday
By STEPHEN LABATON (NYT); Business/Financial Desk
Late Edition - Final, Section C, Page 1, Column 2, 1712 words
DISPLAYING ABSTRACT - Lobbyists and lawmakers are questioning whether Sen Christopher J Dodd will become populist champion on issues that broadly affect middle class or does he shrink from controversial issues that offend huge donors as he prepares to take over leadership of Senate Banking Committee; Dodd has shown through 25-year record in Senate that he is adept to going both ways; at various times he has broken with big corporate interests in support of principle; at other times, he has broken ranks with his more liberal party peers to advance causes associated with corporate patrons; how Dodd balances competing interests of corporations and financial institutions with those of investors will define his chairmanships
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AND THEN THERE'S THIS:
From Bill Moyers "NOW:"MOYERS: Once upon a time we did have strong government regulation intended to protect shareholders like Verbalee.
But a wave of deregulation weakening those protections began during the Reagan and first Bush administrations and continued during the Clinton era.
By the mid-1990s, corporate and Wall Street influence over both sides of Congress was at its zenith and the financial industry was clear about what it wanted, changing the security laws that had shaped our economy for 60 years.
WILLIAM S. LERACH, ATTORNEY: Federal securities laws had been passed in 1933 and '34 in the wake of the Great Depression and Stock Market collapse. They were the most investor-protective laws in the world. And of course, they produced the greatest securities markets in the world over time. They made honesty the coin of the realm in the United States securities markets.
MOYERS: After the Crash of 1929 brought on the Great Depression, government set up the Securities and Exchange Commission as a referee to make sure Wall Street played fair. Laws like Glass-Steagall were passed to protect investors against fraud and conflicts of interest.
ROBERT POLLIN: You had divisions and so-called firewalls between investment banks — so-called investment banks like Merrill Lynch that take your money and they invest it in the stock market — and a commercial bank like Citibank that takes our deposits and then lends to businesses that wanna do business.
MOYERS: Just as the dot-com bubble of the 1990s started to inflate, many of those securities laws were recast by Congress. Proponents say it was for good reason; the laws, they say, were being abused in predatory lawsuits.
STUART KASWELL, ATTORNEY: The trial lawyers were abusing the way the securities laws were designed to work. The securities laws are designed to protect investors if somebody lies, cheats, or steals, if somebody lies on a statement filed with the SEC, lies on a financial statement. That's what the securities laws are designed to protect. But what we found was in the '90s, there were plaintiff's lawyers, trial lawyers bringing cases just because a stock price fell.
MOYERS: Stuart Kaswell was general counsel for the Securities Industry Association at the time. Changing the laws was imperative, he says, because many of these lawsuits were not about securities fraud at all. They were a way for trial lawyers to enrich themselves.
KASWELL: They'd file a suit and then they'd extract a settlement from the company. And it was too expensive for the company to defend the case. They'd just write a check to try to make it go away and then get back to their business. Well, that is an abuse on the whole economy that punishes shareholders, that punishes job creation. It punishes investors.
MOYERS: To fix the problem, supporters of deregulation argued for passage of a bill called the Litigation Reform Act of 1995.
Connecticut Senator Christopher Dodd, a Democrat, was a leading sponsor of the bill. Without it, he said, 'frivolous' lawsuits could puncture the dot-com boom.
SEN. CHRISTOPHER DODD (D-CT): One-half of all the firms in Silicon Valley have been subjected to securities fraud suits in the last 4 or 5 years. That just gives you an indication of what is going on here. These new startup, high-tech firms, they are the ones who are victimized by this. Those are the firms of the future.
PAMELA GILBERT, ATTORNEY: Getting rid of frivolous lawsuits is a very good idea, but that's not what the legislation was all about. The legislation was gonna protect criminals and swindlers and white-collar defrauders.
MOYERS: Attorney Pamela Gilbert is an advocate for investors' rights. She fought the Litigation Reform Act. She says accounting firms were pushing it in order to limit their own liability.
GILBERT: One of its major elements was that it would relieve or very much limit the liability of people who assist in fraud. So they may not be the mastermind behind the swindle, but they are the accountants or the lawyers or the brokers who enable the fraud to go on. And what the bill did was, in some cases, say that those people couldn't be sued at all, or when you could sue them, that it would limit their liability.REP. BILLY TAUZIN (R-LA) : There ought not to be a debate anymore about whether we need reform, that ought to be behind us.
MOYERS: The powerful Republican Congressman Billy Tauzin of Louisiana argued for the Litigation Reform Act's "Safe Harbor Provision." This would protect corporate executives from lawsuits if they made inaccurate projections about their companies' future performance.
REP. TAUZIN (R-LA) : It's time to end this predatory system that is costing everybody in this country a loss of initiative, a loss of corporate initiative because everybody is afraid to disclose too much they're gonna get sued.
MOYERS: To attorney Bill Lerach, the Safe Harbor rule protecting executives from lawsuits had the result of giving corporations free rein to lie to shareholders.
LERACH: Most investors have no idea that Congress eliminated the liability of corporate executives for even deliberate lies. I want to say that again. Even deliberate lies about future corporate performance. This was one of the most astonishing parts of the 1995 act.
MOYERS: Lerach is a class action attorney — one of those accused of making millions of dollars in settlements from those so-called frivolous lawsuits.
In 1995, Lerach told members of Congress that passing the Litigation Reform Act would be a big mistake.
LERACH: In 10 or 15 years, you will be holding another hearing with a debacle in the securities markets that will make you remember the S&L mess with fondness.
MOYERS: President Bill Clinton also opposed the Litigation Reform Act, even though his party chairman and chief fundraiser, Senator Dodd, was pushing for it. When the act passed both Houses of Congress, Clinton vetoed it.
He told Congress, quote: "Those who are the victims of fraud should have recourse in our courts. Unfortunately, this bill could well prevent that."
But Republicans controlled both Houses of Congress, with an agenda virtually written by big business. They enlisted enough Democrats to line up a two-thirds majority, overriding Clinton's veto and turning the Litigation Reform Act into law.
GILBERT: When this bill was being debated, two things were predicted. One is that the incidents of fraud would increase, and two was that victims would not be able to collect when that happened. And not just with Enron, but with many other situations, we are seeing that the incidents of securities fraud have been on the rise, the incidents of restatements of earnings have been on the rise.
MOYERS: Which brings us back to WorldCom. Two years before the company's collapse as the stock was beginning to falter, institutional investors and analysts told Bill Lerach's law firm something didn't smell right. They were skeptical of the accounting procedures and not satisfied with the public assurances made by CEO Bernard Ebbers. Lerach's investigators went to work.LERACH: And what we found was shocking. We found that the company was engaged in a wide ranging falsification of virtually everything about its business that was important to investors. Its revenues were falsified. Its profits, its rate of growth, its business expenses were artificially depressed and hidden. And its stock was grotesquely inflated for a long period of time.
MOYERS: Six months later, Lerach's firm filed a shareholder's lawsuit in Federal Court in Mississippi. The dot-com boom was still going great guns, and no one seemed to take notice — not the financial press, not WorldCom's board of directors, not the auditors or the government regulators.
LERACH: Nobody in the mix had an incentive for the truth to come out. The directors went along with it. Why? Because they're flying around on corporate jets and getting all the handouts that Bernie Ebbers is giving them. Where's the accounting firm, Arthur Andersen? Well, they're sitting there collecting huge fees. Nobody listened because nobody wanted to hear.
more.......at
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