Safe Harbors for Financial Fraud

June 26, 1995

In the wake of the nation's savings and loan debacle, the financial derivatives shock to U.S. pension systems, the junk bond manipulations of Mike Milken, one could expect Congress to bolster the rights of investors in securities fraud cases.

Instead, Capitol Hill legislators are rallying to protect the interests of corporate executives, securities dealers, lawyers and accountants against the claims of victims of financial crimes.

Legislation approved by the House and awaiting a Senate floor vote today would grant virtual immunity to these participants in securities fraud lawsuits. Executives who hype their companies' financial projections to jack up the stock price would be sheltered from legal action.

Bondholders defrauded by Charles Keating and his S&L scam, the largest in U.S. history, would find it almost impossible to sue the co-defendants for relief under the pending bill. They recovered $240 million from Keating's accountants, lawyers and securities dealers, although still losing nearly 40 percent of their money.

Originally drafted to reduce the number of frivolous investor lawsuits against corporations, the bill was pushed by Silicon Valley companies whose fortunes are highly volatile. But the sweeping protections included have fired the opposition of investor groups, advocates for the elderly and even the federal Securities and Exchange Commission.

The number of federal securities fraud cases has nearly doubled over the past decade. But the SEC, which polices securities fraud, says that investor lawsuits are important in accomplishing its mission. A study released last month by the Congressional Research Service finds the number of securities suits against companies "exceptionally small."

The loudest complaints have come from the elderly, whose retirement assets are most vulnerable to fraud. Senior citizens account for over 30 percent of securities fraud victims, according to a study by the Gray Panthers.

The House bill includes the chilling proviso that the losers of a fraud lawsuit must pay lawyer bills of those they sued. The Senate measure would limit defendant responsibility in lawsuits only to their degree of proven guilt, instead of making all parties liable for fraud settlements.

The arsenal of weapons against investors in the legislation shows that it is more about protecting the shadowy dealings of corporate leaders and their professional confederates than in limiting frivolous class action lawsuits. If the integrity of the marketplace is to be truly protected, the Senate will vote down this invitation to expanded investor fraud.

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