A reform-minded Congress opened door to corporate lying

July 17, 2002|By JAY HANCOCK

EVERYBODY'S talking about the amazing, lying business managers who gave soothing reassurances about their companies' stock just before it dropped. But almost nobody's talking about the law that made it all possible.

The 1995 Private Securities Litigation Reform Act, passed by Congress over President Bill Clinton's veto, ended what was essentially a ban on predictions by bosses about their companies.

Before 1995, executives avoided all "forward-looking" public statements about profits, sales or stock prices. To weigh a company's prospects, investors had to think - at least a little - and dig into corporate filings or the financial press or consider advice from brokers.

Now chief executives sing like nightingales, which drowns out the other information. And they can lie about the future with little fear of consequences, thanks to the 1995 law, also known as the Safe Harbor Act.

Recent examples of executive embellishment could fill several volumes of Mother Goose and Hans Christian Andersen, but one atrocious example is sufficient to make the point.

It's Aug. 29, 2001. The stock of the telecom company Global Crossing Ltd. - legal home, Bermuda; management home, Beverly Hills - has fallen from almost $25 in January to about $4.

And with good reason. It has become clear that there is a glut of optical communications fiber and that heavily indebted Global Crossing is in danger.

One analyst downgrades the company that morning, but then Global Crossing issues a stirring rejoinder that heartens existing shareholders and tantalizes potential ones.

"We remain extremely confident in Global Crossing's business strategy and the fact that we will emerge from the current downturn as an industry leader well positioned for long-term growth," says chief executive Thomas J. Casey. "We believe our stock has been trading irrationally based on highly inaccurate rumors and groundless speculation."

The day after Casey's hallucination, thousands of poor suckers bought 11 million Global Crossing shares. The stock closed at $4.06. A commentator on CNN said there was "very little additional downside risk" for Global and that the shares would be back to $8 soon, "so I think right now you definitely want to be holding this stock."

Bankruptcy filing

Of course, what Global Crossing was well positioned for was immediate catastrophe, not long-term growth. Its stock fell below $1 in early October and now trades just north of zero. The company entered bankruptcy proceedings in January.

A Global Crossing spokeswoman declined to comment on Casey's statement. I was unable to contact Casey, who stepped down as chief executive officer in early October after the company "revised" his Aug. 29 revenue projections.

For my money, the moral minefield laid when executives predict their financial results is much worse than what happens when Wall Street analysts make buy and sell recommendations knowing they can affect their firms' securities deals.

At least an analyst is a third party, known to be operating on imperfect information. But when a boss talks about being not just confident but "extremely confident," you figure it's coming from the source, the guy has inside dope and he couldn't say it if it weren't true.

Unfortunately, he could. And for that we can thank the 1995 Congress.

Its act created strong civil liability protections for executives making financial predictions. The law was supposed to reduce nuisance litigation by letting CEOs give candid evaluations of a company's future without worrying about a shareholder lawsuit every time things didn't turn out exactly as forecast.

But CEOs are born salespeople. Even when they don't have a sinister motive for hyping a stock - such as dumping their shares - bosses often can't help putting a shine on an unsavory apple. The result was probably hundreds of inaccurate corporate forecasts and a big, fat stock market bubble.

`Corporate chicanery'

The liability protection of the 1995 act "is one of the major, major contributors to this rise in corporate chicanery," James Chanos, a Wall Street financier who has become famous for being one of the first to question Enron's results, told me.

"I'm no fan of the plaintiffs' bar, but I think the pendulum went too far the other way" in protecting against shareholder lawsuits.

Amen. Chanos is one of the few making this point to Congress, but with little effect. As far as I can tell, Washington has no desire to re-gag executives.

It should. Last month, lawyers for ex-Enron managers Kenneth L. Lay, Jeffrey K. Skilling and Andrew S. Fastow asked a Houston judge to dismiss a giant shareholder lawsuit against them, claiming protection under the 1995 act.

It pains me to say anything nice about Bill Clinton, but on this one, he was right. We should clean up corporate America's books and then, when it comes to predictions, let the books speak for themselves.

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