Rep. Frank undermines the effort to improve governance with his effort to include in the financial regulation bill a bonanza for the plaintiffs’ securities bar provided by a reversal of the Supreme Court’s Stoneridge decision [discussed in WSJ lead editorial of 6-18-10, Reforming Main Street]. As a transactional lawyer who dealt with the consequences of the law before the Supreme Court rationalized it in 2008 and would deal with them again if Rep. Frank succeeds, I think some elaboration is needed.
Simply put, this effort would cost jobs and greatly impede economic recovery. It would do so by making it harder for companies to procure goods and services from each other, thereby decreasing total economic output. The proposed change, which would allow private damage actions for aiding and abetting the securities law violations of others, would prompt many companies to address the securities law compliance efforts of at least those public companies (and possibly private companies with outside investors) with which they propose to do business, in addition to customary concerns about price, quality, timing, etc. These matters would be addressed in due diligence and through formal warranties and indemnities in contracts.
This was exactly what was happening before the Supreme Court acted in 2008. Contract negotiations over various goods and services having nothing to do with financing, were often digressing into discussions of vendor accounting, especially revenue recognition, and public reporting, making it much harder and more costly to get the deals done.
All of this may be justified if it truly protects investors, but this is not the case. There is no evidence that we are plagued with a rising tide of securities disclosure or accounting violations of this nature. In any event, even if we are, under existing law, anyone is already liable (in damages and to SEC sanctions) for their own primary securities violations. This includes, but is not limited to, material assistance of a violation which is nominally by a third party, but where both parties participate and hope to derive some benefit. Rep. Frank’s effort would substantially lower the bar for holding one company liable for the securities violation of its counterparty, where the dealings are at arms length. Honest companies would have to be concerned that they will have to justify their actions in court if it turns out that their counterparty encounters unhappy investors. This is especially true if the vendor is considerably smaller than the customer – the “deep pocket” syndrome.
Congress needs to promptly relegate this “employment prevention act” to the dustbin where it has been residing, and focus its efforts on steps which will bolster the economy, by improving governance and public confidence, such as enhancement of proxy access in the manner which has been so eloquently advocated by other commentators on this site and which is threatened by recent efforts discussed on this site. Let’s emphasize companies getting their own houses in order before we ask them to care for the “securities houses” of others.
Publisher’s Note: Thanks to guest reviewer Martin B. Robins, an adjunct professor in the Law School of Northwestern University. He is presently, and for the past 10 years has been, the principal of the Law Office of Martin B. Robins where his practice emphasizes acquisitions and financings, technology procurement and licensing, executive employment and business start-ups. The firm represents clients of all sizes, from multinational corporations to medium sized businesses to start-ups and individuals.
For more on Stoneridge, see Publisher’s post Stoneridge Symptomatic, 4/2008 — you’ll have to scroll down a bit to find it.