New York, NY – In recent months, political positioning has become an extremely important factor influencing both the policies and statements of various officials from the Securities and Exchange Commission. As discussed a few days ago, some market participants have attributed Chairman Christopher Cox’s about face on soft dollars last week to politics.
Now, the SEC is considering supporting “investor’s rights” in a Supreme Court case addressing the issue of whether banks, auditors, and other vendors can be held liable for another company’s fraudulent behavior.
The case that is the focus of the SEC’s consideration is one involving Enron’s bankers — Merrill Lynch, Barclays, and Credit Suisse. The question at hand is whether “secondary actors”, including audit firms, banks, or vendors, can be considered directly liable for securities fraud. In the past, there was little legal recourse for a litigant unless he/she could prove that the accused company did more than just “aided and abetted” in the fraud.
SEC chairman Christopher Cox has been under substantial pressure from numerous groups, including investor advocates, the Chairman of the Financial Services Committee, and the plaintiff’s attorney in this Enron-related case, to submit an opinion on this issue.
Since he took over the chairmanship of the Financial Services Committee, Representative Barney Frank has been extremely vocal about his concerns that the SEC’s policies might be overly supportive of corporate interests vis a vis the interests of retail investors. In fact, these concerns have prompted Rep. Frank to invite SEC chairman Christopher Cox and the other four other SEC commissioners to discuss their views on shareholder lawsuits, as well as other pertinent topics later this month.
Last week, Sen. Chris Dodd, Chairman of the Committee on Banking, Housing, and Urban Affairs, also weighed in on this issue by sending a letter to SEC Chairman Cox asking him whether the SEC plans to write an amicus brief in the Supreme Court case. Dodd noted in his missive that he applauded the SEC’s previous opinions on similar “investor rights” cases.
The SEC last addressed this question close to three years ago when it filed a “friend of the court” opinion backing Homestore shareholders in the Simpson v. AOL case heard by the Ninth Circuit Court of Appeals.
In this case, the SEC asserted that in their opinion, a third party could be considered a primary violator if it “engages with the corporation in a transaction whose principal purpose and effect is to create a false appearance of revenues, intending to deceive investors in the corporation’s stock.”
It is rumored that the SEC has asked the U.S. solicitor general to file an amicus brief, outlining the government’s support of the plaintiffs in the Enron-related case. The Solicitor General has until June 11 to file these documents.