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New Bill Would Enable Investors to Sue BankersSubmitted by: Ted Allen, Publications

U.S. Sen. Arlen Specter of Pennsylvania has introduced legislation that would overturn Supreme Court decisions that limited the ability of investors to sue investment bankers, vendors, and other ?secondary actors? who participate in securities fraud.

The bill, S. 1551, the ?Liability for Aiding and Abetting Securities Violations Act of 2009,? would amend the Securities Exchange Act of 1934 to authorize investors to sue bankers and other secondary actors who provide ?substantial assistance'? to corporate officials who engage in securities fraud. In its Central Bank (1994) and Stoneridge (2008) decisions, the Supreme Court significantly curtailed the ability of investors to bring class-action claims against bankers, suppliers, and others.

?The massive frauds involving Enron, Refco, Tyco, Worldcom, and countless other lesser-known companies during the last decade have taught us that a stock issuer's auditors, bankers, business affiliates, and lawyers . . . all too often actively participate in and enable the issuer?s fraud,? Specter said in a July 30 floor statement when he introduced the bill.

While the Securities and Exchange Commission now has the authority to sue secondary actors, Specter said, ?the SEC?s litigating resources are too limited for the SEC to bring suit except in a small number of cases.?

The prospects for the bill are uncertain. S. 1551 now has three co-sponsors, including Sen. Jack Reed of Rhode Island, who chairs the Senate Banking Committee?s Subcommittee on Securities, Insurance, and Investment. Specter, a long-time Republican, switched parties earlier this year to help the Democrats reach a filibuster-proof, 60-seat majority in the Senate.

J. Robert Brown, a securities law professor at the University of Denver, said the bill reflects a significant shift in the views of lawmakers, who acted to limit shareholder lawsuits in 1995 and 1998. ?While the [b]ill may never become law, it is, if nothing else, a symbol of the changed attitudes and atmosphere in connection with securities regulation,? Brown said in an Aug. 14 posting on his ?The Race to the Bottom? blog.

In a recent editorial, The Wall Street Journal criticized Specter?s bill, warning that it would create a ?new lawsuit bonanza.? Noting that the SEC ?has the authority to punish fraud and distribute fines to victims,? the Journal wrote: ?Private lawsuits are about trying to use expansive liability claims that distort justice and harm the shareholders of innocent but deep-pocketed companies.?

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on August 18, 2009 (boomark / email).