One of the biggest financial frauds in U.S. history was recently settled with a Prudential Securities agreement to pay $1.5 billion to reimburse 340,000 investors who were sold $8 billion in fraud-ridden investments. The company signed the agreement to avoid criminal indictment and possible liquidation.
Congress' response to this good news for investors? Not to tighten regulations, but to loosen them, for investors big and small.
The regulations of 50 states and Washington, D.C., would mostly be eliminated, with state regulators reduced to assessing fees and enforcing federal regulations.
This is only one provision in a drastic restructuring of the nation's securities marketplace that is being backed by congressional Republicans.
One sponsor, Rep. Jack Fields, R-Texas, said the effort "virtually puts every rule, every regulation, every procedure, every piece of paper, every person on the table."
Small investors aren't the only ones affected. For example, one provision would radically revise a law that warns companies when they are a target of a takeover bid. One part of a House bill would protect companies when they make forecasts, even if they are made recklessly.
Supporters of the bills say that they seek to reduce burdensome regulations to make it easier for companies to raise funds. They also seek to protect companies from unfair lawsuits.
"We think the securities legal system is being hijacked by the trial bar," said Stuart Kaswell, general counsel for the Securities Industry Association, the brokerage industry trade group. "You've got lawyer-driven litigation, and it's being paid for by shareholders."
Opponents say the package is so sweeping that it could have unintended consequences.
"This could take a real whack at public confidence in the marketplace," said Maureen Thompson, spokeswoman for North American Securities Administrators Association, which represents state and provincial regulators in the United States, Mexico and Canada.
"We don't see what evidence there is that the markets are being impeded in any way. They set records every day."
Opponents worry that the bills would leave small investors vulnerable to fraud.
The Securities and Exchange Commission would have primary responsibility for protecting investors, because most state regulations would be gone. But it would get extra duties with a smaller budget. In the Fields bill, the SEC would gain the additional role of ensuring that regulations "promote efficiency, competition, and capital formation." And other members of Congress have talked about cutting the agency's budget.
"What it's really doing is eliminating the rights of the states to protect the citizens of the state," said Russell Forkey, a Fort Lauderdale securities lawyer who represents investors.
The Securities Industry Association says the SEC does a good job of protecting investors.
And the amount of fraud that state regulators prevent must be balanced against the costs they add to corporate fund-raising efforts, Mr. Kaswell said.
Here's what would be lost, if state securities regulations were repealed:
The SEC might allow a convicted felon to hold a public stock offering, if the conviction was disclosed in the prospectus. In general, federal regulations focus on disclosure, while state regulations focus on the merit of a securities offering. States, therefore, might reject such an offering as unsuitable.
States would also lose the power to bar brokers from doing business within their borders. It was this hammer -- the threat to pull a company's license -- that state officials held over Prudential to help force a settlement in the company's fraud case, said Kurt Eichenwald, author of Serpent on the Rock, a new book about Prudential.
"If this legislation had been law three years ago, Prudential-Bache would have gotten away with the biggest fraud in history," he said.
Some who find merit in some of the provisions are cool on others. A former SEC attorney who now defends corporations favors curbs on class-action lawsuits.
"Most of these cases really aren't fraud," said Richard Brodsky. "The argument is, these are shakedowns, holdups, for bona fide statements that turn out to be false."
Sensormatic Electronics Corp., based in Deerfield Beach, Fla., was sued by some shareholders after its stock dropped 68 percent in a day in July. The suits claimed the company was inflating its shares with false statements about its European operations.
But Mr. Brodsky said he can't understand the push for repealing regulation 13D, mandating disclosure of big stock purchases, because big and small investors rely on such information.
"Mr. Boesky would have been delighted with the abolition of 13D, and so would Mr. Milken," he said, referring to convicted traders Ivan Boesky and Michael Milken. "That's part of the reason they went to jail."
Highlights of a bill proposed by Rep. Jack Fields, head of the House Commerce Committee's panel on securities:
* Would repeal regulations that mandate disclosure within 10 days when a bidder buys more than a 5 percent stake in a company. The disclosure would only need to come annually.
* Drop a requirement to deliver a prospectus at the same time a security is sold.
* Repeal most state securities regulations.
* Loosen margin rules for institutional investors (pension funds or mutual funds).
* Restrict the right of institutional investors to sue over "unsuitable" investments.
Highlights of a bill that has passed the House, and which is awaiting reconciliation with a similar Senate bill:
* Make it easier to make projections and forecasts.
* Restrict class-action suits filed against corporations.
* Restrict liability in stock fraud cases. Investors who had been defrauded would be limited in seeking compensation from accountants, bankers and lawyers who might have helped a wrongdoer who has no assets left.