SEC seeks to shield firms in fraud suits

The Baltimore Sun

WASHINGTON -- The Securities and Exchange Commission has begun to take steps on two fronts to protect corporations, executives and accounting firms from investor lawsuits that accuse them of fraud.

The commission filed a little-noticed brief in the Supreme Court Friday urging the adoption of a legal standard that would make it harder for shareholders to prevail in fraud lawsuits against publicly traded companies and their executives.

At the same time, the agency's chief accountant said the SEC was considering ways to protect accounting firms from large damage awards in cases brought by investors and companies.

Critics said the moves signaled a major retrenchment from the post-Enron reforms.

They say it shows that a lobbying push by big companies, Wall Street firms, and the accounting industry to roll back what they see as onerous regulation and excessive investor litigation is gaining traction.

But SEC Chairman Christopher Cox said yesterday that both efforts were in the best interests of investors because they were aimed at preventing the accounting industry from further consolidation and limiting what he called "fraudulent lawsuits," including some that he said had been filed by "professional plaintiffs."

Institutional investors and some analysts expressed alarm at the developments, noting that the number of shareholder lawsuits is declining significantly.

"It is clear from these actions that this is a commission intent on reversing seven decades of rule making, by Democrats and Republicans, that have protected investors and opposed shielding auditors," said Lynn E. Turner, a former chief accountant at the SEC and now managing director of research at Glass Lewis, an adviser to large shareholders.

"This administration and this agency are very pro-business and anti-investor."

On Friday, the commission's chief accountant, Conrad W. Hewitt, told a group of securities lawyers at a conference in Washington that, because there are only four remaining large accounting firms, the agency has begun to consider how to limit the legal liability of those firms in suits filed by investors and companies.

Hewitt said that he had witnessed numerous meritless lawsuits against auditing firms when he was the managing partner of Ernst & Young and that the potential claims against some firms are now so large that they can lead to bankruptcy and force further consolidation in an industry that is already heavily concentrated, audience members recalled.

Hewitt also said that five European countries had already found ways to limit auditor liability.

The European Commission, the European Union's administrative arm, issued a policy paper advancing the view that the biggest firms should be given new legal protection against damage claims, audience members said.

Some countries have put a monetary cap on legal liability, while others have adopted limits based on the size of the client corporation or the fees generated by the company being audited.

Copyright © 2021, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad