Washington has been consumed this summer by health-care reform and crime legislation. But for some companies, securities-law reform has generated far more interest. Frustrated at the skyrocketing cost of what they consider frivolous shareholder lawsuits, the Big Six accounting firms are pushing for legislation to limit the right of investors to sue for securities fraud.
Proponents highlight the benefits of reform for growth companies, which say they are often hit with nuisance suits when bad news sends stock prices tumbling. But accountants stand to gain most. Under two bills now before Congress, shareholders would no longer be able to recoup 100% of damages from auditors if the accountants played only a minor role in the fraud (table). That would be a major change in existing law, which has saddled the Big Six with $1.4 billion in fines, settlements, and jury verdicts since 1991.
The legislation would limit accounting firms' liability to a proportional share of damages. The current system encourages shareholders to aim for the wealthy firms, particularly if a guilty company has gone out of business. "The accounting profession faces a liability burden unmatched by almost any other sector of our economy," Deloitte & Touche Chairman J. Michael Cook told Congress in early August. With so much at stake, the Big Six have funded a $12 million lobbying campaign. They've enlisted hundreds of supporters, including high-tech companies and groups such as the National Association of Manufacturers.
"FREE REIN." Not surprisingly, plaintiffs' lawyers and consumer groups are leading the charge against the measures. They argue that the bills would weaken the firms' incentive to unearth questionable practices. Support has also come from officials in securities-law enforcement who say that shareholders could be big losers. The reform "will have the practical effect of giving free rein to financial wrongdoers," says Craig A. Goettsch, president of the North American Securities Administrators Assn.
With Congress still embroiled in crime and health-care issues, lawmakers may not have time to act on the legislation this year. But shareholder lawsuits won't go away. And neither will the legislative drive to curb them.
PUTTING THE BRAKES ON SUITS
Pending legislation would limit the rights of shareholders to sue for securities fraud. Among the provisions:
-- To discourage dubious cases, losers would have to pay all legal fees.
-- Named plaintiffs in securities-fraud suits must own at least $10,000 of stock or 1% of company's securities.
-- Defendants would be responsible for only a proportional share of damages they cause. Currently, each defendant can be held liable for 100% of the damages assessed against all defendants.