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Michael Phelan
Michael Phelan
Attorney • (866) 249-3164

Lobbyists Now Control S.E.C.

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How soon they forget! Just five years after the huge accounting fraud scandal at WorldCom and the collapse of Enron decimated tens of thousands of retirement and investment accounts, the lobbyists for the accounting industry, Chamber of Commerce, and big, publicly held companies have succeeded in convincing the Securities and Exchange Commision to abandon some of the investor protections adopted in the wake of these scandals. The New York Times reports today that last Friday, the S.E.C. filed a brief in the case, Tellabs Inc. v. Makor Issues and Rights Ltd. urging the U.S. Supreme Court to adopt a legal standard that would make it harder for shareholders to prevail in fraud lawsuits against publicly traded companies and their executives. According to a former chief accountant at the S.E.C.,

“It is clear from these actions that this is a commission intent on reversing seven decades of rule making…that have protected investors and opposed shielding auditors. This administration and this agency are very pro-business and anti-investor.”

The issue in the Tellabs case is the interpretation of the Private Securities Litigation Reform Act of 1995 that sets out what investors must allege in a fraud lawsuit to prevent the case from being dismissed. The law requires that investors state facts “giving rise to a strong inference that the defendant acted with the required state of mind.” The U.S. Court of Appeals for the Seventh Circuit interpreted this to mean that investors had to show whether the allegations, if true, would permit “a reasonable person” to infer that the defendant “acted with the required intent.” According to the Times, the S.E.C. brief urged the Court to adopt a much higher standard requiring investors to show “a high likelihood” that the defendant possessed the intent to violate the law. This standard is much higher than the burden of proof in a typical civil case. The case involves a securities fraud lawsuit by investors against Tellabs for allegedly fraudulent statements made between 2000 to 2001 by Tellab’s senior executives. The company’s stock soared to over $67.00 per share after the CEO repeatedly made false statements about the company’s earnings and sales. When the company corrected these false statements, the stock dropped to $15.87 per share. Typically, the insiders responsible for the public release of false information profit from the artificial spike in stock price and cash out before the market catches up with the truth. The company’s shareholders suffer the loss. The S.E.C., through its political appointees, makes clear its intention to help the Bush administration limit the liability of people like “Kenny Boy” Lay and Bernie Ebbers at the expense of the rights of investors. Add the S.E.C. to the list of federal agencies like the FDA, CDC, EPA, NHITSA, and CPSC that are controlled by former lobbyists for or members of the industry that the agency is supposed to be regulating.