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Prevent Financial Fraud: Repeal the Accountant Immunity Act—the 1995 Private Securities Litigation Reform Act (PSLRA):

Despite the lessons of the 1980s savings and loan debacle, Congress overrode a Presidential veto to enact 1995 legislation, the Private Securities Litigation Reform Act, making it difficult or impossible to sue accountants or companies for most securities fraud violations. Congress should repeal the PLSRA and 1998 legislation expanding it, the Securities Litigation Uniform Standards Act (SLUSA).

These bills diminish the legal threat against corporate wrongdoers and their coconspirators, particularly their accountants. The bills make it harder for victims to go to court, build a case once in court, and recover damages, even if they win. As the distinguished securities law Professor John Coffee of Columbia Law School testified in December:

"... the Enron episode and the general increase in accounting restatements suggests that the SEC may not be winning its war against accounting irregularities. What could explain this apparent decline in the quality of financial reporting? A good case can be made that both (1) the legal threat confronting the auditor has been sharply reduced over recent years by a series of recent judicial and legislative developments, and (2) the incentives for the auditor in acquiesce in questionable accounting practices have grown, as the nature of the industry has changed." (Senate Commerce Committee, 18 December 2001)

The primary "legislative development" Professor Coffee goes on to discuss in his testimony is the PSLRA.

Enactment of PSLRA was opposed by every major consumer group, labor union and senior citizen organization and many law professors.

How Did PSLRA Happen? Massive Campaign Contributions:

Why did so many members of Congress vote for a bill limiting auditor liability despite the lessons of the 1980s S&L debacle? One answer: massive campaign contributions.

In the 1999-2000 cycle, when the industry was seeking Congressional support in its fight with the SEC over its auditor independence rule proposal, its contributions increased to $10,024,624.

Our reform platform—Repeal the Accountant Immunity Act:
The PSLRA and SLUSA include seven key provisions making it harder for defrauded investors to sue wrongdoers. PIRG's platform is to repeal those provisions:

-- Repeal the provision that allows false forward looking statements or predictions by firms: Companies can now make specious claims to pump stock prices without fear of lawsuits, which led to Enron, the Internet bubble, and a dramatic number of "restatements of earnings" in the last four years.

-- Repeal the provision that requires a victim's legal complaint to include detailed proof of irregularities: At the same time, however, victims are not allowed to search company records (discovery) for details until later in the case, a catch-22 limiting lawsuits and making it easier for valid cases to be thrown out.

-- Repeal the provision that limits auditor liability: Auditors now face only proportionate, not full liability, making lawsuit risk merely a cost of doing business rather than a threat that deters misconduct.

-- Restore aiding and abetting liability to accountants: PLSRA, despite requests by SEC, failed to overturn a 1994 Supreme Court holding that accountants and lawyers were immunized from liability for aiding and abetting frauds. PIRG filed a friend-of-the-court brief to the Supreme Court unsuccessfully supporting victims in the case, Central Bank of .Denver vs. First Interstate Bank.

-- Extend statute of limitations for securities fraud claims: Despite requests by the SEC, the bill failed to cure another Supreme Court decision, Lampf, which requires claims to be brought within three years of the fraud, an impossibly short limit due to the complexity of many schemes that often take years to assemble and then discover.

-- Restore use of racketeering laws in securities lawsuits: No matter how bad the conduct of securities fraud violators, consumers can no longer bring claims for damages under the powerful law used to fight corporate crime-the Racketeer Influenced and Corrupt Organization Act (RICO), which had allowed for a treble damage remedy.

-- Eliminate provision preempting stronger state remedies: In 1998, when accountants and their Congressional allies realized that small investors were using strong state law remedies against securities fraud violators, enactment of SLUSA by Congress forced all securities-fraud class actions out of state courts into federal courts and into the harsh requirements of the PSLRA.

Solution: Congress must repeal the 1995 Private Securities Litigation Reform Act. It serves accountants well, but is not in the public interest. Senator Richard Shelby (AL) and Representatives Edward Markey (MA) and Bart Stupak (MI) have introduced comprehensive proposals to repeal parts of the PSLRA that immunize accountants from fraud liability and make it difficult for investors to bring lawsuits against companies for securities fraud violations..

Further Reading On The PLSRA And Securities Fraud:

Professor John Coffee of Columbia Law School testified before the Senate Commerce Committee, 18 December 2001

Professor Susan Koniak of Boston University Law School before the Senate Judiciary Committee, 6 February 2002. Professor Koniak's testimony emphasizes the role of outside lawyers, as well as accountants, in securities fraud.

Wall Street Journal, 6 February 2002 (subscription required)
"Probe Into Enron Collapse Prompts Panel to Review 1995 Curbs on Suits"
By ROBERT S. GREENBERGER
Staff Reporter of THE WALL STREET JOURNAL
(Excerpt)
WASHINGTON -- As federal investigators and Congress expand their probe into the collapse of Enron Corp., lawmakers want to revisit a 1995 law limiting lawsuits that will make it difficult for company shareholders to recoup their losses.
…
The Consumer Federation of America, Consumers Union and U.S. Public Interest Research Group are among the groups pointing to a Dec. 12, 1995, letter they wrote lawmakers opposing the bill. "This legislation will protect financial swindlers from being held accountable to their victims," the letter said.

Proposed Legislation To Repeal PLSRA (Selected Proposals):

HR 3617 proposed by Representative Ed Markey.
HR 3829 introduced by Representative Bart Stupak.
S. 1933 introduced by Senator Shelby.

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