Securities Law Enforcement Reacts to the Crisis: Congress, the Courts and the Regulators

I recently published an article discussing the reactions of each of the three branches of government to the economic crisis which became so evident in mid-2008 (Soraghan, Joseph, “Securities Law Enforcement Reacts to the Crisis: Congress, the Courts and the Regulators,” Inside the Minds, New Developments in Securities Litigation 55-76. Aspatore Books/Thomson-Reuters March 2010). The article points out that, not surprisingly, the economic crisis, highlighted by the names AIG, Lehman Brothers, Madoff and others, called to action Congress, the regulators, and possibly even the Supreme Court.

Brought before Congress since late 2008 have been proposals of huge B and not-so-huge B scope. (For example, the proposals would add more supervision and regulation of bank holding companies, the asset-backed securitization process, OTC derivative products and markets, private fund investment advisers and securities rating agencies, among many other functions.)  Most have since been adopted in bills passed separately by the Senate and the House of Representatives, and await review by joint conference committees. It is likely that most will be adopted in some form, after joint conference action, and signed into law. They will significantly affect the conduct of business in this country, and therefore how attorneys must advise their clients.

These include a proposal to bring back aiding and abetting liability, subjecting to liability persons who knowingly or recklessly provide substantial assistance to other persons in violating Rule 10b-5. Adoption will impact, for example, attorneys preparing registration statements, accountants giving audit opinions in such statements and managing underwriters in public offerings. More than just those involved in public offerings, however, will be at the increased risk created by this legislation, including all persons assisting issuers or even individual security holders in selling or purchasing securities.

Similarly, the SEC has, during and following a period of intense negative scrutiny of that agency since the 2008 economic meltdown, brought many more enforcement cases in a number of areas, the main one of which is insider trading. But it is not the number of cases it has brought, rather, it is the SEC’s attempt to broaden the scope of liability under insider trading and possibly other laws, which should concern business people and their attorneys. Indeed, the broadening by the SEC of its definition of what disclosures and use of information are prohibited, together with the largely unregulated and rapidly growing (and often unthinking) use of social media, may bring about a “perfect storm” of what the SEC may consider violations of the insider trading laws.

And the Supreme Court in its recent ruling in Merck & Co., Inc., et al. vs. Reynolds, et al, No. 08-905, 559 U.S., 2010 WL 1655827 (2010) (decided shortly after the above article was published) also has expanded enforcement of the securities laws by loosening the restrictions on private securities fraud litigation. (The article describes the arguments and options for decision presented to the Court.)

In its April 27, 2010, ruling the Supreme Court adopted an interpretation of the period of limitations on bringing securities fraud actions in court which is significantly less restrictive of plaintiffs than many cases in the lower courts have been. Because private lawsuits under Rule 10b-5 for securities fraud act as private enforcement devices, the result will undoubtedly be greater enforcement of the securities laws.

The full article is available from the author or from Thomson-Reuters. Thomson Reuters Inside the Minds series provides legal and business intelligence from lawyers and C-Level executives (CEO,CFO, CTO, CMO, Partner).