Oxley: Security Suits Decline Not My Doing

WASHINGTON--A recent decline in stockholder class action suits is more likely due to a 1995 litigation reform measure than financial and accounting requirements of the 2002 Sarbanes-Oxley Act, the drafter of the later bill told underwriters.

Former U.S. Rep. Michael Oxley, R-Ohio, said he wished he could take credit for the near historic low point for securities class actions, "but frankly I think it was the Private Securities Litigation Reform Act [PSLRA]."

The 1995 law raised procedural hurdles for bringing securities class actions to federal court in an attempt to stop plaintiffs' lawyers from bringing an action anytime a company's stock price fell.

"I think the evidence is pretty clear that it [PSLRA] reduced the number of what we called strike suits in those days," Mr. Oxley told directors and officers liability underwriters and other participants in the professional lines insurance sector during Wednesday's opening session here of the Professional Liability Underwriting Society International Conference.

"It also doesn't hurt having Bill Lerach going to jail and Milberg Weiss [law firm] finally revealed for [being] the shysters that they were and are," Mr. Oxley said, referring to the fact that Mr. Lerach, a well-known securities class action plaintiffs' attorney, and other members of his former firm have pleaded guilty to charges that they participated in schemes to pay secret kickbacks to individuals who agreed to act as defendants in shareholder actions.

Statistics revealing the post-Sarbanes-Oxley decline in securities suits were included in a recent study by PricewaterhouseCoopers Securities Litigation Services, among others. The PwC study estimates that federal filings this year will come in at about 139, well below the 10-year average of 187.

In addition, Stanford Law School Securities Class Action Clearinghouse (a joint project between Stanford Law School and Cornerstone Research), which tracks such cases on its Web site, shows that filing numbers, which were up to 226 in 2002, fell to 178 in 2005 and to 116 in 2006.

Mr. Oxley was more bullish about the role of SOX in accomplishing its main objective--restoring public trust.

"Our goal was to restore investor confidence through more transparency and accountability," he said, measuring the success in terms of how the stock market has rebounded. "The market has almost doubled in the last five years," he said.

"We lost $8 trillion in market capitalization during those terrible days" of the financial restatements and ultimate meltdowns of Enron, WorldCom and others, he said, noting, for example that the stock price of WorldCom tumbled from $60 per share to $1, accumulating to a $100 billion loss in market capitalization on its own.

Gary Brown, moderator of the panel that included Mr. Oxley, reviewed some of the main SOX provisions, including rules for CEO and CFO certifications of financial statements, auditor attestations of internal controls, audit committee independence and other corporate governance rules.

Mr. Brown, chair of the corporate department of Baker, Donelson, Bearman, Caldwell and Berkowitz in Washington, served as special counsel to the U.S. Senate's governmental affairs committee for the Enron investigation.

He said one important way SOX dealt with investors' loss of trust in corporations was by placing direct responsibility for oversight of ethics and compliance programs on boards of directors. Such responsibilities are "a real source of [potential] director liability," he told directors and officers liability underwriters.

Anthony Galban, senior vice president and global D&O product manager for Chubb, asked Mr. Oxley to comment on a frequent criticism of SOX--the idea that that companies are using overseas markets to go public because of the cost and burdens of regulation here.

Mr. Oxley responded that there's been "a natural maturation of capital markets all over the world.," adding that "the capital markets have met globalization just [like] the steel industry [and] the auto industry. That's a good thing, not a bad thing."

In addition, Mr. Oxley, who is the vice chair of NASDAQ, said initial public offerings on the exchange are up 20 percent over last year and the United States led the world in IPOs last year.

Admitting that a concern he had in the wake of the passage of SOX was that there "would be a rush to the bottom" with offerings being taken to international exchanges in countries that would try to "cut corners," he reported that "just the opposite has happened."

Pointing to "J-SOX" recently adopted in Japan, for example, he said, "Other countries have adopted similar provisions that we passed in Sarbanes-Oxley." He also said the law's focus on transparency helped stop stock options backdating schemes in their tracks.

Prior to SOX, he said, companies had 90 days to report insider dealings with options and stock sales. "Now they have 48 hours and it has to be done on the SEC [Securities & Exchange Commission] Web site," he said, noting that most stock options backdating allegations occurred prior to the July 30, 2002 effective date for Sarbanes-Oxley.