Now we’re getting somewhere.
Over the past 20 years, corporate interests and Wall Street lobbyists have stripped away investor rights and cushioned themselves from being held responsible for fraud. Not surprisingly, these same interests led the economy down the path to destruction. Legislators have finally taken notice.
The latest development is a bill introduced by Senator Arlen Specter from Pennsylvania that, if passed, would reverse a disastrous series of Supreme Court decisions that prevented many victims of fraud from filing lawsuits against third-party participants.
The concept of Senator Specter’s legislation is straight-forward: help someone steal money and you are also held accountable. Shamefully, corporate lobbyists are already trying to undermine the legislation. The Department of Commerce, which shills for Wall Street, issued a statement essentially claiming that this legislation will somewhat slow the economic recovery. Ironically, this voice comes from the very same people that brought the economy to the brink of disaster and it was their successful efforts at less regulation that got us into trouble in the first place. So why should anyone listen to them now?
If Senator Specter’s bill is enacted, it would be a “game changer” and the most significant development since the Supreme Court’s 1994 decision “Central Bank,” which held that private plaintiffs may not maintain aiding and abetting suits under the Securities and Exchange Act. The Central Bank case was also recently upheld by the Supreme Court in the “Stoneridge” decision. The catalysts for this issue returning to the forefront are the multiple Ponzi schemes of late as well as a case involving the collapsed brokerage firm Refco.
In the case of Refco, its CEO hid losses by transferring them to a separate company and it is alleged that an outside lawyer may have knowingly drafted the legal papers allowing the fraud to occur. The lawyer escaped liability on the technicality that those Supreme Court decisions prevented anyone from suing him. U.S. District Judge Gerald Lynch, who presided over the case, dismissed the claims against third-parties because of the Supreme Court precedents. Judge Lynch wasn’t pleased by this and wrote that, “It is perhaps dismaying that participants in a fraudulent scheme who may even have committed criminal acts are not answerable in damages to the victims of the fraud.” He invited Congress to review the law on third-party liability.
In introducing this bill, Senator Specter has accepted Judge Lynch’s invitation for Congress to step in and restore third party liability for securities fraud. His timing couldn’t be better. One of the biggest challenges when large frauds such as Ponzi Schemes are uncovered is that after they are detected, there is little left to divvy out to victims. However, it’s rare that these fraudsters ever work alone.
Two great examples are Madoff and the Agape World Ponzi scheme. The recurring theme in these, and other fraud cases, is that the perpetrators were not, and cannot be, successful without the help of major financial institutions. As readers of my blog know, it is alleged that financial giant Fiserv (NASDAQ:FISV) may have played a role in Bernie Madoff’s fraud and Bank of America (NYSE:BAC) went so far as to set up a branch inside Agape’s headquarters as well as allegedly providing the scheme with a “cloak of legitimacy.”
It’s logical that if any well healed institutions helped aid and abet a Ponzi scheme artist, they too should be held accountable and be responsible for investor losses. Senator Specter’s colleagues need to exhibit similar gumption and stand up against the lobbyists and support this bill. Investors are watching…and voting.