Sen. Mike Enzi (R-WY), the only accountant in the U.S. Senate, took to the Senate floor Thursday to explain why the amendment by Sen. Arlen Specter (D-PA) to expand liability in securities litigation would be so detrimental to investment.
The National Association of Manufacturers opposes the Specter amendment (Key Vote letter) because it could render a manufacturer liable for some other company’s securities fraud, the only connection being that the other company sold the manufacturer’s products. Accounting firms, financial consultants and other third parties are also alarmed at the Specter amendment’s attempt to turn them into deep-pocket defendants.
As Sen. Enzi stated:
[The Specter amendment] standard only requires that one knows of the “improper conduct,'” not that he “knows that the conduct is improper.” This is a critical and unacceptable difference. To be clear, the standard does not even meet what is used by the SEC to prosecute criminal aiding and abetting charges. The SEC standard is significantly higher. Because the standard in this amendment is so flawed, we would be opening thousands of innocent small businesses to secondary charges of fraud.
Again, we are not talking about criminal charges. These charges would be strictly considered in a civil court. Keeping this standard would give profit-motivated trial lawyers a vague statutory standard to work from–not a good combination. They would be able to cast a wide net for defendants, and this opens professionals in their company to the costs of discovery and trial, in addition to potential liability for damages awarded in the rest of the criminal case.
Let’s not forget we are talking about accountants, tax preparers, and attorneys who aid everyday companies. This means these professionals would be faced with a standard of evidence they cannot refute or argue, and they could likely be facing unfounded charges. …
Their options under this standard would be pleading out for millions of dollars, even if innocent, or losing even more in the long process of discovery and trial in order to defend themselves and their work. All this for someone who may not even know the criminal or have known that the person’s actions were criminal. Is this how our country’s legal system is supposed to work? Are we going to incentivize frivolous lawsuits? The Specter amendment standard may even go so far as to hold these professionals liable for not finding fraud.
For another, non-manufacturing perspective on the dangers of the Specter legislation (first written as S. 1551) we commend analysis by Kevin LaCroix of the D&O Diary blog, who comments on issues related to directors and officers’ liability. In “Specter’s “Aiding and Abetting” Bill: Why it Could Pass and Why it Matters” last year, LaCroix wrote:
[The] potential defendants who could find themselves drawn into securities class action lawsuits on aiding and abetting claims if the bill passes will include not just gatekeepers but also other companies whose business transactions with the alleged primary violator are alleged to have aided and abetted the securities fraud.
In other words, were Senator Specter’s bill to pass, it would not only greatly expand the potential securities liability exposure for companies’ outside professionals. It would also expand the potential securities liability exposure of all companies that transact business with public companies.
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