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“INTRODUCTION OF STOP ENABLERS OF FRAUD ACT” mentioning the U.S. Dept. of Justice was published in the Extensions of Remarks section on pages E1831 on Oct. 11, 2002.
The publication is reproduced in full below:
INTRODUCTION OF STOP ENABLERS OF FRAUD ACT
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HON. EDWARD J. MARKEY
of massachusetts
in the house of representatives
Thursday, October 10, 2002
Mr. MARKEY. Mr. Speaker, I am pleased to introduce the Stop Enablers of Fraud Act, which eliminates the exemption that shields accounting firms, investment banks, and other professional services firms from liability in private suits when they assist their clients commit securities fraud. This exemption was created as a result of the Supreme Court's 1994 decision in Central Bank of Denver v. First Interstate Bank of Denver, which precluded private parties from recovering damages from those who assist in the perpetration of fraudulent activities. Congressional action reaffirmed the authority of the Securities and Exchange Commission (SEC) to bring cases against aiders and abettors of securities fraud, but the SEC's limited resources and heavy workload have prevented it from pursuing every meritorious case against firms that help their clients engage in fraud.
Recent results of the Commission's pursuit of aiders and abettors have been disappointing for investors defrauded with the assistance of professional services firms that possess the specialized expertise required to construct elaborate securities schemes. According to the SEC, between August 2001 and May 2002, the Commission filed or instituted 40 initial actions for aiding and abetting violations of the federal securities laws. For the 22 matters that had been concluded as of May 2002, 4 included orders of disgorgement of ill-gotten gains. The total amount ordered disgorged by the SEC in the four actions was a mere $321,368.87. With an estimated $3 billion in losses suffered by state pension systems as a result of the Enron debacle alone and investors nationwide facing unlikely prospects of recovery due to the insolvency of the alleged primary violator, the bar against private parties seeking damages from the aiders and abettors of fraud should be lifted. Disgorgement of individual profits can never amount to more than a trifle compared to investors' losses on the open market. Disgorgement applies only to forfeiture of the ill-gotten profits reaped from the fraud, which typically represents only a fraction of what investors actually lost from the securities scheme. The ability to recover damages from aiders and abettors in private securities suits would compensate investors for their actual losses, not merely force defendants to surrender profits from their securities violations. As a result of Central Bank, defrauded investors are short-changed, forced to settle for a fraction of their actual losses, if they are able to recover any funds at all.
The Stop Enablers of Fraud Act responds to the series of corporate scandals that have illuminated the integral, albeit supporting, role that professional services firms sometimes play in the design, implementation and validation of fraudulent activities conducted by their clients. In their responses to the consolidated complaint in the pending Enron litigation, professional services firms frequently have cited the Central Bank precedent as they seek to have the charges against them dismissed, arguing that aiders and abettors are immune from liability for fraud alleged in private suits. For example, Merrill Lynch's motion to dismiss states, in relevant part:
[I]n recent years two developments have effected tectonic shifts in the law governing federal securities fraud actions, especially those pled not against the issuer of the securities in question but rather against the peripheral professional organizations who provided services to the issuer. Those two developments were (a) the enactment of the Private Litigation Securities Reform Act (sic) . . . and (b) the Supreme Court's decision in Central Bank of Denver N.A. v. First Interstate Bank of Denver . . . The Section 10(b) claims alleged against Merrill Lynch must be dismissed . . .
[because] plaintiffs' principal theory of liability against Merrill Lynch . . . is precluded by the Supreme Court's holding in Central Bank.
While it remains to be seen whether such arguments will prove decisive in the Enron case, Central Bank nevertheless poses a significant risk to investors who, defrauded by a firm that subsequently became insolvent, may be deprived of recovering losses from the remaining entities that helped to enable the fraud to occur in the first place. It is clear from last week's Justice Department criminal complaint against Enron's former Chief Financial Officer Andrew Fastow that Mr. Fastow did not act alone. The Justice Department's complaint states ``Enron at least once enlisted a major financial institution to assist in its financial statement manipulation.'' During Senate hearings held in July, the financial institution was identified as Merrill Lynch.
The Stop Enablers of Fraud Act overturns the Supreme Court's decision in Central Bank and restores the ability of individuals to bring private suits against those who aid and abet a securities fraud. For decades prior to the Court's decision, firms that assisted their clients to perpetrate fraud had been held accountable for their role in fraudulent activities. Individuals who have been defrauded as a result of the machinations of Mr. Fastow and those who aided and abetting Enron's frauds should not be blocked from pursuing private suits to recover their losses. Empowering individuals to hold accountable the enablers of securities fraud will compel accountants, securities firms, and attorneys to consider the potential litigation risks before they help their clients commit fraud. The exposure of aiders and abettors to liability in private suits is in the best interest of investors and the marketplace. The Stop Enablers of Fraud Act also serves as an important deterrent effect for those who, tempted by the pursuit of profit, may reconsider becoming an accomplice to the type of securities frauds that have so damaged the financial health of Americans across the country.
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