WASHINGTON -- Claims that the number of securities fraud cases in the United States is exploding are overblown, but some fine tuning in the system may be warranted, academic experts told a House panel yesterday.
"Lay down the meat-ax and take out the scalpel," John C. Coffee Jr., professor of law at Columbia University, told the House Energy and Commerce Committee's subcommittee on telecommunications and finance.
"The first and greatest myth about securities class actions is that there has been a recent explosion of them," Coffee said. "In fact, over the last 20 years, securities class actions have remained fairly stable on a percentage basis, representing about 10% of all class actions filed."
Coffee and other academics were commenting on a push by some members of Congress for legislation that would limit the ability of private investors in municipal and other securities to win major settlements from accountants, attorneys, and other side participants in deals that go sour because of alleged fraud.
One bill, introduced by Rep. Billy Tauzin, D-La., would relax the current system of so-called "joint and several liability" in securities fraud cases. Under that system, if fraudulent activities occur that should have been detected by other participants in the transaction, such as accountants, joint and several liability holds everyone involved fully responsible for.
Tauzin's bill would only allow an investor to recover that pan of his or her damages from an accounting or other firm that is directly attributable to the firm's activities, or a system of "proportionate liability." Tauzin says that the bill is needed to curb an explosion in securities fraud litigation that is strangling financially the nation's accounting and other firms.
The proposal has drawn strong opposition from investor groups who charge that it would shield wrongdoers, while closing the courts to their victims.
Many academics and other groups testifying yesterday said the statistics simply do not back up claims that litigation has gotten out of hand.
"Approximately 123.5 consolidated suits were filed per annum between 1989 and 1992," said JOel Seligman, a professor at the University of Michigan Law School. "This is hardly the litigation explosion suggested by proponents of new legislation."
"I am opposed to the legislation presently pending in Congress," said Abraham J. Briloff, a professor at the City University of New York. "The [accounting] profession is confronting a most serious crisis, but it is not the socalled litigation crisis; instead it is an identity crisis."
"The initiatives that have been put forward in the name of litigation 'reform' will have the practical effect of giving free rein to financial swindlers," said Mark Griffin, director of the securities division of the Utah department of commerce and a member of the board of directors of the North American Securities Administrators Association.
"During the last decade, we witnessed financial frauds and scandals of historic proportions," he said, citing former California money manager Steven Wymer who pleaded guilty Sept. 29 to nine felony counts and agreed to pay municipalities and other clients roughly $209 million to settle civil and criminal charges brought by federal prosecutors.
"Public policy should search for reforms that can reduce the transaction costs of securities class actions without sacrificing their impact" Coffee said.
