More than two months have passed since the SEC’s January 21 deadline established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Sec. 929Y.) to recommend whether or not Congress should overturn the Morrison Supreme Court decision by restoring US investors’ right to hold accountable in US courts foreign companies that mislead or defraud them on US soil. This anti-US investor decision raises basic questions. Why should Sony be treated differently from Apple? Why should BP be freed from US investor accountability when Exxon isn’t? Why should any company that defrauds or misleads US investors be immunized against US investor accountability?
In comments delivered November 8, 2011, at the University of Pennsylvania, SEC Commissioner Elisse Walter accurately cited Morrison v. National Australia Bank as one in a line of recent Supreme Court decisions that are “hostile” to investors’ legal rights of action, which she described as “critical” to securities law enforcement and the only way for investors to fully recover their losses. She also correctly noted the SEC has never had sufficient resources to pursue all violations of securities law and has traditionally relied upon private actions to complement its enforcement actions.
Yet, she and the other commissioners remained silent as the deadline for action on Morrison passed by, raising new questions about the depth of this SEC’s commitment to investor protection. Chairman Mary Schapiro’s appointment earlier this month of anaccountant with no investor protection credentials to the Public Company Accounting Oversight Board (PCAOB) is a case in point. As Commissioner Luis Aguilar said in his February 3 statement opposing that appointment: “Congress entrusted this Commission with the significant responsibility of appointing the members of the PCAOB. In exercising this responsibility, the Commission is required to abide by the statutory criteria to appoint individuals ‘who have a demonstrated commitment to the interests of investors.’ “
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An analysis by The New York Times published February 3 found apparent laxity in the SEC’s willingness to pursue investor protection by enforcing securities laws:
[The SEC] has repeatedly allowed the biggest firms to avoid punishments specifically meant to apply to fraud cases. By granting exemptions to laws that act as a deterrent to securities fraud, the SEC has let financial giants like JPMorganChase, Goldman Sachs and Bank of America to have advantages reserved for the most dependable companies, making it easier for them to raise money from investors, for example, and to avoid liability from lawsuits if their financial forecasts turn out to be wrong. Close to half of the  waivers went to repeat offenders – Wall Street firms that had settled previous fraud charges by agreeing never again to violate the very laws that the SEC was now saying that they had broken.
That Congress should override the Morrison Supreme Court decision should be an easy and obvious recommendation for an investor protection agency. Indeed, the justification for such SEC action can be found in these concerns raised by Justices Stevens and Ginsburg in their comments on Morrison:
Imagine, for example, an American investor who buys shares in a company listed only on an overseas exchange. That company has a major American subsidiary with executives based in New York City; and it was in New York City that the executives masterminded and implemented a massive deception which artificially inflated the stock price – and which will, upon its disclosure, cause the price to plummet. Or, imagine that those same executives go knocking on doors in Manhattan and convince an unsophisticated retiree, on the basis of material misrepresentations, to invest her life savings in the company’s doomed securities. Both of these investors would, under the Court’s new test, be barred from seeking relief … The oddity of that result should give pause. For in walling off such individuals … the Court narrows the [securities law’s reach] to a degree that would surprise and alarm generations of American investors – and, I am convinced, the Congress that passed the Exchange Act. Indeed, the Court’s rule turns … jurisprudence on its head, by withdrawing the statute’s application from cases in which there is both substantial wrongful conduct that occurred in the United States and a substantial injurious effect on United States markets and citizens.
So, does the SEC support the Court’s turning “jurisprudence on its head” by immunizing from accountability those who perpetrate “substantial wrongful conduct” and cause a “substantial injurious” effect on US citizens? “The world wonders.” World War II buffs will recognize this phrase as part of a message sent from commanding Adm. Chester Nimitz to Adm.William Halsey, whose fleet was missing during a critical Pacific battle in which American soldiers needed its protection.
Will the SEC similarly miss an important opportunity to protect Americans in harm’s way?