Even leaving aside the obvious need to regulate the shadow banking system — if institutions need to be rescued like banks, they should be regulated like banks — why were we so unprepared for this latest shock? When Bear went under, many people talked about the need for a mechanism for “orderly liquidation” of failing investment banks. Well, that was six months ago. Where’s the mechanism?

One observer briefed on the situation described the session as a “game of chicken” between the government and the heads of the major banks.

We must avoid simply merging regulators and hoping for synergies. We need a system that focuses on the prevention of crimes and crises...

He makes the interesting proposal of walls between classes of customers. We are not sure that will be enough of a solution to address the meltdown that has been created by numerous factors ranging from the too-big-to-fail doctrine that placed deposit insurance and taxpayers at risk and the interconnections that created flashpoints and accelerants instead of fire breaks, but it could be a part of a solution. Excerpt:

Seventy-five years later, instead of trying to limit what products innovative financial firms can offer, it would be more prudent to limit the markets to which they can sell their wares. In other words, the customers, not the companies, should be divided. This could be accomplished by extending the current system of government classification of “qualified investors,” used to limit who can invest in things like hedge funds. By demonstrating expert knowledge or the ability to absorb loss (because of high net worth), qualified investors could be given a pass into the caveat emptor world of modern Wall Street. Those without the inclination, the sophistication or the deep pockets to qualify would be limited to the more closely regulated menu of stocks, bonds and mutual funds.

As expected (my previous blog), Treasury Secretary Paulson (remarks, fact sheets, etc) and the little-known Fannie/Freddie overseer, the Federal Housing Finance Agency director Joe Lockhart (statement), held a Sunday morning news conference to announce the takeover of the quasi-public Fannie Mae and Freddie Mac. Fed chairman Bernanke's statement. Joint bank regulator news release. New York Times website story. Washington Post website story. Floyd Norris in the NY Times. Blog by Dean Baker, an economist and co-director of the public interest think tank Center for Economic and Policy Research: "Yes, this was predictable." More from Baker:

From Dean Baker:

As I said back in September of 2002: "If housing prices fall back in line with the overall rate price level, as they have always done in the past, it will eliminate more than $2 trillion in paper wealth and considerably worsen the recession. The collapse of the housing bubble will also jeopardize the survival of Fannie Mae and Freddie Mac and numerous other financial institutions."

The Treasury Department on Sunday seized control of the quasi-public mortgage finance giants, Fannie Mae and Freddie Mac, and announced a four-part rescue plan that included an open-ended guarantee to provide as much capital as they need to stave off insolvency. At a news conference on Sunday morning, the Treasury secretary Henry M. Paulson Jr. also announced that he had dismissed the chief executives of both companies and replaced them with two long-time financial executives.

Freddie Mac and Fannie Mae have also inflated their financial positions by relying on deferred-tax assets — credits that the companies have built up over the years that can be used to offset future profits. Fannie maintains that its worth is increased by $36 billion through such credits, and Freddie argues that it has a $28 billion benefit. But such credits have no value until the companies generate a profit -- something they have failed to do over the last four quarters, and something that is increasingly unlikely within the next year.

After a moribund period, some say due to a lack of a quorum, the Chris Cox-led SEC has issued two decisions this week, neither of which will help small investors. Barb Roper, director of investor protection at the Consumer Federation of America, has issued two strong statements criticizing the two actions:

i did a short blog last weekend explaining the weaknesses of FINRA-run securities arbitration. Over at the Huffington Post, consumer attorney Dan Solin's post FINRA Puts Lipstick On A Pig explains all the stuff I left out. Worth a look.

Two weeks ago the FINRA, the self-regulatory apparatus of the investment sector (Financial Industry Regulatory Authority), announced a new pilot program so that investors could choose all three of the arbitrators hearing their securities disputes from a list of "public" members; today, in regular practice, at least one of the three arbitrators on each panel is industry-affiliated. But there's a catch, a big catch: all those so-called public arbitrators come from a list that is industry pre-approved in some non-transparent, closed internal FINRA process. Highly praised FINRA CEO Mary Schapiro should have done better for small investors. A pilot program should take a bigger step. In today's Washington Post, longtime syndicated financial columnist Jane Bryant Quinn explains some of the problems in securities arbitration, in a column on arbitrator selection.

Her column applies to the main system, not the small pilot program: From Arbitration Favors Firms Over Investors:

Say that you have an auction-rate case against UBS and get stuck with a Merrill Lynch branch manager as your required industry panelist. How can that Merrill manager bring in a large award, or indeed any award? His own firm is up against the same charges. He might worry that if he finds for you, it could cost him his promotion or even his job.

When trying to remove Wall Street's thumb from the scale during arbitration, "you're up against some of the best-funded lobbying in the country," [investor attorney Philip] Aidikoff says. "Where are the people who speak for individual investors?" Where, indeed.

Check out economist Dean Baker's blog entry Why Is the Government Guaranteeing Fannie and Freddie's Stock Price? from a few days ago:

There is a clear rationale for making good on Fannie and Freddie's bonds. [...] But what interest does the public have in protecting the share prices of Fannie and Freddie stock? [...] In a country that can't fight a few billion dollars to provide funding for child care or children's health care, this multi-billion dollar affirmative action plan for dumb stockholders deserves a little questioning.

From Dirt Diggers Digest:

Many companies—from cigarette manufacturers to investment banks involved with subprime mortgages—have failed to fully inform investors of potential liabilities. They have been able to do so, in large part, because of lax accounting rules.

The Investor Environmental Health Network (IEHN), "a collaborative project of investment managers that tracks product toxicity issues," has just issued an appeal for interested parties to submit comments urging FASB to adopt stricter standards for Statement No.5. The comments are due by August 8.

In fact, despite our prediction over the weekend that a bailout was no longer "likely," Treasury Secretary Paulson has engineered a massive bailout of the mortgage giants Fannie and Freddie. More later. Steve Labaton in the New York Times: Treasury Acts to Save Mortgage Giants. Neil Irwin and Jeffrey Birnbaum in the Washington Post: U.S. Unveils Plan To Aid Mortgage Giants. Yesterday's blog.

Get any email from your frequent flyer program lately urging you to take action on oil prices? Today's Wall Street Journal has an article about the airlines' joint campaign www.stopoilspeculationnow.com against oil price speculation. The story Airline Oil Lobbying Alarms Financial Firms (pd subs. req'd) by Elizabeth Williamson says:

Many economists join financiers in saying the attacks on speculators, while politically appealing, make little economic sense. They say speculation is less responsible for spiraling oil prices than is turmoil in supplier countries and the weakness of the dollar on world markets.

Dr. Cooper says:

The upward pressure that speculation puts on prices is not limited to crude, but applies to the whole energy complex and recent months have seen sharp increases in gasoline prices despite weakening fundamentals.[...]Growing global demand certainly has played a role in triggering the price spiral of recent years, but in a well-functioning market, steadily growing demand would not cause such a powerful upward surge in prices and a huge increase in volatility (see Attachment 5). It is the failure on the supply-side to invest, mergers resulting in highly concentrated markets, and barriers to entry that have allowed the cartel and the oligopoly to profit at the expense of the public. Speculation magnifies the upward spiral.

We rely on independent third parties to issue unbiased judgments in the marketplace. Credit reports for individual consumers are provided by credit bureaus. Credit ratings for debt and other instruments issued by financial firms are provided by third party credit rating agencies-- the big three are Standard and Poor's, Fitch's and Moody's and until enactment of a 2006 law, had little if any significant oversight. Based on a new SEC report, some of the problems that led to the mortgage meltdown can be attributed to that lack of oversight of these three companies. From the Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies (news release and full report in pdf) released yesterday:

findings from extensive 10-month examinations of three major credit rating agencies that uncovered significant weaknesses in ratings practices and the need for remedial action by the firms to provide meaningful ratings and the necessary levels of disclosure to investors...

Each of the NRSROs examined uses the "issuer pays" model, in which the arranger or other entity that issues the security is also seeking the rating, and pays the rating agency for the rating. The conflict of interest inherent in this model is that rating agencies have an interest in generating business from the firms that seek the rating, which could conflict with providing ratings of integrity.

According to today's New York Times story Accounting Plan Would Allow Use of Foreign Rules, by Steve LaBaton, the Securities and Exchange Commission (SEC) is preparing rules changes that would allow U.S. companies to choose to be regulated under either international or U.S. standards. If adopted, the proposals would weaken investor protections. As the story points out:

James D. Cox, a securities law expert at Duke Law School who returned this week from teaching corporate law in Europe, said the shift to international rules amounted to "outsourcing safety standards." "We would not for a moment tolerate having American auto safety standards set by China or India," he said. "Why should we do it for financial safety standards? There has to be some accountability."

U.S. accounting rules, including a number of post-Enron, post-WorldCom (old enough to remember those debacles just 6 years ago?) investor protection reforms enacted as part of the Sarbanes-Oxley Corporate Reform Act of 2002, are so-called "rules-based" standards, while generally more permissive international rules are known as "principles- based" standards. Proponents of weakening U.S. law have used a variety of "apples-to-oranges" and, worse, deceptive arguments to claim that U.S. capital markets are both in the tank and in that tank because of the heavy hand of U.S. regulation. Yet as the the state and provincial securities cops (known as the North American Securities Administrators Association (NASAA), point out:

U.S. Markets Remain a Magnet for Capital

The cornerstone of the principles argument -- a claim of decreased foreign IPOs on U.S. markets -- is questionable, at best. In 2007, U.S. IPOs reached a record high, not seen since the year 2000, bringing in $54 billion, and including a large number of foreign IPOs from China.

Claims that the Sarbanes-Oxley Act (SOX) has driven away foreign companies that are unfounded. Currently, record IPO numbers in themselves argue against this claim. SOX is revered worldwide and SOX-inspired legislation has appeared in several foreign regimes, following the U.S.'s lead.

Foreign investors, counter to popular argument, are indeed drawn to U.S. listings due to the low cost of capital, high financial returns and premiums on home-market listings, and the fact that U.S. markets serve as a proving ground for foreign companies, which must demonstrate to investors and the financial community that they meet the U.S.'s high standards of investor protection and financial integrity.

The S.E.C. also plans to announce details of a pilot program that would enable foreign brokers to deal directly with American investors, while continuing to be largely regulated by the foreign country. The first country in the program will be Australia, although officials hope to eventually include other countries.

What if the price you paid for your car loan or mortgage wasn't based on your qualifications, but how big a kickback the broker received? And what if that spread between what you should have paid and what you were forced to pay was even worse if you were black or brown? When do legal commissions become illegal kickbacks? Are improper incentives to brokers and executives material to the foreclosure crisis that's led to the economic crisis? What if you got bad investments because your mutual fund manager was seduced by a party-lifestyle involving luxurious spas and dwarf-tossing contests, paid by brokers? Does a corporate captain who took the lifeboat while his passengers drowned deserve to walk away with millions of dollars?

Here are some recent stories.

Days at Wimbledon. Nights at U2 concerts. Flights aboard the Concorde. And a dwarf to toss.

Chief executives of three financial companies who received outsize pay packages even as their shareholders lost billions in the spreading credit crisis are scheduled to testify before Congress on Friday...

Here's a few more:

In Illinois, Attorney General Lisa Madigan is trying to determine whether Countrywide, the nation's largest mortgage lender, and Wells Fargo, the second-largest lender, put black and Latino borrowers in subprime or other high-cost loans when they could have qualified for a lower-cost loan.

If the subpoenas find evidence of discriminatory lending practices, Ms. Madigan may push lenders to more aggressively modify loans to minority borrowers in financial distress so they can stay in their homes, or seek other monetary remedies in addition to changes in how loans are made, said Deborah Hagan, chief of the Illinois Attorney General's Consumer Protection Division. The investigation might be extended to other lenders, she added.

On Friday, Massachusetts Secretary of State Bill Galvin, the state's top securities cop, filed a complaint accusing Merrill Lynch of defrauding the city of Springfield, as Jenny Anderson reports in the New York Times: Massachusetts Accuses Merrill of Fraud. The story notes that just the day before Merrill had agreed with Massachusetts attorney general Martha Coakley to reimburse Springfield its investment losses based on a claim of improper sales practices, but that the Galvin suit goes to suitability. Putting an 80-year old retiree, for example, in a high-risk, high growth investment would be an unsuitable practice. In the Galvin complaint, the state argues that the city asked for Triple-A rated investments and was instead put into

"certain esoteric financial instruments known as Collateral Debt Obligations (CDOs)... which were unsuitable for the City and which, within months after the sale, became illiquid and lost almost all of their market value."

As Anderson reports:

The case underscores how subprime investments keep turning up in unexpected places and raises new questions about Wall Street's sales practices and its role in the mortgage crisis. In recent years, as home prices soared and mortgage lending boomed, investment banks packaged hundreds of billions of dollars of home loans into securities for sale to investors around the world. Now, record defaults are resulting in huge losses for municipalities, states, banks, insurance companies and nonprofit organizations.

The Supreme Court has just issued its disappointing opinion in Stoneridge, holding that only the government, but not aggrieved small investors, could enforce the securities laws against professionals (lawyers and accountants) who help companies cook the books. We had filed an amicus on the opposing side, jointly with the AARP and Consumer Federation of America. I say "film at 11" as if it is somehow news that the court has once again ruled in favor of powerful interests and against small investors. Justice Stevens filed a strong dissent, joined by Justices Ruth Bader Ginsburg and Souter and arguing that investors do have a cause of action under Section 10(b) of the securities law against the professionals who aid and abet wrongdoers. From the dissent:

While I would reverse for the reasons stated above, I must also comment on the importance of the private cause of action that Congress implicitly authorized when it enacted the Securities Exchange Act of 1934. A theme that underlies the Court's analysis is its mistaken hostility towards the 10(b) private cause of action. [...] In light of the history of court-created remedies and specifically the history of implied causes of action under 10(b), the Court is simply wrong when it states that Congress did not impliedly authorize this private cause of action "when it first enacted the statute."

Yesterday, the Solicitor General of the United States ignored the SEC and filed a Supreme Court amicus brief urging the court to protect powerful corporations against investors in the case Stoneridge Investment Partners v. Scientific-Atlanta. The case concerns when powerful professional advisors -- such as banks, lawyers and accountants -- can be held liable for participation in schemes to defraud investors. In May (previous post), the SEC (an independent expert agency) had voted unanimously to file a brief on behalf of investors in the case, but it appears that this president and his political advisors have forgotten all the lessons of Enron. Along with AARP and the Consumer Federation of America, we filed a brief on behalf of investors as have House Financial Services Chairman Barney Frank (D-MA) and Judiciary Chairman John Conyers (D-MI) (their release with link to brief).

A wide variety of law professors, pension funds and state attorneys general also filed briefs siding with small investors against corporate wrongdoers. Here's a summary of the issues from American Lawyer. The story notes that

The last time the Supreme Court directly addressed this issue was 1994, in Central Bank of Denver v. First Interstate Bank of Denver. The Court held that private securities actions can be brought only against someone who is a "primary violator," and are barred against anyone who simply "aids and abets" corporate fraud.

Despite the joint testimony of all 5 SEC commissioners yesterday that Congress needs to take no action to amend the Sarbanes-Oxley Act, expect a floor amendment from Reps. Scott Garrett (R-NJ) and Tom Feeney (R-FL) today to the Financial Services Appropriations Act for Fiscal Year 2008. Our letter -- with the Consumer Federation of America and others -- in opposition. The Garrett-Feeney amendment is part of the incessant but unsubstantiated bleating from the U.S. Chamber of Commerce to weaken this critical Enron reform law's Section 404, which provides that corporate officers assess and corporate auditors attest to the veracity of financial statements. The amendment would delay implementation of Section 404 yet again for smaller public companies. As our letter points out:

At those companies where it has been implemented, SOX 404 has brought about dramatic improvements. It has uncovered thousands of material weaknesses in internal controls – 1,300 in 2005 and 1,118 in 2006. That drop in material weaknesses between 2005 and 2006 reflected the fact that 404-compliant companies saw a 35 percent drop in material weaknesses.

The Supreme Court today made it harder for investors to bring lawsuits, by raising pleading requirements in a ruling strengthening the draconian 1995 Private Securities Litigation Reform Act, a bad law unfortunately passed over a presidential veto. Decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd. Here are stories in the New York Times and Newsday (from the Chicago Tribune). As Steve Labaton of the New York Times reports:

The Supreme Court dealt a new blow today to investors suing companies over accusations of fraud when it set a higher standard to prevent the lawsuits from being dismissed.

Most Americans think that everyone with a dispute has the right to a day in court. Wrong. On Tuesday, I am speaking on a panel in Philadelphia, at a conference of the National Association of Consumer Agency Administrators. The topic: Binding mandatory arbitration. It's an important access to justice issue that may finally be receiving serious legislative scrutiny, with hearings and bills to protect consumers, employees and farmers under consideration in both the House and the Senate. And, investor arbitration is the topic of Washington Post syndicated columnist Michelle Singletary's column today: If you take on your broker, you're likely to lose.

Who is being forced into arbitration? Pretty much everyone, including identity theft victims of MBNA credit card bank. Identity theft victims? They never had an account! Yet, as described in recent testimony by Paul Bland of Public Justice, MBNA routinely files arbitration claims seeking "unpaid" debts from the victims, and gets its favorite arbitration company to "blackball" arbitrators that rule for the consumer, even once.

Did I say "pretty much everyone?" Wrong. Car dealers convinced Congress to pass a law a few years ago protecting them, as "small" guys, from mandatory arbitration in disputes with car manufacturers (big guys). What about car buyers? Arbitration. Must be as big and powerful as car dealers. However, at the end of the last Congress, the Sens. Jim Talent-R-MO and Bill Nelson (D-FL) amendment banning mandatory arbitration as an unfair practice in predatory loans to military personnel became law as part of S. 2766, the 2007 Defense Appropriations bill. That was an important step.

Over the last 15-20 years, a concerted effort by corporations and their law firms has resulted in the insertion of binding mandatory arbitration clauses into virtually all consumer, employee, investor, small farmer and other small business contracts. In many cases, the consumer never even signed that contract (and most are one-sided standard form contracts, anyway, not negotiable contracts); rather, it was amended with a "blow-in insert" to a monthly credit card or other bill, sometimes with a "right" to opt-out or decline the change. Employees have no real choice, either, of course, other than quitting. As for the farmers, when the agribusiness truck full of baby chicks arrives, they don't get the truckload unless they sign the receipt that includes an "I agree to arbitration" line.

In his recent detailed testimony at a hearing (all testimony) of the House Judiciary Committee, consumer lawyer Paul Bland of Public Justice explained that private arbitration firms are using practices that make arbitration even more unfair:

Private arbitration companies are under great pressure to devise systems that favor the corporate repeat players who draft the arbitration clauses (and thus decide which arbitration companies will receive their lucrative business). For example, arbitrators who rule against corporations and in favor of individuals are often blackballed from serving as arbitrators in future cases. Also, some arbitration companies have undertaken advertising campaigns aimed at prospective corporate clients which make a number of inappropriate promises of favorable treatment.

The Singletary column reports on a study that finds it is getting harder and harder for small investors to win claims against their brokers. While this is true, the small investor arbitration system run by the private regulator known as the NASD remains one of the few arbitration systems that is not stacked completely against the consumer. As an example concerning the private firm known as the National Arbitration Forum in Paul Bland's testimony explains:

From material taken from NAF's website disclosures pursuant to California's disclosure requirement, enclosed as Exhibit 8 hereto are the results from a single quarter's worth of decisions by just one NAF arbitrator. This person handled 80 cases brought by banks against individuals, and ruled for the bank in all 80 cases. In 78 of the 80 cases, she gave the bank 100% of the amount it claimed, in two cases, she gave slightly less. She also ruled on one claim brought by a consumer against a bank, and dismissed it.

A large number of cases have been documented establishing that the NAF has entered awards in favor of MBNA and other lenders against persons who were identity theft victims who did not, in fact, owe any debts.

Among the pro-small guy arbitration bills that have been introduced in the 110th Congress are the following:

We expect many more bills to be introduced. And we expect a lot of Congressional action to restore access to justice. Visit the PIRG-backed Givemebackmyrights.org campaign for more information.

Carrie Johnson of the Washington Post has a followup story Frank Critical of Bush on Suits discussing responses of House Financial Services Committee Chairman Barney Frank (D-MA) and others to the stunning news that the President's input had over-ridden the request of the independent Securities and Exchange Commission (SEC) that the U.S. file a Supreme Court brief in support of investors.

"You've got the president making economic arguments," Frank said in an interview yesterday. "Those aren't legal arguments. . . . I think they're setting a bad precedent." [...] AFL-CIO President John J. Sweeney yesterday called the administration's inaction "among the most outrageous events in the long and sordid history of the Enron scandal."

The Washington Post reports today in SEC to Side With Enron Plaintiffs by Carrie Johnson that the SEC "has asked the U.S. solicitor general to file court papers supporting investors in an upcoming Supreme Court case, an action that has not been made public." It's not a new view, it merely means that the SEC is not switching sides, as many worried it might, at least for now. See my previous post.

Today's Wall Street Journal story SEC's Allegiances Are Put to Test by Kara Scannell (pd. subs. req'd) explains an important behind-the-scenes investor protection battle that will affect Enron and other investor litigation. Will the SEC under Chairman Cox file an amicus brief to the Supreme Court that continues to support an investor's right to sue a bank or lawyer or accountant that has directly participated in a company's scheme to defraud investors? (The legal issues and circuit splits leading to the case are explained here .) In pre-Cox cases, the SEC had filed amicus briefs supporting plaintiffs on scheme liability. But the Cox SEC's brief in another recent case, where it supported raising already-high pleading standards for plaintiffs, worries investor rights advocates. Is a reversal from investor champion to fraudster champion next for the SEC?

Yesterday, I was privileged to speak on a panel called "Investor Protection Through Effective Enforcement and Regulation" at the spring Public Policy Conference of the North American Securities Administrators Association. NASAA is comprised of U.S. state and Canadian provincial securities law enforcers. It plays a critical role in policing the markets. Keynotes were U.S. Senator Robert Casey (D-PA) and former SEC Commissioner Harvey Goldschmid, who is now back at Columbia Law School. MORE.

Recently, despite dramatically improved market confidence and performance due to the results of the Sarbanes-Oxley Corporate Reform Law enacted to clean up the mess left by Enron, Worldcom and other fiascos, the U.S. Chamber of Commerce and various Wall Street interests have released three pseudo-academic reports purporting that America is falling behind in global finance. Their reason? America's too-tough investor protection laws and that burdensome Sarbanes-Oxley Act, especially its Section 404, which simply requires corporate CEOs to certify that the books aren't cooked. As I pointed out to the NASAA officials, recent letters to Congress from U.S. PIRG, the Consumer Federation of America and others have explained the fallacies in the reports' analyses.

On a positive note, House Financial Services Committee chairman Barney Frank (D-MA) recently condemned one report recommendation supposedly under active SEC consideration: requiring defrauded shareholders to submit their fraud claims to arbitration rather than have their day in court. Professor Goldschmid called that idea "nutty" in his excellent remarks. As for the purported global finance crisis, my fellow panelist Damon Silvers of the AFL-CIO suggested that the reports by the Chamber and others were seeking "protectionism," not for steelworkers or textile workers, but for Wall Street bankers making $50 million/year.

On Tuesday, the Senate defeated the anti-investor DeMint (R-SC) amendment to S. 761, the America Competes Act. The vote against the DeMint amendment to gut the Sarbanes-Oxley Corporate Reform Act was 62-35. (Yes, to table DeMint amendment, is the pro-investor vote.) Chairman Dodd (D-CT) and ranking Republican Richard Shelby (R-AL) of the Banking Committee led the fight against. Senator Shelby led a total of 14 Republicans against the wrong-headed proposal backed by the U.S. Chamber of Commerce. His leadership helped bring the Chamber to a crushing defeat, signaling that its well-heeled campaign to weaken investor rights is not gaining traction on the hill. Senator Landrieu (D-LA) was the only Democrat present who voted against. Our previous blog has details.

Here's a letter to the Senate from U.S. PIRG, Consumers Union, Consumer Federation of America and Consumer Action opposing a possible anti-investor floor amendment to be offered to S. 761, the America Competes Act by Senator Jim DeMint (R-SC) on the Senate floor today. Excerpt from our letter:

Sen. DeMint has suggested that the Sarbanes-Oxley Act has eroded the competitiveness of U.S. markets. This argument simply is not supported by the facts. In fact, by every important measure of competitiveness -- the ability to attract capital, to provide companies with access to low-cost capital, and to provide individuals and institutions with a safe and profitable place to invest -- SOX has helped not hurt our markets. Moreover, by undermining important protections that attract capital to our markets, Sen. DeMint's amendment would seriously endanger our competitive advantage in these areas that are most important to the overall health of the U.S. economy.

We have heard reports that Sen. Jim DeMint (R-SC) may offer an amendment to S. 761, the America Competes Act, on the Senate floor Tuesday. His amendment is a bad idea and we urge opposition. It would make compliance with the "No More Enrons" internal control provisions of the Sarbanes-Oxley Act voluntary for the majority of public companies (those with market capitalization of less than $700 million each). The amendment would harm investors and undermine the competitiveness of U.S. capital markets. That the Senate may even consider an amendment such as this is not a response to any competitiveness problem. It's simply a testament to how much money the U.S. Chamber of Commerce is spending promoting its campaign to weaken investor protection laws. They've got their reports and they've got their press events. Both are weak on facts and long on rhetoric. Here's a recent consumer group letter with the 411 both you and the Congress need to cut through the PR fog.

The SEC has scheduled a public meeting tomorrow Wednesday to discuss the Public Company Accounting Oversight Board (PCAOB). In a preview story -- Some Accuse SEC of Pushing Accounting Board, Tilting to Business in Rules Process -- by Marcy Gordon of the AP, investor protection experts express serious concerns:

"This is an effort to make sure that investors never learn about material weaknesses" in companies' financial controls, said Lynn Turner, a former chief accountant at the SEC.

Barbara Roper, director of investor protection at Consumer Federation of America, said the SEC move was a way of gutting Sarbanes-Oxley's internal-controls requirement, called Section 404, "without openly repealing it." "This is just the SEC pandering to business interests by rolling back a regulation that has proven to be effective," Roper said.

Over at tompaine.com, excutive editor Isaiah Poole has a nice column -- A License To Commit Fraud -- critiquing a recent Fifth Circuit decision that immunized some of Enron's investment banks from liability to investors. Poole quotes a partial dissent from Judge James L. Dennis that the ruling: "immunizes a broad array of undeniably fraudulent conduct from civil liability ... effectively giving secondary actors license to scheme with impunity, as long as they keep quiet." Poole makes similar points to plaintiff's attorney Al Meyerhoff, who says: "Participation in fraud has thus been elevated by the Fifth Circuit to simply another line of business."

We've joined the Consumer Federation of America and other leading groups in letters to Hill leadership and committee chairs, urging them to reject the unfounded call from various business groups and some smattering of academics to roll back the Sarbanes-Oxley Corporate Reform Act and other investor protection laws. [Here's the leader letter ; the others are similar. And here's a Reuters story on it.] Excerpt from our letters:

The war that is being waged on investor protections is based on the fallacy that U.S. markets are losing their competitive edge and that the U.S. enforcement and regulatory environment is a key reason why. Nothing could be further from the truth. In fact, our markets are thriving even in the face of the growing strength of foreign competitors. They are able to do so not despite but because of the world class investor protections they offer. Because the advocates of a regulatory rollback misdiagnose the problem, they prescribe a dangerous "cure" that threatens to undermine the very basis on which our markets are best able to compete -- their unrivaled ability to attract capital, to provide investors with a safe and profitable place to invest, and to provide companies with the lowest cost of capital in the world.

Why investors need strong laws: From the SEC ---

Washington, D.C., March 1, 2007 - The U.S. Securities and Exchange Commission today charged 14 defendants in a brazen insider trading scheme that netted more than $15 million in illegal insider trading profits on thousands of trades, using information stolen from UBS Securities LLC and Morgan Stanley & Co., Inc.

This week, we joined the Consumer Federation of America and Consumer Action in detailed comments opposing proposed rollbacks of accounting standards by the Public Company Accounting Oversight Board, or PCAOB, (say "peek-a-boo") (PCAOB Letter) and the SEC (comments to SEC). Over at the Corporate Crime Reporter, editor/publisher Russell Mokhiber -- the nation's only fulltime reporter on the corporate crime beat -- has a detailed story on our PCAOB filing. MORE:

When Congress said "No more Enrons" and enacted the Sarbanes-Oxley (SOX, or oddly, Sarbox) corporate crime law in 2002, two core parts of the law were its creation of a new investor protection watchdog known as the Public Company Accounting Oversight Board and its Section 404 -- which requires CEO-certification of financial statements. These two investor protection measures have been under a relentless and unwarranted attack by the U.S. Chamber of Commerce. To believe the Chamber, you'd think that these important investor protection measures were steps toward a corporate apocalypse.

The result has been predictable. Both the SEC and the PCAOB have attempted to appease the Chamber by responding with a slew of anti-investor rollback proposals. These proposals by the government are being put forward despite any documentation of a real problem, and significant counter-evidence that the law is working fine.

As our PCAOB letter points out, one-time startup compliance costs are dropping dramatically for companies in their second year under Section 404, and further, the benefits of Section 404 far outweigh its costs:

Moreover, substantial evidence supports the conclusion that SOX 404 brings benefits that greatly exceed its costs. That evidence takes a number of different forms. These include: statements by institutional investors that they have seen significant post-SOX improvements in the quality of financial reporting; statements from senior managers of public companies that it has helped them to streamline and improve processes and make better business decisions; evidence that, absent the requirement, many public companies had failed to maintain adequate internal controls or report weaknesses in those controls; and academic research on the effects of SOX 404.

The significant difficulty that many public companies experienced in implementing Section 404 -- a factor that has helped to drive up implementation costs -- has been taken by some to imply a problem with the standard itself. AS2 [the implementing standard] can hardly be blamed, however, for public companies' poor compliance with a requirement that has been on the books for decades, for their lack of adequate competent personnel to oversee controls, or their failure to adopt adequate control systems.

Finally, the latest shrill attack on SOX is that has caused massive "Capital Flight" -- the claim is that companies are going public" not in New York or Silicon Valley, but in Europe and Asia, due to the new law. Yet, as we document extensively, their argument is not based on the facts:

In making its case against SOX 404, the business community has repeatedly argued that a relaxation of the standard is needed to preserve the competitiveness of U.S. securities markets.

Recent reports have thoroughly discredited this argument. For example, a study by Thomson Financial analyzing 20 years of initial public offerings (IPOs) reportedly found no noticeable ill effects from SOX. Instead, they found that foreign IPOs accounted for 16 percent of IPOs in the United States last year, the highest proportion in the 20 years covered by the study. Furthermore, the $10.6 billion foreign companies raised through U.S. IPOs last year represented a 23 percent share of U.S. IPO volume, the highest level since 1994, according to the study.

To the degree that the United States has seen a decline in its share of global IPOs, a number of analyses, including recent reports by Goldman Sachs and Ernst & Young, have clearly documented that other factors are primarily responsible. The Goldman Sachs analysis notes that U.S. share of global equity market capitalization dropped dramatically from 1970 to 2000, long before the passage of SOX, attributes recent IPO trends to "economic and geographic factors" as well as the spread of the "U.S. capital market 'culture'" and notes that U.S.-based but globally minded firms stand to benefit from the growth of world markets.

U.S. Reps. George Miller (D-CA), the chair of the U.S. House Committee on Education and Labor, and Barney Frank (D-MA), the chair of the Financial Services Committee, have sent President Bush's counsel Fred Fielding a letter asking whether Sallie Mae chief Albert Lord's sale of 400,000 shares of stock just 3 days before the budget announcement, and therefore four days before the stock price tanked, may have benefited from communications from the White House: MORE:

As you know, the President has called for more than $17 billion in cuts to the lending industry, including $11 billion in reduction to Special Allowance Payments (SAP). Such cuts could have an impact on the financial health of companies such as Sallie Mae, which are wholly reliant on the federal student loan program. Given the timing between the stock sale and the public announcement of lender cuts, we seek additional information about these events. Specifically, we ask that you provide us with the details of any and all communications between the White House and SLM Corp. and its agents beginning November 1, 2006 through the date of this request.

Sallie Mae spokesman Tom Joyce said the timing of Lord's stock sale just before such market-moving news was "utterly coincidental."

In 1994, U.S. PIRG unsuccessfully participated in an amicus brief before the Supreme Court in a case, Central Bank v. First Interstate Bank, in which the court essentially abolished the right of defrauded investors to hold accountants and lawyers responsible when their actions, or inactions, aided and abetted securities fraud by their clients. But winning that case wasn't good enough for the lawyers and accountants and their clients. In 1995, Congress passed, over a Clinton veto, anti-investor legislation known as the Private Securities Litigation Reform Act, sponsored by then-Representative Chris Cox, now chairman of the SEC, and Senator Chris Dodd, now chairman of the Senate Banking Committee. The bill raised the bar against liability even higher. Not enough, so the following Congress, additional restrictions were placed on the right of aggrieved investors to bring cases in state court in the Securities Litigation Uniform Standards Act. Then came Enron, and Worldcom, and Tyco, and Global Crossing, and a host of other cases, so the accountants hid out for a few years. Now they are back. Check out Steve LaBaton's story in today's New York Times, S.E.C. Seeks to Curtail Investor Suits:

The Securities and Exchange Commission has begun to take steps on two fronts to protect corporations, executives and accounting firms from investor lawsuits that accuse them of fraud. Last Friday, the commission filed a little-noticed brief in the Supreme Court urging the adoption of a legal standard that would make it harder for shareholders to prevail in fraud lawsuits against publicly traded companies and their executives. At the same time, the agency's chief accountant told a conference that it was considering ways to protect accounting firms from large damage awards in cases brought by investors and companies.

Several papers have stories today on yesterday's SEC's civil complaint against 21-year-old Floridian Aleksey Kamardin, said to be linked to a ring of Eastern European hacker/ID thieves who are taking over investors' online stock trading accounts for the purpose of manipulating the markets. It's a new variation of the old "pump and dump" scheme that the Washington Post's Ellen Nakashima calls Hack, Pump And Dump. From the SEC:

SEC Sues Floridian for Scheme to Intrude Into Online Accounts, Manipulate Market

The United States Securities and Exchange Commission today filed a complaint in the United States District Court for the Middle District of Florida charging twenty-one year old Aleksey Kamardin with participating in a fraudulent scheme to manipulate the prices of numerous stocks through the unauthorized use of other people's online brokerage accounts.

Barney Frank in today's Washington Post: "I didn't even know they had a chimney at the SEC, and then all of a sudden this came slipping down it." In numerous media opportunities this fall, the incoming chair of the U.S. House Financial Services Committee, Rep. Barney Frank (D-MA), had indicated that the committee would scrutinize rising levels of executive pay. Based on news stories today, it looks as if Chairman Frank will be bringing his former House colleague Christopher Cox, now-chairman of the Securities and Exchange Commission (SEC), before his panel sooner rather than later to explain the agency's abrupt decision last week -- without either a public vote or a public comment period -- to reverse a previous position and allow companies to report stock options granted to executives over a period of years, not in the year they are granted. The effect will be to lower apparent compensation to executives, and to mask the growing divide between what companies pay employees and what they pay executives. Also quoted was former SEC chief accountant Lynn Turner:

The change "will make it harder for investors to get a transparent picture of the magnitude and value of options being granted to corporate executives."

Corporate and conservative interests opposed to strong investor protection rules made their case in oral argument in federal district court yesterday, challenging the constitutionality of the PIRG-backed Public Company Accounting Oversight Board (PCAOB), according to the Washington Post. The PCAOB was established by the Sarbanes-Oxley corporate reform act passed in the wake of the Enron, Worldcom and other corporate scandals and, along with the so-called SOX law itself, has been under attack by the U.S. Chamber of Commerce and its various fellow travelers, including the plaintiff in this case, a supply side "think tank" known as the Free Enterprise Fund, ever since. Heavy hitters including Kenneth Starr, the former U.S. Solicitor General, are backing the lawsuit, which claims lofty constitutional principles but could gut investor protections, as this story in Accountingweb points out.

The Lafayette Federal Credit Union in Kensington, MD is claiming on its website that members have approved management's "take-the-money-and-run" plan to convert to a for-profit bank. Meanwhile, according to the Washington Post, insurgent members continue to organize to oust the board members seeking conversion. Also, the Post reports that the National Cooperative Business Association continues to assist members who say they never received ballots. The conversion vote must still be approved by regulators at the National Credit Union Administration. Our previous blogs explain the problem of credit union conversions, which are being driven not by the business needs or original public-interest, community welfare purposes of these member-owned bank alternatives but instead by a small number of wrong-way leaders dreaming of potential personal profit.

For many years since his retirement from the New York Times, renowned investigative reporter and author