Fall 2006 MONITOR SECURITIES FRAUD
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MONITOR
S E C U R I T I E S F R A U D
Fall 2006
B E R M A N D E V A L E R I O P E A S E T A B A C C O B U R T & P U C I L L O
The Dating Game: Analyzing the Options Scandals
The number of companies ensnared backdating scandal lost an average of SECURITIES FRAUD MONITOR:
in the backdating scandal just keeps on $510 million in market value – or 8% Your study analyzed the market value
growing. Yet at the same time, many in average loss – in the three weeks after losses of 48 firms that have been
the business lobby continue to argue disclosure of their involvement. By accused of backdating practices. Do
that stock options comparison, the executives involved you think the findings apply to an
misdating is a gained at most a total of $600,000. even broader spectrum of Wall Street
victimless crime. As the study notes: “It appears that companies?
Business Professor the potential benefit to executives from
H. Nejat Seyhun clandestine backdating is miniscule H. NEJAT SEYHUN: We have just up-
begs to differ. compared to the potential damage to dated that initial study to include [a to-
In a soon-to- shareholders.” tal of] 88 firms that have been identified
be-published by The Wall Street Journal or otherwise
H. Nejat Seyhun
study, Seyhun The Securities Fraud Monitor spoke with linked to the scandal. The numbers
and his colleagues at the University Seyhun about the options scandal, did not change significantly, although
of Michigan’s Ross School of Business his research and the implications for the losses did fall slightly – from $500
found that 48 companies linked to the shareholders. million per firm to about $436 million
per company. The corresponding gain
for executives also fell from $600,000
Oklahoma Firefighters v. El Paso Corp.: to $500,000 per year. But qualitatively,
our earlier results continue to hold.
How a Small Fund Made a Big Difference This scandal will eventually cost share-
holders up to $100 billion.
When it comes to securities class ac- securities class action against El Paso
tions, many public pension funds make Corp., which settled for $285 million SFM: We understand you and your
a clear distinction between fulfilling in August. colleagues were studying these back-
their obvious fiduciary duties – moni- “When we first got involved with dating scams long before the regula-
toring potential losses and collecting this case, it was mostly a question of tors and the media caught onto it.
settlement money – and actually filing covering ourselves and being a respon-
lawsuits. sible fiduciary. It was strictly about HNS: The stock price patterns around
Some small and mid-sized funds monitoring our stock losses,” said Bob option grant dates were well known
figure they may never be lead plaintiff, Jones, the fund’s executive director. for a long time. David Yermack [of
especially in a major case, where a “We didn’t think a little fund like New York University] had done a lot
larger institution often holds sway. ours would ever be lead plaintiff. Now of work in the mid 1990s. He showed
So it was with some surprise that the here we are making a big difference stock prices were rising after the grant-
$1.5 billion Oklahoma Firefighters Pen- with one of the biggest settlements of
sion & Retirement System found itself all time.”
in a position to play a vital role in the Continued on page 5 Continued on page 6EDITORIAL
Berman DeValerio Pease Tabacco Dis-Implying Investors
Burt & Pucillo prosecutes class actions
nationwide on behalf of institutions With a Democratic majority, the frequently led by institutions, have
next Congress may prove less sympa- surmounted formidable legal barriers
and individuals, chiefly victims of
thetic to corporate complaints about to win these cases, proved egregious,
securities fraud and antitrust law
burdensome regulation than its Repub- knowing misconduct, and achieved
violations. The firm, which was
lican-led predecessors. Not to worry. record settlements. The florid details of
founded in 1982, has offices in Boston, Business leaders have formed their own these huge fraud cases are well known;
San Francisco and West Palm Beach. “independent committee” to sidestep many of their perpetrators are serving
In addition to conducting litigation, that hurdle. lengthy jail terms.
the firm provides securities fraud The Committee on Capital Mar- If only the understaffed, underpaid
monitoring, evaluation and advisory kets Regulation has been floating trial SEC and Justice Department had any
services to public pension funds and balloons about its plans to make U.S. hope of prosecuting all the wrongdoers.
other institutional investors. stock markets more competitive. None There always have been, and always
of them bode well for investors. will be, too many. The CEO Commit-
Formed with an endorsement from tee knows this, and is counting on it,
The Securities Fraud Monitor is published
Treasury Secretary Henry Paulson,
by the law firm of Berman DeValerio
the committee includes current and
Pease Tabacco Burt & Pucillo, One
former CEOs of a host of firms, notably This is no time to race to the
Liberty Square, Boston, MA 02109, PricewaterhouseCoopers, the NASD, deregulatory bottom.
(800) 516-9926. This newsletter DuPont, Deloitte and Lehman Brothers.
is designed to inform Berman Committee members have been
DeValerio’s clients and friends about quoted as saying their recommenda- not to mention the prospect of limiting
current securities fraud and corporate tions may include urging the Securities enforcement by the SEC by applying
governance issues. It is not a substitute and Exchange Commission to “dis-im- political pressure.
for legal advice. ply” the private right to sue for securi- This is no time to race to the
ties fraud, leaving enforcement solely to deregulatory bottom. Indeed, recent
the government. efforts to force improvements in cor-
If you would like to receive ad-
The rationale offered is that IPOs by porate conduct have been successful.
ditional copies of this issue, or
foreign companies are increasingly tak- The 2002 Sarbanes-Oxley reforms have
if you would like to be added to ing place in countries which don’t have dramatically improved the competence
our mailing list for future issues, pesky requirements and remedies con- and performance of corporate financial
please contact Richard Lorant, cerning the truth or falsity of financial officers and directors and their auditors,
Director of Marketing & Com- statements. If U.S. investment banks and fraud cases are way down.
munications, at (617) 646-1825 or are going to compete for this business, The past year ending June 30, 2006,
rlorant@bermanesq.com. it is said, they need to be able to offer a saw only 129 fraud cases filed, fewer
kinder, gentler regulatory environment. than any one-year period since 1996,
Peter A. Pease, Executive Editor Perhaps it is not surprising that and the percentage of filings per issuer
Paulson, formerly the CEO of Goldman in the first six months of 2006 was
Richard Lorant, Managing Editor
Sachs, would prefer to limit regulation only 0.9%.
Copyright 2006 of the markets in favor of his invest- One would think that the committee
Berman DeValerio Pease Tabacco ment banking brethren. After all, they of CEOs would be pleased that their
Burt & Pucillo and the accounting firms have had to ranks may soon become respectable
www.bermanesq.com pay billions to compensate defrauded again. They can thank healthy regula-
shareholders in recent years. Plaintiffs, tion and remedies for that. ■
SECURITIES FRAUD MONITOR
2Firm Settles Three Cases For Total of $103.5 Million
Berman DeValerio has recently one relating to the auditors’ work for Lastly, the firm has received prelimi-
negotiated three securities class action Symbol Technologies, Inc. Berman nary approval of an $18 million settle-
settlements, obtaining $103.5 million DeValerio had already negotiated a ment in the case against telecom firm
from defendant companies, auditors $139 million partial settlement in the ICG Communications Inc. The firm
and underwriters. Symbol lawsuit in 2004, acting as co- served as co-lead counsel on behalf of
The firm reached a $61.5 million lead counsel on behalf of the Municipal the Strategic Market Analysis Fund.
partial settlement in a class action tied Police Employees’ Retirement System The case alleged that ICG execu-
to an accounting scandal at Philip of Louisiana. tives misled investors, touting the
Services Corporation. Of that, $50.5 The class period in the related case company while failing to disclose prob-
million will be paid by the bankrupt against Deloitte covers those who pur- lems that threatened the company’s
company’s former auditors, Deloitte & chased Symbol stock between March 2, entire ISP business, and while misrepre-
Touche, with another $11 million com- 2000, and Oct. 17, 2002. senting growth, revenues and network
ing from its underwriters. The company, which makes mobile capabilities.
The class action is still proceeding and wireless computer devices, was ICG filed for bankruptcy protection
against individual defendants, with a accused of improperly booking a $10 in November of 2000. A final court
trial date tentatively scheduled for May million royalty payment in the third hearing on the proposed settlement has
14, 2007. quarter of 2000 and of improperly been scheduled for Jan. 12, 2007.
The case stemmed from a January recording more than $40 million in “We’re very pleased with these three
1998 announcement that Philip Ser- revenue in the first quarter of 2001. settlements, particularly given that two
vices would take charges to earnings of The plaintiffs alleged that Deloitte of the companies involved had filed
between $250 million and $275 million had made false statements and/or omis- for bankruptcy protection, making it
for fiscal 1997. That figure later rose to sions on Symbol’s financial statements harder to obtain payments for inves-
over $381 million, with the company for 1999, 2000 and 2001. tors,” said Norman Berman, a partner
restating financials for 1995, 1996 and The case continues against four involved in both the Philip and ICG
1997. individual defendants. cases. ■
The 1995 restatement, for example,
disclosed that earnings had been over-
stated by approximately $22.5 million,
or a whopping 690%.
The share price plunged 80% over
the six months following these dis-
closures, and Philip Services filed for
bankruptcy protection.
Plaintiffs had alleged that the
company and its officers made false
and misleading statements regarding its
publicly reported revenues, earnings,
assets and liabilities.
The class period covers those who
purchased Philip Services stock be-
tween Feb. 28, 1996, and Jan. 26, 1998.
In September, Berman DeValerio
received final approval for another $24
million settlement from Deloitte – this
“All in favor of a cap on our liability?”
SECURITIES FRAUD MONITOR
3Two More Defendants Added to Fannie Mae Case
Goldman Sachs & Co. and KPMG countable,” Block said. “By virtue of the substantial fees
LLP have been added as defendants Goldman Sachs noted its inclusion reaped from Fannie Mae, including tens
in the Fannie Mae securities fraud as a defendant in the quarterly report it of millions of dollars in non-audit fees,
case. The two firms join the mortgage filed in October with the SEC. KPMG had a self-interest in providing
company itself and three former senior According to court documents, the Fannie Mae with healthy audit opinions
officers as defendants in a fraud that is three individual defendants – former and, therefore, an incentive to turn a
expected to result in an $11-billion-plus CEO Franklin Raines; former CFO blind eye to the company’s fraud,” the
restatement. Timothy Howard; and former con- complaint says.
KPMG had been Fannie Mae’s troller Leanne Spencer – manipulated KPMG was terminated as Fannie
outside auditor for 35 years. Goldman Fannie Mae’s financial results in order Mae’s auditor on Dec. 21, 2004.
Sachs served as the dealer and under- to receive additional compensation. The complaint accuses Goldman
writer for a number of Fannie Mae real If Fannie Mae’s earnings hit certain Sachs, meanwhile, of furthering the
estate mortgage investment conduit, or targets, they were rewarded. fraudulent scheme through two REMIC
REMIC, transactions. transactions “for the sole economic
Berman DeValerio, acting as co-lead and improper purpose of shifting $107
counsel, represents the lead plaintiffs, million of Fannie Mae’s earnings into
the Ohio Public Employees Retirement
“It became increasingly future periods.”
System and the State Teachers Retire- clear to us that KPMG and Goldman Sachs “deceived the
ment System of Ohio. Fannie Mae, Goldman Sachs were active investing public by intentionally
also known as the Federal National participants in the designing and implementing sham
Mortgage Association, is the nation’s Fannie Mae fraud and that transactions with no legitimate business
largest source of financing for home they should be purpose in order to create losses for
mortgages. Fannie Mae and create the false appear-
held accountable,”
The Securities and Exchange Com- ance that Fannie Mae’s earnings were
mission has ordered Fannie Mae to
partner Jeffrey Block said. stable and not volatile,” the complaint
restate its financials from 2001 through continues.
mid-2004. The complaint also says that Gold-
The new defendants were included “They each had a strong motive man Sachs had a motive to make Fannie
in an amended consolidated class ac- to manipulate Fannie Mae’s earnings Mae happy; Fannie Mae was one of
tion complaint filed in August 2006. to meet the established targets,” the Goldman Sachs’ largest trading clients.
The additions follow a report by Fannie complaint says. “Indeed, before, during and after
Mae’s regulator, the Office of Federal The complaint says that KPMG the Class Period, Goldman Sachs acted
Housing Enterprise Oversight, which “knowingly or recklessly” issued false as lead manager, co-manager, and
outlined the two firms’ roles in the and misleading audit reports that underwriter in numerous securities of-
fraud. certified Fannie Mae’s financial results ferings for Fannie Mae, through which
Jeffrey Block, a Berman DeValerio for 2001 through 2003, even though Goldman Sachs received substantial
partner overseeing the Fannie Mae case, KPMG knew or recklessly disregarded compensation,” the complaint reads.
said new evidence discovered by the the fact that the audits were not in The case was filed on behalf of
firm and co-counsel led to the decision accordance with Generally Accepted anyone who purchased the publicly
to add the new defendants. Auditing Standards, or GAAS. traded common stock or call options or
“It became increasingly clear to us Between 1998 and 2003, Fannie Mae sold the publicly traded put options of
that KPMG and Goldman Sachs were paid KPMG nearly $53 million in fees Fannie Mae during the period between
active participants in the Fannie Mae – approximately 83% of which went to April 17, 2001, and Sept. 27, 2005. ■
fraud and that they should be held ac- non-audit work.
SECURITIES FRAUD MONITOR
4Small Fund, announced that it had overstated its
proved oil and gas reserves by 41%.
However, the lawsuit alleged that,
the company’s statements of proved
Big Result With Berman DeValerio as counsel, reserves were artificially inflated.
the fund was appointed deputy lead On Feb. 17, 2004, the company
Continued from page 1
plaintiff, and was later elevated to co- announced that an independent review
lead plaintiff in 2005. of its proved oil and gas reserves re-
Not that the fund stepped into its The fund played an active and vital vealed that, as of Jan. 1, 2003, El Paso
new role lightly. role throughout the litigation, particu- overstated such reserves by 41%, or
In 2003, Oklahoma’s board adopted larly when it came time for settlement 3.64 trillion cubic feet. As a result, the
a securities litigation policy, setting a negotiations, said Michael J. Pucillo, company said it would take a pre-tax
loss threshold for case analysis, retain- the Berman DeValerio partner who
directed the case.
Several recent studies have high-
lighted the power of public
fund lead plaintiffs in securities The fund played an active
class actions. Cases prosecuted and vital role throughout the
by institutional lead plaintiffs litigation, particularly when it
have resulted in higher recov-
came time for settlement
eries, lower attorneys’ fees and
improved corporate gover-
negotiations.
nance at companies accused of
wrongdoing.
“By choosing to partici-
pate in this case, Oklahoma charge of approximately $1 billion for
protected the retirement assets the fourth quarter of fiscal year 2004.
not only of its 19,000 members Following these announcements,
but of all investors who were the company’s common stock fell 17.6
misled by El Paso,” Pucillo percent, from a closing price of $8.81
said. “By taking a pro-active approach, on Feb. 17, 2004, to a close of $7.26 on
ing counsel to monitor its portfolio, the fund demonstrated how important Feb. 18, 2004.
and making its trading data available it is for smaller funds to get involved.” Under the terms of the settlement,
electronically for swifter analysis. The Oklahoma fund also is expected $273 million of the total amount will
Berman DeValerio began providing to recoup the expenses it incurred by come from the company and its insur-
monitoring services, calculating po- taking the lead role. ers, and, separately, $12 million from
tential losses and issuing periodic case According to the complaint, El Paso auditors PricewaterhouseCoopers.
recommendations and updates. materially misrepresented its financial Notices advising class members of the
“Our relationship with Berman condition, causing its stock to trade at settlement should be mailed out shortly.
DeValerio’s attorneys strengthened over artificially high prices. The plaintiffs A hearing on approval of the settlement
time,” said Marc Edwards, the board’s alleged, among other things, that the is pending.
attorney. “We were comfortable with company reported strong “proved” The case, captioned Oscar Wyatt v.
them, and confident in the high quality global oil and natural gas reserves. El Paso Corp., was brought in the U.S.
of their work. Moving forward as lead Proved reserves – defined as those District Court for the Southern District
plaintiff simply made sense in this case.” that can be extracted from known fields of Texas. The class period covers all
The Oklahoma fund had no role under existing economic and operat- investors who bought El Paso common
in the case when it was initially filed ing conditions – represent a key metric stock from Feb. 22, 2000, through Feb.
in 2002. But two years later, the fund in assessing an oil company’s future 17, 2004. ■
applied for lead plaintiff after El Paso growth.
SECURITIES FRAUD MONITOR
5Backdating Scandal and report it tomorrow, but pretend I
got it six months ago, then there would
SFM: You have also found strong
evidence of other games executives
Continued from page 1 be a built-in six-month delay. play. Can you explain the difference
ing of options, and he attributed it to We looked to see if these V-shaped between backdating and forward
springloading. Then other researchers patterns around the granting of the op- dating?
noticed that stock prices were falling tions were more pronounced the bigger
before the grant date as well. That was the reporting delays. Data confirmed HNS: Backdating is when the board
called bullet-dodging. our hypothesis. The bigger the report- grants options on a certain date, but
We were not convinced that that ing lag, the bigger the V-shaped price the grant date for the executive is then
was all that was going on, because we reversals around the grant date. We set back to a date when the stock was
noticed that the companies whose finished our paper in January 2005 at a lower price. Since options are
stock price fell before the grant date and sent it to an academic journal for issued with an exercise price equal to
were also the ones whose stock price publication consideration. Unfortu- the stock price on the grant date, that
bounced back after the grant date. nately for us, no one could believe that means the options are immediately “in
While we could believe that bullet- top-level corporate executives would the money.” What is happening here
dodging and springloading could occur do this. They thought our claims were is a form of fraud. The top executive is
outlandish. basically changing the board’s intent
and decision in order to increase his or
SFM: How long did it take before her compensation.
“No one could believe that people did start to believe? Forward dating is another kind of
game. If stock prices have been falling
top-level corporate executives
HNS: We kept trying to publicize our prior to the grant date, there is no point
would do this. They thought findings. But it wasn’t until The Wall in backdating. This would only increase
our claims were outlandish.” Street Journal wrote its backdating story, the exercise prices, and thus reduce the
“Perfect Payday,” in March that people value of the options. However, execu-
started paying attention. tives can benefit by waiting to see if the
in different companies at different stock prices will continue to fall. There
times, we just did not find it credible SFM: Would you say your analysis is incentive to wait for a lower price.
that the same firms could be experienc- provides backdating proof? If prices continue to fall, they can
ing both at the same date. It seemed designate a date in the future (thus for-
too risky and we thought it would be HNS: I wouldn’t say it’s proof, exactly. ward dating) with a lower stock price
impossible to pull off. The company For proof that would stand up in court, as the grant date. If prices immediately
would have to announce some bad you need to look at actual corporate revert up, they can simply report the
news only to be followed a few days documents to see when did the board original date as the grant date with no
later by especially good news. meet and when did the person receive loss of value. Forward dating is harder
Then, in early 2004, my colleague the option grant. Our research provides to detect because there may not be a
M.P. Narayanan had lunch with an convincing statistical evidence. I would built-in reporting delay anymore. [Sar-
executive who said that they were actu- say it is highly persuasive statistical evi- banes-Oxley requires options grants to
ally backdating options in his own firm. dence, but it is still statistical evidence. be reported within two days.]
Backdating could easily explain both There’s always a chance that some- Let’s say I intend to play the forward
the falling as well as the rising stock body may have reported their options dating game. Stock prices have fallen
price patterns. grant late and then got lucky by getting from $50 to $40 and I get the option
Our intuition was the following: if the stock for a minimum price. But award when the stock price is at $40.
companies were backdating, and they based on our research, we can make I decide to wait and not report the
had to report option grants immediate- statements such as “there’s only a one- grants immediately to HR. If the price
ly, then there would be built-in report- in-a million chance that these options continues to fall to $30 and then goes
ing lags. So if I get the option today grants were due to random events.” up, I report the day it was $30 as the
SECURITIES FRAUD MONITOR
6grant date. I get to earn an extra $10 stand. It’s shocking that The Wall Street SFM: What does this scandal demon-
per share from playing the forward dat- Journal ran two or three stories defend- strate about corporate America?
ing game. ing backdating. [WSJ columnist] Hol-
If, instead, the stock price goes up man Jenkins apologizes for corporate HNS: To me, one of the lessons of this
immediately to $41 and the day after fraud that this is not a big deal, but he debacle is just how much control the
that to $42, I simply report that I got obviously missed the point. Somehow top management has over the board of
the options two days ago when the it didn’t register that this is a fraud directors. This really suggests that the
stock price was $40. In this case, it going on. How can he or anyone else top management is running the board
looks like I was honest even though I defend fraud? – not the other way around. It suggests
had intended to play the forward dating What makes this illegal is that top- that the checks and balances of corpo-
game. No one will catch that. In the level management is tampering with rate governance are not there to protect
end, if prices fall, I win. If the prices go corporate documents to the detriment shareholder interest.
up, I don’t lose. This is a nice game of shareholders. It’s as if they added a
for me. zero to their paycheck. SFM: So what are the possible fixes?
SFM: Is forward dating as prevalent as HNS: For starters, the chairman should
backdating? be a separate person from the CEO.
“There’s a lot that people don’t At companies where the CEO and the
HNS: We find very strong evidence chairman are one and the same, it’s
understand. It’s shocking that
for forward dating as well, but it’s more like the fox is guarding the chicken
subtle and much more difficult to catch.
The Wall Street Journal ran coop. Another way to encourage board
It’s probably more egregious than two or three stories defending independence is to make the votes of
backdating. An executive could always backdating.” the board members secret, so none of
pin the blame on the HR department the directors or the CEO knows how the
by saying: “Look, I told HR to process other directors voted. Only the chair-
these grants, but they did not.” Or, person should know.
“Gosh, I forgot to tell HR to process SFM: Explain for us two other dat-
these.” ing game terms: bullet-dodging and SFM: Should regulators be doing more
springloading. to curb these abuses?
SFM: If forward dating is so egre-
gious, how come we haven’t seen very HNS: Bullet-dodging refers to an- HNS: The SEC needs to address
much about it in the popular press? nouncing the bad news before the springloading and bullet-dodging. I
granting of the options. With the bad applaud the new executive compensa-
HNS: I don’t think people understand news out, the stock price is reduced, tion changes the SEC implemented this
what it is. We’re now yelling that allowing the executive to get the stock summer. But they need to put some teeth
there’s another game – the forward dat- at a lowered price. into these changes. Sarbanes-Oxley is
ing game – just like when we initially With springloading, you get the op- all good and fine. But nothing happens
yelled about backdating. People didn’t tions first, then you announce the good when Sarbanes-Oxley is ignored and
pay attention then either. We’re going news. These two practices are very somebody doesn’t file options grants in
to continue to scream here. close to insider trading. If the executive two days. There’s no penalty.
were to buy and sell shares on this news The SEC, for instance, could give
SFM: Do you think the backdating – rather than granting himself options shareholders private rights of action.
scandal has gotten the attention it – he would go to jail for the same So if somebody doesn’t report compen-
deserves? act. Bullet-dodging and springloading sation in two days, investors can file
shouldn’t be treated any differently a lawsuit. Or they could put in some
HNS: I don’t really think so. Again, than insider trading. explicit fines for each occurrence of non-
there’s a lot that people don’t under- compliance. ■
SECURITIES FRAUD MONITOR
7Securities Litigation: Myth and Fact
MYTH: Shareholder lawsuits are spiraling out of control. MYTH: Most shareholder lawsuits are frivolous.
FACT: New lawsuits are actually declining. After a decade FACT: High pleading standards effectively discourage
in which filings held steady at about 200 a year, the num- frivolous litigation. Congress amended the securities laws
ber of new shareholder lawsuits has hit a historic low. The in 1995 and 1998 to address concerns about so-called “strike
number of federal securities fraud class action filings dropped suits.”6 Since then, most securities fraud lawsuits are routed
16% in 2005, declining to 179 cases from 214 the year to federal courts. There, heightened pleading standards make
before. This year, filings are on track to fall to 123 – 36% them harder to prosecute than any other type of private ac-
below the 1996-2005 average.1 tion. Companies are further insulated from frivolous lawsuits
because shareholders’ lawyers can only begin gathering docu-
MYTH: Shareholder lawsuits are lawyer-driven, resulting ments and testimony to support their case after a judge has
in little or no recovery for investors and large windfalls for ruled the complaint meets the high pleading standard.
lawyers.
MYTH: Government authorities can prosecute corporate
FACT: Recoveries are up and lawyers’ fees are down. The wrongdoers all by themselves.
growing involvement of public pension funds and other in-
stitutional investors as lead plaintiffs has increased recoveries FACT: Private litigation is a vital complement to federal
and lowered attorneys’ fees, according to a number of recent and state regulatory efforts. The Securities and Exchange
studies.2 The latest, by St. John’s University Law School Commission and other government regulators and prosecutors
Professor Michael A. Perino,3 suggested that public pension have traditionally relied on the plaintiffs’ bar as an important
funds serve as effective monitors of class counsel. adjunct to their work. As then-SEC Chairman Arthur Levitt
testified in 1995: “Private rights of action are fundamental to
Billions of dollars are recovered each year. A total of $14.2 the success of our markets; they are an essential complement
billion was available to investors in current securities class ac- to the SEC’s enforcement program; and they play a significant
tion settlements as of Oct. 1, 2006, according to ISS Securi- role in helping to ensure full and complete disclosure. The
ties Class Action Services.4 The average size of settlements Commission must oppose any measures that would eviscerate
overall has increased for years, reaching $71.1 million in investors’ legitimate remedies against fraud.”7 What was true in
2005, up 156% from the prior year’s average of $27.8 mil- 1995 is only more so in 2006 – following accounting scandals
lion. That figure does not incorporate mega-settlements in at Enron, WorldCom, Global Crossing and, most recently,
the Enron and WorldCom cases.5 more than 120 companies under scrutiny for improper prac-
tices in stock options backdating. ■
SECURITIES FRAUD MONITOR
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