[Congressional Record Volume 148, Number 134 (Friday, October 11, 2002)]
[Extensions of Remarks]
[Page E1831]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


               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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