Friday, April 11, 2008

You too Can be a Securities Fraud

Many in the securities industry breathed a sigh of relief when the Supreme Court ruled in Stoneridge vs. Scientific-Atlanta that private individuals may not sue those who allegedly aid or abet a securities fraud (For a full examination of this, see Mark Perry's analysis.). You may wonder why this is a good thing; those who aid fraud should be sued. The problem is that the statutory and regulatory definition of "securities fraud" is so broad and the threshold for it is so low that virtually every law firm, accounting firm, securities firm, and business partner in the country could get swept up, and the resulting litigation tsunami would become the full-time job of the federal courts for time and eternity.

On the other hand, the Supremes made it very clear that the SEC has full authority to pursue such aiders and abettors, and that means if you're even tangentially involved with securities, there could be a wide net and a big club waiting for you. Attorneys and accountants are facing what OB-GYN doctors have faced for years: They can't afford insurance and so stop practicing in that field. It's to the point where the only professionals in the field are ones that small businesses (real small businesses, not ones that look like Microsoft but that the government still defines as small) can't afford. Small businesses will still need money, though it's just that they won't get professional help before they raise it, thus exacerbating the problem. So whether they're issuing promissory notes to investors, printing the money in the basement, or dealing meth behind the shop, they'll end up breaking the law. Except that dealing meth carries smaller fines and shorter prison sentences.


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