WALL STREET REFORM

August 2002
		How can the Bush administration and Congress clean up Wall Street and restore investor confidence in the wake of corporate scandals?

Forum Introduction Do stock options act as invitations for corporate fraud and misleading financial statements? Did Enron's trading of energy futures on the Commodity Futures Exchange enable it to mislead investors? How much should people with mutual funds worry about corporate corruption and accounting scandals? What is the role of a corporate board of directors? Will the conviction of corporate executives have any real influence on the markets? What would have happened if legislation to privatize a portion of Social Security had been approved? What happened to all the money that people lost -- was it ever 'real'? Why not limit the amount of time an accounting firm can serve as a company's independent auditors?

Bobbi Everett of El Cajon, Calif. asks: ________________________________ Do people with mutual funds have to worry about corporate corruption and the recent scandals at Enron, WorldCom and Global Crossing? Why does it seem like these cases occurred specifically in telecom and energy companies -- both industries that were recently deregulated? Should I avoid investing in such markets? Ronald Berenbeim responds: ________________________________ Most diversified mutual funds are likely to have at least some stock in these companies. Many specialized funds could be heavily invested. It is estimated, for example, that approximately 60 percent of Enron employees' 401(k) plan assets consisted of Enron stock. It is not coincidental that the cases occurred in recently deregulated industries. The absence or lifting of regulatory barriers is an irresistible temptation and it often leads to disaster. For example, product liability lawsuits bankrupted two companies that with little experience in the business decided to market implantation devices. AH Robins [Dalkon Shield] and Dow Corning [Silicon Breast Implants] thought they could enjoy pharmaceutical-style profit margins without the FDA regulatory testing requirements. These companies learned to their sorrow that FDA testing might have helped them to avoid many problems. Surgically implanted devices now require FDA approval. Maybe there will be lower profits and fewer bankruptcies. Frank Torres responds: ________________________________ It is clear that the recent scandals had an impact on nearly every investor, including those who invested in mutual funds -- either because of direct investments in companies at the center of the storm or indirectly because of the lack of confidence in the market. It is estimated that the average stock mutual fund is down by nearly 21 percent this year, which some experts have attributed to the crisis in confidence in corporate America and further exacerbated as many investors cashed in to try to cut their losses. And investors may face additional hits as corporate CEOs review their company's books in order to meet the requirement under the new law passed by Congress. Some watchdogs believe that there will be more companies restating earnings during this period. The AFL-CIO, a major labor union, has raised other concerns related to mutual funds. They fear that pension and mutual funds have conflicts of interest because the funds often compete for a company's benefit business, including 401(k) plans. The AFL found that funds often vote with company management on issues like huge executive pay plans rather than watching out for the interests of the shareholders those funds represent. The SEC and Congress are looking into this issue. Some have made the connection between deregulation, particularly in the energy markets, and the recent corporate scandals. Federal and state investigations into the role played by Enron and other companies in last year's California energy crisis are ongoing. Olivia Kirtley responds: ________________________________ People with investments in mutual funds face the same risks arising from misstated financial reports as individual investors. Mutual funds are simply a collection stocks that fund managers have selected to invest in. The fund managers rely on financial reports when they make their investment decisions, as do individual investors.