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?

Laura J. of Hougen Mead, Wash. asks: ________________________________ Is the new corporate reform legislation retroactive? That is, will it affect executives who previously engaged in corporate fraud? Can we expect to see the arrests of former Enron, Global Crossing and WorldCom executives? Will this have any real influence on boosting the markets and investor confidence? Ronald Berenbeim responds: ________________________________ No. It probably would be unconstitutional if it did. The ex post facto provision of the U.S. Constitution prohibits the prosecution of persons for conduct that was legal at the time that the act occurred. I wish that we could be certain that that all the malefactors in these three cases will eventually be brought to justice. As of this date [Aug. 12], indictments have been limited to the WorldCom situation. Newsweek did report a rumor that Andrew Fastow, Enron's former CFO, may be negotiating a plea bargain. That report is nearly two weeks ago, so it may be that it wasn't true or nothing came of it. All other arrests and indictments have been for personal -- not corporate -- conduct [i.e., tax evasion, insider trading, corporate looting]. Can it be that in the cases you cite, prosecutors do not have the law or the evidence to do so? I am writing these comments on Aug.12. Perhaps by the time they appear, events will prove this skepticism to have been mistaken. Such arrests or indictments are likely to boost market confidence. The Dow soared on the day that the Adelphia executives were arrested. Frank Torres responds: ________________________________ Corporate officers at the center of some of the accounting scandals are already under indictment, including top executives from WorldCom and Adelphia. Federal officials have indicated that they are close to charging Enron executives and there will likely be others facing charges of fraud. It remains to be seen whether any corporate officers will actually serve time in jail. Sending corporate executives to jail is only one part of regaining investor confidence. Congress is still working on other issues needed to restore consumer trust. Sen. Durbin (D-Ill.) and Rep. Delahunt (D-Mass.) have introduced legislation that would help investors get some of their losses back when a company goes bankrupt. Sen. Kennedy (D-Mass.) And others are pursuing reforms that will protect pension funds. Sens. Levin (D-Mich.) And McCain (R-Ariz.) are addressing the issue of stock options. Congress is also investigating the role banks played in the corporate scandals. The SEC is working to implement the requirements of the Sarbanes-Oxley bill, including the creation of an independent oversight board. All these measures will go a long way to restore investor confidence. Lastly, the new criminal penalties, including increased jail time, do not apply retroactively to fraud committed by corporate executives before the Sarbanes-Oxley bill was signed into law. That means that the actions by Enron, WorldCom or Global Crossing corporate officers are not likely to be covered by the new law. Olivia Kirtley responds: ________________________________ The legislation is not retroactive in the sense that it impacts actions taken prior to the date of enactment. However, some provisions might be considered retroactive in their scope. For example, although it is not totally clear from the legislative language, the best reading of the provision requiring the rotation of the lead audit partner and review partner is that the five-year limit is absolute. In other words, if you have been lead audit partner for three years, you can only stay in that position for another two years. As to the arrests of corporate officers -- probably, but that is Department of Justice's call. As to whether this will have any real influence on boosting the markets and investor confidence, that was certainly one of the driving forces of the legislation, but only time and market participants can answer that. In the short term, it could potentially have a negative impact as accounting and financial issues are discussed and disclosed that are difficult for many investors to understand, but over time it should have a positive impact on investor awareness and confidence.