Statement of Senator Michael B. Enzi
On Senator Specter’s ‘Aiding and Abetting’ Amendment for the Proposed
Restoring American Financial Stability Act
I rise today to talk about Senator Specter’s amendment #3776 - a very technical legal issue which crosses the professional fields of accounting, tax preparation and legal counsel. However, to understand where Senator Specter would take this amendment, I want to explain where we have been.
In 1995, Congress rightly decided that the Securities Exchange Commission (SEC) should have sole authority and ability to prosecute criminals violating securities laws. This decision was made because we knew that private securities lawsuits would be driven by the wrong factors. At that time, we saw how just a handful of law firms were using class action lawsuits to clog up the courts and to tie up companies in litigation for years for mere fluctuations in companies’ stock prices. Private lawsuits would have negative impacts on our economy and private securities lawsuits would potentially open up small businesses to unwarranted liabilities – just as these small businesses are struggling to make a come-back and hope to hire more workers to stimulate our economy.
Fifteen years later in 2010, Senator Specter has introduced an amendment which would run contrary to Congress’ decision. Senator Specter’s amendment would create what’s called a ‘private right to action’ – meaning trial lawyers are going to have a field day with this. What’s worse though, is that the legal standard included in this amendment just won’t hold water. The standard for ‘aiding and abetting’ in this amendment has been adjusted three times in two weeks and it still isn’t right. The standard in this amendment requires, “actual knowledge of the improper conduct underlying the violation” and of “the role of the person in assisting in such conduct.” This standard is only slightly better than the first two proposals discussed earlier in this debate.
At first glance this standard may seem like all that’s needed to show that someone has aided another in the act of committing fraud. It would seem that if a person has knowledge of improper conduct and knows that they are helping that person—this would be a simple legal matter. However, this is absolutely not the case. I will explain why in just a minute.
Now I am not a legal mind debating legal standards or case law. However, I am a business man and accountant by trade and I can see what this poor legal definition will do, not only to the business of accounting, but to our domestic securities industry as well. Tinkering with the language of this amendment doesn’t conceal the fact that the real world impact of this provision has not changed.
I need to point out that the legal standard this amendment would set has holes. Using the argument laid out in the Specter amendment, here is another example. You see person “X” running through the park. Having seen this person running, you now have knowledge that X was running. As a passerby, you got out of X’s way so that they could continue on their run. If we were to apply the Specter standard, even if you have never met this person, you would have knowledge of this person’s actions (running) and you got out of their way on the sidewalk (aiding). If this person has just robbed a bank, under this standard, you could now arguably be considered a secondary accomplice.
In another less hypothetical example, if a lawyer reviews a client’s statement to their investors, approves what has been written, and the client falsified those statements – the lawyer is completely liable, despite not knowing the client’s disclosures were false.
Although changes from the first draft of this amendment to what is before us now are somewhat better, this amendment is still unacceptable. This amendment does not require that the person in question has knowledge that the primary violator has broken the law – it just requires that the person is aware of the conduct itself.
In other words, one doesn’t have to know that they are helping someone violate the law -- which is what aiding and abetting is -- one just has to know of the conduct. I will say that again. This standard only requires that one knows of the “improper conduct” NOT that he “knows the conduct is improper.” This is a critical and unacceptable difference. To be clear, this standard does not even meet what is used by the SEC to prosecute criminal aiding and abetting charges. The SEC standard is significantly higher.
Because the standard in this amendment is so flawed, we would be opening up thousands of innocent small businesses to secondary charges of fraud. Again, we are not talking about criminal charges here. These charges would strictly be considered in civil court. Keeping this standard would give profit-motivated trial lawyers a vague statutory standard to work from. They would be able to cast a wide net for defendants and this opens up professionals or their company to the costs of discovery and trial, in addition to liability for damages awarded in the rest of the criminal case.
Let’s not forget, we are talking about the accountants, tax preparers and attorneys who aid everyday companies. This means these professionals would be faced with a standard of evidence they cannot refute or argue, and could likely be facing unfounded charges. Their options under this standard would be pleading out for millions of dollars even if innocent, or losing even more in the long process of discovery and trial in order to defend themselves and their work. All this for someone who may not have even known the criminal or known that that person’s actions were criminal. Is this how our country’s legal system is supposed to work? Are we really going to incentivize frivolous lawsuits? The Specter amendment’s standard may even go so far as to hold these professionals liable for not finding fraud.
I also want to note that this proposed amendment also goes beyond just the actions of some accountants or lawyers involved in the securities industry. Senator Chuck Schumer and Mayor Michael Bloomberg of New York City commissioned a report which found that meritless securities lawsuits are driving up the cost of doing business in securities and driving away foreign investors-- making the United States less competitive worldwide. Having a standard like the Specter amendment proposal means foreign trading partners may be reluctant to bring business here right when our country needs investment the most. Foreign investors will not want to bring business here if doing so exposes them to the private liability Senator Specter’s amendment would create.
As an accountant and former small business owner, and for each of the reasons I have outlined, I urge my colleagues to oppose this ill-conceived amendment.