Good, Bad, and Ugly Day for Investor Protection

Jeff McCord, Contributing Writer

June 6th, 2011 was a big news day for American investor protection.

First, in a surprise win for the public good, the Supreme Court unanimously agreed with Halliburton’s investors that their fraud suit against the oil services and defense giant had been wrongfully killed by the notoriously pro-Big Oil federal appeals court in New Orleans. The case against Hal may now proceed in lower court.

But, in what is likely bad news for American investors, the Deutsche Boerse (DB) is pressuring New York Stock Exchange-Euronext (NYSE) shareholders to sell-out to DB in their July 7 vote — even though neither European nor U.S. regulators have ruled on the legality of this mega-merger that would create the world’s largest securities market.

And, in a related ugly development, the SEC will reportedly wait until the Fall to take a position on the radical Supreme Court Morrison decision that strips Americans of rights under US law when defrauded by off-shore brokers, banks or other foreign based companies (such as the soon to be Frankurt-based DB-NYSE, brokers registered with it and companies listed on it). On the merger itself, the SEC has yet to express an opinion.

We’ll look at each development that total to a good, bad and ugly June 6th for American investor protection.

Supremes Agree with Hal’s Investors on Fraud Suit: Is Dick Cheney Concerned?

National Public Radio succinctly summarized the Halliburton case and yesterday’s good Court ruling:

The high court ruled that investors in Halliburton may pursue a class-action suit against the company for allegedly making false statements in filings with the Securities and Exchange Commission.

The lawsuit charges that Halliburton deliberately made false statements in its public filings from 1999 to 2001 to inflate the price of the company stock. Specifically, the investors allege that the company misrepresented its potential liability in asbestos litigation, among other things. The investors claim that those false statements painted a falsely rosy picture of the company’s financial health, causing people to buy the stock, and that when the company corrected its statements more than two years later, the stock price fell, causing investors to lose money.

Halliburton argued that the investors should not be certified as a class because not all its members showed that they relied upon the false statements. But the Supreme Court unanimously rejected that argument. (Source)

What most news organizations neglect to mention, however, is that then CEO Dick Cheney, during a hunting trip, personally orchestrated Halliburton’s purchase of the politically connected Dresser Industries, a move that dramatically raised Hal’s asbestos litigation exposure. That, in turn, allegedly led the company to lie about its total toxic risks. Ever the Teflon-coated operative, Cheney, is not a defendant in the lawsuit, although he was CEO at the time the company made allegedly false statements to the SEC and investors, and was instrumental in enlarging Hal’s asbestos exposure. (See past Investor Advocate postings for details on the Halliburton case and Cheney’s high profile role.)

Deutsche Boerse Ram Rods NYSE Acquisition Before Regulators Can Rule

When NASDAQ abandoned its attempt to buy the NYSE last month, managers of both DB and NYSE pressed the pedal to the metal on promoting the outsourcing of America’s largest stock market to Germany before regulators on either side of the Atlantic have a chance to interfere.

Even as DB and NYSE managers called for NYSE shareholders to vote for the deal on July 7, NYSE chief executive Duncan Niederauer admitted to Reuters, “We don’t expect to have all regulatory approval by the July vote.” (Source)

As a possible encouragement to ignore regulatory risk, DB and NYSE managers said the combined company would pay each shareholder a special dividend of about $2 per share once the deal is consummated (and probably before regulators rule on its legality).

Although much of the media is cheering on the merger, a few journalists, securities law experts and bloggers (including THE INVESTOR ADVOCATE) have raised warning flags. FORTUNE magazine, for instance, raised doubts about the merger’s advisability as a business venture:

[T]he all-share deal will create an Uberboerse worth around $26 billion, making it the world’s largest exchange (measured by market cap). But, does bigger mean better? (Source)

And, NAKED CAPITALISM voiced unease with an NYSE-DB’s unprecedented concentration of market power:

The arguments in favor of the merger all stress greater efficiency. But as any systems engineer will tell you, improvements in efficiency too often come at the expense of safety. (Source)

The NYSE-DB Capital Colossus May Operate Above US Law

More recently, law professors and investor attorneys have warned that a Frankfurt-based NYSE-DB may well operate above U.S. law, thanks to a Supreme Court decision last summer (Morrison v. National Australia Bank), the impact of which is not fully appreciated by the public.

Under Morrison, companies listed solely on a foreign exchange (like DB today or a Frankfurt-based NYSE-DB tomorrow) or brokers based off-shore (as in Frankfurt), may be immunized against any legal actions brought under US securities law by either private American investors or federal regulators.

James D. Cox, Brainerd Currie Professor of Law at Duke University School of Law and a former legal adviser to the National Association of Securities Dealers explains the problem for investors:

The Morrison Supreme Court decision says that only a security listed in the U.S. or traded here is covered by a private right of action for securities fraud or other related wrongdoing. If the actual New York Stock Exchange trading computer is located in Frankfurt, Morrison means that even a person who buys an NYSE-listed stock would not be able to bring a fraud lawsuit under U.S. law.

USA: A Free Port for Freebooters? Private & Public Enforcement At Risk

Even if the NYSE remains in NY, private investor attorneys worry the Supreme Court may have unknowingly hung an “open for business” sign for off-shore financial pirates and shyster brokers — to say nothing of foreign companies who simply enjoy cooking their books. Salvatore Graziano, president of the National Association of Shareholder and Consumer Attorneys, and former Assistant District Attorney for Manhattan, explained the possible wider repercussions of the Court’s decision:

Under some interpretations of Morrison, the Supreme Court unwittingly has allowed the U.S. to become a safe haven for fraud so long as the securities at issue are listed abroad. Pension funds and other institutional investors face only bad choices if they wish to diversify with non-U.S. securities, because they will now potentially only have recourse under our securities law if a foreign security is listed on an American exchange.

Worse, by broadly ruling that US securities laws themselves do not apply to entities based off-shore, Morrison likely limits the ability of federal regulators — as well as U.S. investors — to take action against foreign wrongdoers who prey upon Americans, even if scams occur on US soil.

Many law professors, former regulators, consumer and investor advocates and others have called upon Congress to overturn the Morrison decision. Congress, however, dropped the ball by asking the SEC to study the matter and report back.

SEC Silent on DB-NYSE Deal, Postpones Report on Anti-US Investor Decision

Earlier this year, the SEC held hearings on Morrison and was expected to report its findings this Spring. Unfortunately, the Commission has reportedly decided to wait until this Fall to issue its findings – well after the NYSE and DB shareholder vote on the merger and when the union will likely be a fait accompli.

With both major political parties knocking on Wall Street doors ahead of the November election and a less-than-aggressive SEC focusing mostly on small-time miscreants, America’s individual pension fund investors may be in for a rocky ride.

More articles by Jeff McCord about investors and securities fraud and the need to improve investor protection can be read at The Investor Advocate

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