Friday, July 11, 2003 | 9:49 a.m.
WASHINGTON -- Policymakers are moving to expand shareholders' rights and their redress when they fall victim to securities fraud.
Staff of the Securities and Exchange Commission plan to recommend that the agency give shareholders more power in nominating and electing company directors, and legislation is advancing in the House aimed at getting more money to defrauded investors.
The bill approved Thursday by a House subcommittee angered state officials, however, because it contains a provision they said would preclude states from signing settlements with investment banking firms that mandate changes in how the firms do business.
New York Attorney General Eliot Spitzer, who led the investigation into abuses at big Wall Street firms that resulted in a $1.4 billion settlement and included such reforms, accused Republican lawmakers who wrote the bill of bowing to lobbying by the investment banking industry -- a generous contributor to lawmakers' campaign funds.
"This is part of a concerted effort on the part of ... (House Republicans) to undercut and handcuff the only entities who were willing to protect small investors," Spitzer said in an interview with The Associated Press.
Spitzer, a Democrat, said GOP leaders of the House Financial Services Committee had "cravenly succumbed to the interests of the very investment banks who defrauded the American investor out of countless billions of dollars and now pre-empting the only enforcement agencies who were willing to confront the problem."
Rep. Richard Baker, R-La., chairman of the subcommittee on capital markets and the bill's lead author, dismissed Spitzer's criticism as "ridiculous."
He said the bill puts no limits on state prosecutions of securities violations but prevents a 50-state patchwork of structural reforms in the industry that should be put in place by federal regulators.
In pursuing abuses, the state regulators "can do the same things they do today," Baker said in a telephone interview. At the same time, he said, the legislation would prevent "state-by-state market structure reforms."
The SEC staff, meanwhile, is expected to recommend that companies be required to lift some of the obstacles that prevent shareholders from nominating and electing directors.
The move comes soon after the five-member SEC moved to force companies to get approval from shareholders before lavishing stock options on executives and directors, a move long sought by investor advocates pushing corporate reform.
Excessive pay, lucrative stock options and special deals for executives whose companies have failed and laid off employees have eroded investor confidence already shaken by the accounting scandals of the past year or so. Big state, union and professional pension funds have been pressing for changes to give shareholders more say in companies' decisions on executive pay and other matters.
SEC Chairman William Donaldson said in April that the time has come for a thorough review of the rules governing shareholders' involvement in company decision-making to "ensure that they are serving the best interests of today's investors."
In pursuing the settlement with the 10 Wall Street firms with state regulators, the SEC filed civil lawsuits against the firms that included dozens of e-mail excerpts showing how analysts allegedly misled investors with rosy stock ratings designed to win the firms investment-banking business from the companies issuing the stock. Among the firms were Merrill Lynch, the nation's largest brokerage, Citigroup's Salomon Smith Barney and J.P. Morgan Chase.
Under the settlement announced in April, the investment firms have to sever the links between financial analysts' research and investment banking. The deal established a $399 million fund to compensate defrauded investors; another $487.5 million in fines is going to states according to their population. Investor advocates and lawmakers have criticized the states for largely planning to use the money for things like road improvement and school construction, while only a few will channel it to aggrieved investors.
The legislation adopted Thursday by voice vote allows states to turn over to the SEC for distribution to investors the fines collected in certain cases -- but does not require them to do so, as envisioned in its original draft. The provision was described as a compromise between the Republican lawmakers and state officials.
"Today we're saying that the system should be changed to create the opportunity for real justice," Baker said before Thursday's drafting session and vote. "We're saying that to truly restore investor confidence, fairness is the key."
The bill also would expand the SEC's subpoena authority and its power to impose fines on company executives, and would increase the agency's range of fines, up to a maximum of $2 million.
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