Silence is golden

With the dramatic crash of so many information technology stocks in recent months, American investors and consumers generally have much to be angry about. Many of the facts in these cases are simply revolting. But, probably the most odious fact of all is the extent to which the directors and officers of the companies involved have been able to retain their ill-gotten gains, while everyone else loses their shirts.

Under the Securities and Exchange Act of 1934, it is unlawful for any person to use or employ, in connection with the purchase or sale of a company's stock, any "manipulative or deceptive device or contrivance." This standard proscribes both the making of untrue statements and the omission of facts from a statement that are necessary to keep the statement from being misleading.

Anyone who is harmed in a securities transaction as the result of a fraudulent or misleading statement may sue for damages all of those who are responsible. Until 1994, this would include any person who aided or abetted the fraud, as well as those who actively participated in issuing the fraudulent or misleading statements. Aiding or abetting in this context could include merely standing silently by while watching others commit the fraudulent acts.

In a 1994 case, however, the U.S. Supreme Court restricted the potential defendants in such cases to those who actually make the material misstatement of fact or who omit a necessary fact from such a statement. As a result, only the "speakers" of false or misleading statements could be sued. Those who silently watched while others committed the fraud could escape liability.

Shortly after the Supreme Court decision, Congress passed the Private Securities Litigation Reform Act of 1995, which imposed even more restrictions on a shareholder's ability to sue the officers and directors of companies involved in fraudulent activities.

One of the most important cases under the new law is a 1997 decision involving Silicon Graphics Inc., in which a number of officers and directors used the new law to escape responsibility for the misstatements alleged in the suit, because those individuals were not the "speakers" of the alleged statements.

Recently, Sen. Richard Shelby (R-Ala.) has tried to interest Congress in correcting this situation, but with little effect. Thus, the recently passed Sarbanes-Oxley Act of 2002, which was supposed to be a remedy for some of the recent corporate shenanigans and which President Bush signed with much fanfare July 30, does not even address this issue. As a result, many corporate officers and directors will continue to escape liability merely by turning a blind eye to the wrongdoing that they should be actively stopping.

If Congress really wants to clean up the stock market mess, it should return to shareholders the right, which the Supreme Court and Congress took from them, to hold accountable the people who should be held responsible.

Peckinpaugh is corporate counsel for DynCorp in Reston, Va. This column represents his personal views.


Materials discussed in this column include: In re Silicon Graphics Inc. Securities Litigation, 970 F. Supp. 746 (N.D. Cal. 1997);

Central Bank of Denver N.A. v. First Interstate Bank of Denver N.A., 511 U.S. 164 (1994);

the Securities and Exchange Act, 15 U.S.C. 78;

the Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67;

the Sarbanes-Oxley Act of 2002, Pub L. No. 107- (was H.R. No. 3763), signed into law July 30, 2002.


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