The U.S. Securities and Exchange Commission granted Tenet Healthcare Corp. an unusual break: The company will be given protection against shareholder lawsuits even though it is being punished for fraud.
The SEC accused the largest publicly traded hospital chain of deceiving investors by failing to disclose a scheme to boost earnings. Tenet Healthcare neither admitted nor denied the allegations but agreed to pay $10 million to settle. Yet, the SEC waived a rule that says companies engaging in fraud lose a statutory shield that makes it difficult for shareholders to sue if forecasts made using the bogus earnings information prove wrong.
This decision is the latest used to demonstrate that SEC and its Chairman Christopher Cox, favors corporations at the expense of investors. During the past six months, the agency created to protect investors has repeatedly taken actually sides against investors after being lobbied by business groups. The SEC has even advised the U.S. Supreme Court to raise the bar making it more difficult for even the SEC to win its suits!
Meanwhile, just this week SEC commissioners with a goal of chipping away at the Sarbanes-Oxley corporate-governance law, which the U.S. Chamber of Commerce claims is overly burdensome for companies and driving up auditing costs.
“There are certain actions they have taken that strongly suggest the SEC is using its authority to scale back litigation and enforcement,” said Barbara Roper, director of investor protection at the Washington-based Consumer Federation of America. “Cox appears to be very sympathetic to the concerns of corporate defendants.”
Barney Frank, chairman of the U. S. House of Representatives Financial Services Committee, has called a hearing to examine the 3,700-person agency, which was created in 1934 to restore public confidence in the capital markets after the stock market crash of 1929.
After 17 years as a Republican congressman from California Cox, over outcries of his political partisanship, was appointed by George W. Bush as head of the SEC in August 2005. His response to recent criticism by investor rights groups, and even state securities regulators, is to simply deny the charges: “We are relentless advocates for investors,” he told reporters May 10, “every day we come to work, that’s our priority.”
On another front, the SEC has indicated it is reviewing the effect of investor lawsuits. Frank said he feared that review might open the door to replacing shareholder lawsuits with arbitration. “This is like the nuclear bomb issue from Cox,” said Joel Seligman, president of the University of Rochester and author of a book on the history of the SEC. “To so radically change the structure of securities-dispute resolution should only occur if Congress weighs in.”
Another SEC move drawing fire is a new policy led by Cox that limits the ability of the SEC’s staff attorneys to set fines on companies. The new procedure requires the staff to seek authorization from commissioners before negotiating penalties. Ohio Attorney General Marc Dann, a Democrat, and Utah Attorney General Mark Shurtleff, a Republican, said in a May 11 letter to Frank that the change is part of a series of SEC actions that “indicate a new direction that is obviously unsettling for investors.”
Meanwhile, the SEC had granted exemptions to Wall Street brokerage firms and banks from being governed by the Investment Advisor’s Act, although these firms were performing the same tasks as investment advisory firms which are governed by the act. It was not until the D.C. Court of Appeals recently ruled against the SEC’s exemption, and outcry ultimately caused the Commission to abandon an appeal, that the exemption ended.
SEC has opposed investors on a number of other occasions, including filing briefs to the U.S. Supreme Court opposing investors seeking recovery for securities fraud. For example, the SEC is opposing Enron shareholders who seek recovery from Merrill Lynch and other investment banking firms which allegedly assisted Enron in efforts to deceive its shareholders.
The SEC also filed a Supreme Court brief opposing investors in a case against Tellabs Inc., accused of overstating its business prospects, and apparently plans to oppose shareholders in a Supreme Court case against Motorola and Cisco Systems, which are accused of helping a communications company add $17 million in phony revenue to its books.
Shepherd Smith and Edwards represents investors to recover losses in investments. We have also worked diligently to protect investor rights through our efforts to prevent legislative changes which would harm investors. Your assistance in protecting investors’ rights would be appreciated. If you or your company has sustained significant investment losses, contact Shepherd Smith and Edwards to schedule a free conficential consultation with one of our attorneys.