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In combating securities fraud, the historic role of the Securities and Exchange Commission has been to deter wrongdoers, while private litigation sought to compensate injured investors. One of the innovations in the Sarbanes-Oxley Act of 2002, however, was to put the SEC in the business of compensating investors . . . somewhat. The result has been a hybrid system that encourages both the SEC and private plaintiffs’ attorneys to chase after the same limited pool of corporate funds available to compensate investors, with the ultimate losers being the injured investors. Major settlements with SEC While the SEC always has had the ability to force the disgorgement of ill-gotten gains and make these funds available to investors, these amounts usually were a drop in the bucket compared to what might be obtained for investors through a private action. But times have changed. Over the past two years, the SEC has obtained major settlements from corporations accused of financial wrongdoing, including $300 million from TimeWarner Inc., $150 million from Bristol-Myers Squibb Co. and $37 million from Symbol Technologies Inc. The difference is Sarbanes-Oxley, which authorized the SEC to combine the civil penalties and disgorgement obtained in enforcement actions and make these funds available to injured investors. The “Fair Funds” program, as it is known, has provided an incentive for the SEC to seek significant penalties from corporations. To date, the SEC has obtained $4.8 billion in penalties that is slated to be distributed to injured investors. Sarbanes-Oxley has not, however, put the private plaintiffs’ attorneys out of business. Almost all of the SEC’s major settlements have been accompanied by a similar major settlement in a related private securities class action (e.g., $2.4 billion in the TimeWarner case, $300 million in the Bristol-Myers case and $102 million in the Symbol Technologies case). It is not surprising that companies that have been forced to settle with the SEC also think it is a good idea to settle with the private plaintiffs-the liability risk is enormous. What is surprising is that Congress is content to let this dual approach go on. Dual approach creates problems In the heady legislative rush surrounding the passage of Sarbanes-Oxley, the prospect of having both the SEC and private plaintiffs’ attorneys work to compensate injured investors probably seemed like a great idea. Multiple investigations and lawsuits over the same conduct, however, waste scarce resources that otherwise could go to investor compensation. Two areas are particularly problematic: corporate defense costs and plaintiffs’ attorney fees. The SEC has no power to stop a private lawsuit from proceeding while it conducts its own civil action. Accordingly, a corporation must battle on two fronts, with all of the attendant defense costs. Meanwhile, the private plaintiffs’ attorneys may be able to free-ride on the SEC’s efforts and still get paid high contingency fees. These unnecessary transaction costs can lead to injured investors receiving millions of dollars less in compensation. Duplicative defense costs are difficult to track (companies do not provide details about their legal expenses), but there is no doubt about the impact of plaintiffs’ attorney fees. The attorney fees awards paid out in the Bristol-Myers Squibb and Symbol Technologies private settlements were $11 million and $10 million, respectively, but the injured investors do not seem to have received much for their money. As noted by the court in the Bristol-Meyers Squibb case, it “was the Company’s desire, prompted by the SEC, to put its house in order that caused the settlement, not any action on the part of Lead Counsel.” Congress should act Christopher Cox, the new SEC chairman, should ask Congress to address this issue. As a sponsor of the Private Securities Litigation Reform Act of 1995 when he was a member of Congress, Cox is familiar with the problems inherent in the private-public model of securities enforcement. If the SEC is going to be in the business of compensating investors, it should be given all the tools necessary to do so, including the ability to seek penalties that are based on investor losses and to stay or seek the dismissal of duplicative private litigation. Alternatively, the plaintiffs’ securities bar is large, well financed and highly motivated. There is scant evidence that plaintiffs’ attorneys were not already obtaining the maximum compensation available (minus a significant amount of attorney fees, of course). One thing seems certain though: Eliminating the current dual approach would put more money in the pockets of injured investors. Lyle Roberts is a partner in the Reston, Va., office of Wilson Sonsini Goodrich & Rosati and is the author of The 10b-5 Daily, a Weblog on securities class actions (www.the10b-5daily.com).

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