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After months of work and media coverage, a high-profile report urging eased financial regulation to keep U.S. capital markets competitive has been derided as a corporate defense lawyers’ “Christmas wish list.” If adopted, critics say, the proposals to scrap some investor protections would create serious new litigation problems and hobble state enforcement authority. The privately funded Committee on Capital Markets Regulation argued in its report that America has lost its hegemony in world capital markets, and it blamed post-Enron scandal reforms as excessive and expensive regulation. It also called for curbs on shareholder class actions and limits on state power to prosecute corporate fraud. As a next step, the committee’s director, Hal S. Scott, a Harvard Law School professor, said the group has asked President Bush to direct his administration to review and implement the proposed regulatory changes and refer legislative reforms to Congress. The Bush administration panel asked to review the report consists of representatives from the U.S. Department of Justice, the Securities and Exchange Commission, the Federal Reserve and the Commodities Futures Trading Commission. Scott was hopeful that the review could be under way by the end of January. Some of the boldest proposals in the Nov. 30 committee report brought angry cries from top state cops. “This whole thing is a D.C.-based, defense lawyer Christmas wish list,” complained Thomas Greene, chief assistant to California Attorney General Bill Lockyer. New York Attorney General and Governor-elect Eliot Spitzer called the proposals “absurd.” Connecticut Attorney General Richard Blumenthal also weighed in, stating that “increasing competitiveness does not require handcuffing law enforcement against corporate crime and wrongdoing.” And plaintiffs’ lawyers have not minced words. “The last time Wall Street and corporate regulators got together to protect investors it was followed by one of the largest upsurges in corporate corruption in U.S. history,” said William Lerach of Lerach Coughlin Stoia Geller Rudman & Robbins in San Diego. Points of agreement Two bright spots of agreement come in improving shareholder rights and plugging ethics loopholes in trial lawyers’ political contributions to politicians with influence over selection of lead counsel-dubbed “pay-to-play.” Among the most repeated criticisms: The committee did not make its case that America has lost its competitive edge in global markets. Capping auditor liability would create a two-tier system of liability. Requiring states to get federal permission to pursue state criminal cases against corporations and approval of civil settlements with national implications would intrude on state sovereignty. “In 1995, Congress substantially reformed the law with the Private Securities Litigation Reform Act and the number of cases are down,” said Professor Hillary Sale, who teaches corporate and securities law at University of Iowa College of Law. “More important is what is actually happening in court. Every study shows the number of motions to dismiss being granted has increased.” The report argues that U.S. stock exchanges are losing the lucrative initial public offering market to overseas exchanges, particularly London, which has snared 25% of the IPO market. Class action settlements increased from $150 million in 1995 to $3.5 billion in 2005-excluding WorldCom Inc.’s $6.1 billion settlement, the report said. It also seeks relaxation of strong internal corporate controls mandated by the Sarbanes-Oxley Act of 2002. But Michael Pucillo, a class action litigator in Boston-based Berman DeValerio Pease Tabacco Burt & Pucillo’s West Palm Beach, Fla., office, called the report’s assumptions outdated. Securities class actions are down, corporate profits are up and Wall Street bonuses this year set records. Recommendations to improve state-federal coordination, in particular to give the Justice Department veto power over state criminal prosecution of corporations if it conflicts with the “national interest,” generated strong criticism. “That would shut down state enforcement,” said Greene. “We’re talking about fraud here, people. There is no national interest in fraud,” he said. John Sturc of Gibson, Dunn & Crutcher’s Washington office and a former SEC attorney, countered, “You can’t have 50 states adopting regulations that conflict and increase the costs, and the countervailing concern is that the feds are not active enough in protecting consumers.” The report garnered plenty of attention in London, where “the perception is that [Sarbanes-Oxley] was a boon to the marketplace here in Europe,” said Michael Zuppone, co-chairman of securities and capital markets practice for Paul Hastings, Janofsky & Walker, who was contacted in London. “From my perspective, if you compare litigation around the globe, it is orders of magnitude greater in the U.S.” The report recommends that the Securities and Exchange Commission allow companies to indemnify directors who act in good faith, and that Congress consider caps on auditor liability. “Is it fair to have a two-tier system of liability?” asked Pucillo. Committee member Ira Millstein of Weil, Gotshal & Manges said this conservative group agreed to majority voting by shareholders, elimination of brokers’ right to vote client shares on the election of directors and more transparency in executive compensation. “Two years ago you would never have gotten a group such as this approving these things,” he said. “That is progress.” As for the more controversial sections, Millstein said, “what’s wrong with arguing about it?”

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