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Foreign companies that decide to go public are shunning American equity markets, according to the findings of an ad hoc committee of academic and business leaders concerned that regulation and litigation are putting U.S. exchanges at a competitive disadvantage. The Committee on Capital Markets Regulation, in a recent report released as a sequel to a report late in 2006, took 13 measures of competitive vitality and found American public equity markets were anemic in 12 and only treading water in one. The alarm is not universally shared, but Hal Scott, the Nomura Professor and Director of International Financial Systems at Harvard Law School, who founded the committee, said the findings are gaining attention. “The good news is we have persuaded people there is a problem,” Scott said. “People are arguing about what to do, not whether there is a problem. The bad news is it is difficult to get people to do what they could do to solve the problem.” The committee found that, in the first 10 months of 2007, a record 56 foreign companies delisted from U.S. exchanges, compared to 12 a decade ago and 30 in 2006. Only one of the 20 largest global initial public offerings (IPOs) in 2006 was listed on a U.S. exchange, and none was in the first 10 months of 2007, compared with eight of 20 in 1996. More choices Foreign companies are still raising capital in the United States, but from institutional investors through private offerings, which are allowed by U.S. Securities and Exchange Commission (SEC) Rule 144A, and exempt from laws governing public offerings, including Sarbanes-Oxley. “Foreign companies have more choices,” Scott said. “As the foreign markets and private markets have gotten better, people are less willing to put up with this litigation and SEC process.” Rachel Robbins, general counsel of the New York Stock Exchange, distinguished SEC regulation, which she said is becoming less onerous, from litigation risks that discourage European companies. She noted that on Dec. 12, SEC Chairman Christopher Cox announced the agency will give smaller public companies another year to comply with the internal control auditing requirement of the Sarbanes-Oxley Act’s Section 404. Neither was Robbins distressed by the committee’s statistical portrayal of U.S. exchanges being pushed to the margins by newly competitive foreign exchanges, especially London’s. In 2007, the New York Stock Exchange gained listings from 20 Chinese companies, including 18 IPOs, she said. “SEC has come to understand the competitive challenge,” Robbins said. “For European companies, litigation is often a deterrent. Litigation is a negative factor they weigh.” The case that has the attention of the international investment community is pending before the U.S. Supreme Court, Stoneridge Investment v. Scientific-Atlanta, No. 06-43. The plaintiffs allege that Charter Communications Inc. entered into several sham transactions with Motorola Inc. and Scientific-Atlanta Inc., now owned by Cisco Systems Inc., to inflate its revenue by $17 million. The defendants argue that they had no role in preparing or issuing the disclosure statements based on the transactions and so cannot be held liable for fraud. “The Stoneridge case could expose third parties to liability in situations where they were not knowing parties to fraud and that has caused concern in both this country and Europe,” Robbins said. Stephen Bainbridge, William D. Warren Professor of Law at the University of California at Los Angeles, who has written extensively about Stoneridge, said the case exemplifies European perceptions of capricious litigation risk when doing business in the United States. “[The defendants] allegedly knew this was essentially a straw man transaction for accounting considerations, but they never lied to the investors and that is what the securities laws are designed to address,” Bainbridge said. “It’s the kind of case that conveys the notion our law casts a very broad net and you face significant liability risks [in the United States] that are not present elsewhere,” he said. “Companies find they can raise capital from investors who will purchase their securities even in jurisdictions that seemingly offer fewer protections. Maybe the investors are making a big mistake, but the fact is investors are buying those securities, so the question is: Have we gone overboard here in the U.S.?” Not all foreign companies are avoiding U.S. exchanges by choice, Robbins added. “You have to distinguish between European companies and emerging market companies,” she said. “Many companies from developing markets that choose European markets for IPOs would not qualify for the New York Stock Exchange.” No mood for deregulation The ominous and still-unfolding subprime mortgage crisis has Washington preoccupied and in no mood for deregulation, said Representative Barney Frank, D-Mass., chairman of the House Committee on Financial Services. “The people who say we have to go to more deregulation had more credibility before the subprime crisis,” Frank said. “We have a need for some substantive increase in regulation. The subprime crisis is an example of where [we] need to put in sensible regulations where [we] don’t have any.” Frank conceded the overlapping thicket of regulatory bodies for equities, banking and finance � the Federal Reserve Bank, Comptroller of the Currency, Federal Deposit Insurance Corp., Office of Thrift Supervision, state bank regulators, SEC and Commodities Futures Trading Commission � can be a competitive disadvantage. “We do have too many regulators, but you run into problems when you try to get rid of one. If the problem is litigation, it has to be looked at by the judiciary committee,” Frank said. Scott said perhaps the most telling indicator that U.S. equity markets are hobbled is the small but growing movement of American companies into foreign exchanges. From 1996 to 2005, it was nearly unheard of for an American company to list an IPO exclusively on a foreign exchange but, measured by value, 1.1% of American IPOs in 2006 were listed only on foreign exchanges. That jumped to 4.3% through Sept. 30, 2007. “It is a very disturbing phenomenon that U.S. companies are doing their IPOs abroad,” said Scott. “That is a far cry from U.S. companies delisting and trading abroad but if things continue in this fashion, I expect that will happen.”

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