Symposium Enron and Its Aftermath: Enron's Legislative Aftermath: Some Reflections on the Deterrence Aspects of the Sarbanes-Oxley Act of 2002

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INTRODUCTION

Since Enron's implosion, an astounding string of accounting scandals have stunned the securities markets. Global Crossing, WorldCom, Adelphia, and a host of other companies have seen plummeting share prices and SEC and criminal investigations. Congress's reaction has been equally stunning and surprisingly swift. It passed with near unanimity the Sarbanes-Oxley Act of 2002 (the "SOA" or the "Act"),1 and President Bush quickly signed it into law. The President billed the Act as one of the "the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt."2 While the SOA is certainly lengthy, with eleven titles and nearly 150 pages of text, its importance and impact are far from certain.

This Article is not intended as a complete overview of the Act; instead, it focuses primarily on those provisions designed to deter securities fraud. Before analyzing whether Congress is likely to achieve its deterrence goals with these reforms, three more general comments about the Act are in order. Admittedly, none fall into the category of stunningly original insights into the legislative process, but they do appear to be considerations that Congress ignored in its headlong rush to get tough on corporate crime.

In fact, the first is simply that haste makes waste. The SOA moved with lightening speed through the legislature and only seemed to pick up momentum with the revelation of each new accounting restatement. Unfortunately, the Act reflects that speed. The original bill that Senator Sarbanes sponsored appears to have been, for the most part, well thought out. But as the political firestorm increased and the Dow Jones Average plunged, there was clearly a sense in Washington that Congress had to do something (anything) and do it fast.3 And so in the end a number of other pending bills were simply engrafted wholesale onto the Sarbanes bill.

The result was, at a minimum, a disorganized law. For example, the Act's criminal provisions are scattered randomly over three separate titles. Separate provisions, such as those directing the United States Sentencing Commission (the "Sentencing Commission") to review sentencing guidelines for fraud and obstruction offenses, seem largely duplicative. More significantly, other aspects of the Act, especially the changes to the statute of limitations for private securities claims, are inconsistent with current law.4 Other aspects of the Act, like the new certification requirements, are internally inconsistent, although at least not totally contradictory.5 Legislation billed as being this important deserved more careful attention.

Second, an election year is a poor time to overhaul a complicated area like securities regulation. Politicians with their eyes on November ballots may opt for easy fixes that look good in thirty-second television commercials rather than taking the time to analyze the merits of proposed policy changes, a fact that one congressman candidly acknowledged.6 Much of the Act simply follows headlines from Enron and other corporate scandals, with little appreciation for whether those headlines highlight systemic problems that need legislative attention. Many other provisions, particularly the vaunted criminal provisions, represent little more than political grandstanding and are unlikely to have any real deterrent effect. In the effort to show that it was doing something, Congress seemingly ignored the efforts that the SEC, the self-regulatory organizations, and others had already undertaken-efforts that might make portions of the legislation unnecessary.7 In other words, there was little appreciation that markets still work and can right themselves.

Third, as always, the devil is in the details. Many provisions of the Act are simply delegations of authority to the SEC to adopt rules.8 Often these involve areas in which the SEC or the self-regulatory organizations had already undertaken rulemaking initiatives, again raising the question of whether legislation was truly necessary. …