Academic journal article Fordham Journal of Corporate & Financial Law

Despite Initial Fears to the Contrary, It Appears That Sarbanes-Oxley Gave Private Litigants a "Dull Sword" When It Comes to Piercing the Corporate Veil

Academic journal article Fordham Journal of Corporate & Financial Law

Despite Initial Fears to the Contrary, It Appears That Sarbanes-Oxley Gave Private Litigants a "Dull Sword" When It Comes to Piercing the Corporate Veil

Article excerpt

INTRODUCTION

Over the past several years, accountants have managed to ride out the storm of massive corporate accounting scandals, the demise of one of the premier accounting firms in the country, a tarnished perception of the profession, and the resulting impact of the landmark passage of Sarbanes-Oxley ("SOX").3 Even though the worst seems to be behind us, the question still remains - are there still more ticking financial timebombs sitting out there waiting to go off? If so, are investors better protected from economic ruin by Sarbanes-Oxley and related regulation? Despite early hopes and predictions that this legislation would stop future scandals and restore investor confidence, the jury is still out on whether this landmark legislation truly affords investors the protections it was intended to provide.

Just over seven years ago in December of 2001, Enron - the nation's seventh largest company based on reported revenues - filed for Chapter 1 1 bankruptcy, touching off an eruption of accounting scandals that rocked the financial world.4 At the time, Enron's collapse was the largest corporate bankruptcy in American history, bringing down a company with approximately $33 billion in assets.5 Over a four-year period, Enron's executives engaged in a fraudulent accounting scheme that included overstating profits and understating debts to drive up the stock price. As the scheme unraveled, investors lost tens of billions of dollars as the stock price plummeted from a high of near $90 a share to less than $1 a share.6 All of this occurred despite the auditing oversight by one of the largest and most reputable accounting firms at the time Arthur Andersen.

Both Congress and the public were outraged that a fraud of such magnitude could be committed. At the urging of the President, Congress initiated hearings to examine the Enron collapse and to develop a plan to prevent similar fraudulent financial schemes from occurring in the future. Nevertheless, over the next half-dozen years, several other major American corporations such as Worldcom (2002), Adelphia Communications (2002), HealthSouth (2002), Qwest (2002), NYSE (2003), Parmalat (2003), Marsh and McLennan (2004), AIG (2005), Krispy Kreme (2005), and Fannie Mae (2006) followed the way of Enron and suffered economic collapse as a result of colossal accounting irregularities, insider trading, or outright theft.7

In the midst of these very visible corporate implosions, accountants, attorneys, and other professionals and organizations who advised public companies were concerned over their expanding exposure as securities fraud plaintiffs and their respective counsel continually crafted new ways to claim that the former acted as enablers, or worse yet, contributors to the frauds committed by the public companies.8 The theory proffered is that the "fraud[s] could not have taken place without lawyers' and accountants' advice to their clients . . . ."9 As a result, Wall Street, accounting firms, and outside counsel have not escaped unscathed. Arthur Andersen collapsed as a result of its role in auditing Enron and subsequently shredding Enron's documents while it was the subject of a federal investigation. 10 Similarly, Merrill Lynch, J.P. Morgan, Citigroup, and many other brokerage firms have been investigated for a myriad of alleged unethical activities. Finally, law firms, including Enron's legal counsel, Vinson & Elkins, which found itself as a defendant in the Enron multidistrict litigation," and Buchanan Ingersoll and Mayer Brown, have been named as defendants in investor suits.12

While Enron crumbled and investigators uncovered Arthur Andersen's role, the American public screamed for the government to intervene and prevent such economic disasters from happening again. On July 30, 2002, President Bush signed the Sarbanes-Oxley Act. 13 One of the major goals of SOX was to create an environment of greater corporate integrity and investor confidence by holding company officers personally accountable for financial misdeeds. …

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