Professor Bainbridge...on law, politics, religion, culture & food

Securities Fraud Indictments Down

Peter Lattman posts the following question for discussion:

AmLaw’s analysis shows shows 357 indictments in major corporate fraud cases between 2002 and 2005. In 2006, there were only 14 indictments identified by the Justice Department as significant cases and only 12 major corporate fraud cases brought in 2007, AmLaw reports. Here’s the more than 4,000-word story, providing a nifty overview of white-collar crime over the past half-decade.

The DOJ told AmLaw that the recent decline in prosecutions is actually a sign of the remarkable success of the Corporate Fraud Task Force. “You’re getting a lot more focus on compliance, and on ethics internally in corporate structures,” says Joan Meyer, senior counsel to the deputy AG. And Debra Yang, the former U.S. Attorney in L.A. now at Gibson Dunn, said “We picked off the low-hanging fruit. We got all the big bad players, or most of them. The mandate has always been not to strangle corporate America, but to put investor confidence back into the market, which I think we have.”

AmLaw issued a press release on the story, in which the magazine’s editor Aric Press is quoted summarizing the issue: “The DOJ maintains that the decline is simply a mark of its success, in combination with Sarbanes-Oxley Act reforms, but others question whether prosecutors have been diverted by new priorities. Our reporting raises a critical question: has the problem of corporate fraud really been ‘solved’ or has the Justice Department simply stopped trying as hard to prosecute it?”

Whaddya think, O Loyal and Beloved Law Blog readers?

The decline in indictments is consistent with a decline in private securities litigation filings during the same period. Cornerstone’s mid-2007 analysis of private securities litigation filings reported that:

Securities class action filings are well below historical averages for the fourth consecutive six-month period, finds a new mid-year report released today by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research. The 59 filings recorded in the first half of 2007 (January through June 22, 2007) represent a 42 percent drop from the average semi-annual filing rate of 101 (mid-year periods July 1996 through June 2005). The number of filings in the first half of 2007 was slightly above the second half of 2006 total of 53. For the two-year period beginning the second half of 2005, the average semi-annual filing rate was 61 filings, 40 percent below the average observed over the preceding nine-year period.

You’ve got several factors that explain the decline in both public and private enforcement activity. First, fraud is always more rampant during a bubble than otherwise, especially at the end of a bubble. The bursting of the tech bubble left behind a lot of work for both public and private enfocrers. As Yang correctly observed, there was a lot of low hanging fruit that has now been plucked. Second, and conversely, the recently strong but not bubbling stock market has left investors reasonably happy and less likely to sue or, for that matter, to have reason to sue. Third, SOX and related legal reforms probably has helped clean up some of the worst offenses that previously would have generated litigation. Fourth, post-Enron, the gatekeepers have been more active. Auditing firms, in particular, are working much harder at fraud prevention than in the past.

All in all, it’s unlikely to be a matter of prosecutorial discretion. Instead, there probably has been a real drop in the supply of cases.