Attorney General Spitzer's Proposed Reforms

Attorney General Spitzer has proposed a series of reforms to strengthen New York's corporate accountability laws.

The proposals are designed to help prevent the types of abuses that have occurred on Wall Street and at major corporations such as Enron, Arthur Anderson, Global Crossing, and to provide similar protections against abuses by not-for-profit organizations.

"States have always been on the front line in protecting consumers against fraudulent practices," Spitzer said. "In fact, the vast majority of corporate fraud cases in the United States are brought by state enforcement authorities, using state laws. Unfortunately, many of New York's laws are outdated and contain major loopholes. In addition, while some beneficial changes were instituted by the federal Sarbanes-Oxley Act, those protections apply only to companies listed on the major stock exchanges, and do not apply to the thousands of companies that New Yorkers do business with every day, or to not-for profit entities that have custody of billions of dollars in charitable funds."

"For these reasons, we must act to strengthen state laws to protect investors and donors. This will also provide a more level playing field for honest corporations and allow us to respond effectively to future frauds."

Spitzer noted that the recent global agreement with the Wall Street firms, which he helped develop, implements structural changes to prevent tainted stock research, but that is just one area requiring reform.

Spitzer's proposals cover the following areas:

1. Protecting honest employees who report illegal activities;
2. Protecting against fraud relating to nonprofit corporations;
3. Preventing securities fraud;
4. Preventing cover-ups of corporate crimes;
5. Addressing misconduct by corporate officers; and,
6. Improving oversight of the accounting industry.

Consumer advocates applauded Spitzer's effort:

Barbara Roper, Director of Investor Protection for the Consumer Federation of America, said: "Investors benefit from a dual system of federal and state securities regulation. As recent experience has shown, aggressive state regulators enforcing strong state laws can step in to protect investors when federal regulators are either too over-burdened or reluctant to act."

Ed Mierzwinski, Consumer Program Director of U.S. PIRG, said: "Attorney General Spitzer's tough investor protection package fills important gaps in new federal laws and will help guarantee the integrity of the markets."

Specifically, the bills would do the following:

Protecting honest employees who report fraud: Time magazine recently named three whistleblowers as its "Persons of the Year," including Cynthia Cooper and Sherron Watkins, who exposed wrongdoing at WorldCom and Enron. In New York, however, the protections available to such honest employees are very limited. For example, an employee of a corporation or non-profit group who becomes aware that his or her employer is knowingly defrauding its customers or stealing government funds can be fired for revealing that information to government authorities. Moreover, in many cases, the whistleblower protection applies only if the employee first discusses the illegal activity with the employer, even if the employee knows that the employer will destroy all evidence of the crime. New York recently expanded whistleblower protections granted to health care workers, and similar protections should apply to all employees, in order to prevent retaliation against employees who report wrongdoing.

Fraud by not-for-profit corporations: The federal Sarbanes-Oxley Act adopted important reforms relating to publicly-traded companies, including requiring corporate officers to sign the corporations annual report, mandating the appointment of audit committees, and seeking to prevent "self-dealing" transactions. These same reforms should be applied to not-for-profit corporations, to ensure that charities are held accountable for the millions of dollars that New Yorkers donate each year.

Securities fraud: Individuals who commit securities fraud should face appropriate criminal penalties. Unfortunately, certain state securities crimes such as Manipulation of Prices of Securities (GBL §339-b), Reporting or Publishing Fictitious Transactions in Securities (GBL § 339-a) and False Statement or Advertisement as to Securities (GBL § 339), are punishable only as misdemeanor offenses in New York. These fraudulent acts should become felonies resulting in significant penalties. In addition, the state should adopt tougher administrative penalties to protect against frauds, including authorizing broker license revocations, the issuance of "cease and desist" orders, and permitting the seizure of broker/dealer accounts that contain the proceeds of fraud.

Cover-ups of corporate crimes: In addition to strengthening our laws to prevent corporate fraud and protect honest employees, penalties should be increased against those who actively impede investigations into corporate misconduct. Our evidence tampering and obstruction of justice statutes, many of which have not been amended in over 35 years, should also be updated to help ensure that corporate frauds can be investigated and prosecuted more effectively.

Misconduct by corporate officers: New York's corporate misconduct and corporate bribery laws should be strengthened. For example, in order for a person to be found guilty of first degree corporate bribery or bribe receiving in New York, the prosecutor must prove that the bribe-taker's employer did not consent to the payments and that there was economic harm to the company. New York's laws should be amended to: (1) require bribe givers and receivers to show that they had obtained the employer's consent for the payment; and (2) eliminate the need to show economic harm.

Accounting fraud: The accounting reforms contained in the Sarbanes-Oxley Act only apply to the auditors of publically listed companies. There are thousands of other accounting firms unaffected by the changes and these protections should extend to those firms as well. Additional changes are also needed to update the definition of the practice of public accoutantcy, provide greater public representation on the State Board for Public Accountancy, and improve the process for disciplining accountants who engage in wrongdoing.

"The past several years have demonstrated that neither federal regulatory efforts nor existing state laws were enough to deter many abuses," Spitzer said. "We must improve and enhance cooperation between regulators and we must strengthen state laws to protect investors and donors, and honest corporations."