Little Guy Has Little Recourse

Without question, SOX had a bad launch, says James Cox, a securities-law professor at Duke University. It cost more than expected and confused auditors and companies alike. But costs are falling and the benefits to investors are becoming clear. "The old, pre-404 system of preventing misleading statements failed," says Barbara Roper, head of investor protection for the Consumer Federation of America; 404 lite "turns back the clock."

A loftier argument claims that SOX is driving financial business away from the United States. Yet for new public offerings, foreign firms have increased their listings since SOX was passed. New York is indeed losing some ground to London, but for other reasons. Its new trading systems are faster than ours, its investment bankers charge half as much (are you listening, Goldman Sachs?) and it lets more crummy companies sell shares to the public. That's business we don't want.

Too many legislators oppose investors, too. Last month the House passed an amendment delaying 404 reporting for smaller companies—the very ones most likely to issue false financial statements. "That's a terrible precedent," says former SEC chairman Arthur Levitt. "It politicizes financial accounting and greatly increases the risk to investors."

Bash the class: When shareholders think they've been had, they bring a class-action suit. In the past, some suits overreached, leading Congress, in 1995, to pass a law making it harder to get into court. One big question remains: what do shareholders now have to prove before they can sue? In a Supreme Court case known as Tellabs, the SEC filed a fierce brief, essentially asking the court to kick out as many claims as possible. Last month the court rejected that view and adopted milder rules. Suing still isn't easy, despite those who say we're drowning in "frivolous" shareholder claims. The number of new lawsuits plunged to a record low of 110 last year, according to Cornerstone Research.

Free the team: Here's something you probably didn't know. Under a 1994 Supreme Court decision, shareholders cannot sue any corporate advisers—lawyers, accountants, investment banks—that "aid and abet" a fraud. A federal court recently stopped a lawsuit against Merrill Lynch, Deutsche Bank and Barclays, among others, for their alleged role in Enron's collapse.

Next term the court will hear a similar case known as StoneRidge. Details don't matter; here's the gist: Did third parties "merely" aid and abet in a communications company's fraudulent transactions, in which case they go free? Or were they primary players and hence liable? The SEC planned to enter the case on the investors' side, but both the White House and Treasury Secretary Henry Paulson (himself an investment banker) said no.