In a little-noticed decision made just before the holidays, Judge Melinda F. Harmon gave the country a Christmas present that we really needed but couldn’t seem to go out and get for ourselves. The 307-page opinion reinterpreted securities law so that financial firms that help companies make fraudulent transactions — of the kind that brought down Enron — can themselves be held liable for fraud.
It remains to be seen whether this decision from the Federal District Court in Houston will accomplish something that our Congress and the executive branch have failed to do in the year since Enron’s house of cards collapsed. But the decision is striking in that it shows how we are becoming increasingly reliant on the courts to make essential changes, sometimes in the face of staggering political corruption, that our society needs in order to get on with its day-to-day business.
More than a year after Enron’s implosion, the three most basic reforms that were put forth when the fraud was exposed have not been adopted. They are: first, a system to assign auditors to companies so that the auditors’ independence can be assured; second, requiring firms to list stock options (given to executives as part of their compensation) as a business expense at the time they are granted; and third, a limit on the percentage of employees’ individual retirement benefits that can take the form of company stock.
When the wave of corporate accounting and governance scandals first broke, these reforms were widely seen as a reasonable first step toward restoring investors’ trust and protecting employees. Yet Congress did not address these issues in its “corporate accountability” bill, which was largely an empty public relations gesture. The SEC obstructed even the weak provisions in this act, with its Chairman Harvey Pitt eventually being forced to resign after appointing a person tied to an accounting scandal to head the newly created accounting oversight board.
Judge Harmon’s decision is particularly noteworthy because it is trying to save big business itself from the fraudulent excesses of one sector. This is a basic regulatory function that would not ordinarily have to become the responsibility of the judiciary. But our Congress and the executive branch have become so corrupted by our system of legalized bribery — political campaign contributions — that they cannot even enact positive reforms that are desired by most of the business class.
The courts have thus become the last branch of our government where there remains enough integrity to confront powerful special interests, at least in certain circumstances. In the two months since our last national election, the corruption of the rest of our government has been breathtakingly highlighted by paybacks to corporate and wealthy interests. Financial contributions to the coffers of campaign 2002 have bought rights for logging companies to further damage national forests, electric utilities to increase their pollution, and pharmaceutical companies to ensure that any Medicare prescription drug benefit — if they can’t block it altogether — will keep U.S. drug prices the highest in the world.
In recent years, the courts have sometimes been a venue for change through class action lawsuits such as those that forced Big Tobacco to stop marketing their cigarettes to children, and held them liable for some of their damage to public health. Hence the corporate-funded campaign for “tort reform,” which seeks to curtail the ability of citizens to seek legal redress for the victims of unsafe products and dangerous corporate practices. People for whom greed is a guiding ethos ironically blame “greedy trial lawyers” for raising the cost of everything from medical care to car insurance through litigation. But this litigation is often the only means to protect society from medical malpractice or corporate malfeasance.
The corruption of most of our government by moneyed interests carries great social and economic costs. Millions of people have lost the bulk of their retirement savings due to corporate fraud over the last few years. And as the economy heads toward a likely recession, the Bush Administration offers yet another tax cut for the country’s wealthiest households, rather than trying to counteract the economic downturn.
As much as the courts may occasionally intervene to regulate commerce or protect the rights of citizens, they cannot substitute for the functioning democracy that this country sorely needs.