Sarbanes-Oxley, Corporate Corruption, and the Complicity of Courts and Legislatures

The main thrust of this article is that courts and legislatures, particularly Congress and the federal courts, are biased in favor of management, and that their failure to hold management to account has emboldened management to engage in corrupt behavior, and has led to passivity and supineness by gatekeepers, such as accountants and directors.Part I explores the notion of bias and asserts that we are bombarded with much information that bias, among others, serves to filter. But bias is most dangerous when it is not recognized by the holder. Part II addresses the notion of complicity and causation/correlation, and then addresses state law developments, such as the development of special litigation committees and statutes exculpating directors from liability, that have insulated management from accountability. Part II concludes by looking at the trilogy of insider trading decisions by the U.S. Supreme Court in the early 1980s Part III moves into the 1990s and the disastrous policy reflected in the 1994 Central Bank decision and the 1995 Private Litigation Securities Reform Act (PLSRA). The Central Bank decision was judicial activism at its worst; PLSRA, by requiring specificity in pleading without the benefit of discovery, and by providing that a cautionary warning on forward-looking information absolved management of any responsibility, even though management knew there was no basis for the statements, also led to a quot;what, me worry?quot; mentality. Part IV examines the criticism of Sarbanes-Oxley by business, and concludes that the accounting profession grossly overreacted to section 404. But this is a problem with the accounting profession, not with the statute itself. The new SEC releases, providing risk-based guidance and defining material weakness, should put to rest some of the criticism. The article also rebuts complaints about overregulation and excessive litigation. The article concludes with the question quot;why not tell the truth?quot; If management were honest and candid, there would be much less litigation and greater market efficiency from truthful disclosure. But for this to come to pass, courts need to be more concerned about truthfulness than they are in protecting management