SEC Affirmative
Solvency/Topicality
1AC—Plan/Solvency
Text: The United States federal government should curtail enforcement
surveillance of markets by the Security and Exchange Commission
authorized under the Sarbanes-Oxley Act of 2002.
The SEC is ramping up its enforcement surveillance—the agency is getting
out of hand
Wilczek 14 - Yin Wilczek covers the Securities and Exchange Commission, corporate governance and securities litigation for
Securities Regulation & Law Report™ and Securities Law Daily™. (“SEC Data Collection to Fuel Cases, Challenge Defendants,”
http://www.bna.com/sec-data-collection-n17179895112/ 9/19/2014) STRYKER
Sept. 11 — The
Securities and Exchange Commission is ramping up its use of data
analytic tools in a fashion that ultimately could pose problems for companies and
registrants, attorneys and other commenters said Sept. 11. The massive amounts of data the SEC now
is collecting will fuel future enforcement cases, and such cases will be especially difficult
to defend against, they said during the American Bar Association's Business Law Section meeting in Chicago. Elizabeth Gray, a
partner in Willkie Farr & Gallagher LLP, Washington, noted that in some areas, the defense bar is seeing massive document requests from
the SEC. The staff is exercising “a lot less discipline,” Gray said. “ The
process in that has gotten slightly out of
hand .” Carmen Lawrence, a New York-based partner in King & Spalding LLP and a former director of the SEC's Northeast Regional
the
new tools, the staff now has the ability to very quickly scan through the information to
obtain what is necessary. The remaining data “could be useful for them in the future,” she said. It is now “all about amassing
data.” The SEC over the last two years has beefed up its use of data analytics for its
enforcement, examination and oversight functions. Earlier this year, SEC Enforcement Director Andrew
Office, also said the staff has become less willing to negotiate down the scope of the SEC's data requests in terms of relevancy. With
Ceresney told Bloomberg BNA that his division is using software developed by Palantir Technologies to mine for connections in insider
trading and other investigations.
The plan ends the enforcement of Sarbanes Oxley
Wallison 6 - Peter J. Wallison, a codirector of AEI’s program on financial policy studies, researches banking, insurance, and
securities regulation. He was a general counsel of the U.S. Treasury Department. (“The Canary in the Coal Mine: What the Growth of
Foreign Securities Markets and Foreign Financing Should Be Telling Congress and the SEC,” http://www.aei.org/publication/the-canaryin-the-coal-mine-what-the-growth-of-foreign-securities-markets-and-foreign-financing-should-be-telling-congress-and-the-sec/
8/8/2006) STRYKER
SEC Enforcement Abuses. Apart from its costly regulations, the SEC imposes significant
costs on the U.S. securities market through excessive and abusive enforcement
activity. Advancement within the SEC’s enforcement division comes from finding
and pursuing dramatic cases, which create incentives on the part of the enforcement staff
to be the first to discover and take ownership of such a case. Under existing enforcement
division procedures, any attorney in the division may initiate a matter simply by sending
a request for information to a person or company that has been charged–in a newspaper
article or elsewhere–with a possible violation of the securities laws. This request is known as a matter
under inquiry (MUI). If the MUI produces no useful information, it can be terminated easily within sixty days of its inception, but if it is not
closed during that period, it automatically becomes an informal investigation. At that point, most U.S. securities counsels will advise their
clients to disclose the existence of the proceeding, which usually results in a decline in the price of the company’s stock. Thereafter, the
matter might be abandoned by the attorney who initiated it, but no division procedure requires that companies subject to informal
investigations be advised that no further action will be taken against them. In fact, these matters often remain open for years because the
attorney who initiated the MUI has lost interest in the case. But
with a public announcement having been
made about an SEC enforcement proceeding, the stock price of the company will
continue to reflect this unresolved matter. Apart from MUIs, regulated companies are also subject to sweep
requests–demands from the SEC staff for information about matters they have found to exist in other companies in the same industry.
These requests can involve years of e-mail, which must be reviewed by the company’s lawyers for relevance or privileged information before
they can be turned over. The costs of these reviews can run into many millions of dollars even though the company has done nothing more
than operate in the same industry as another company that is thought to have engaged in wrongdoing. If a matter turns out to be serious
enough to be brought to the SEC for a formal order, the defendant is afforded an opportunity to make a written submission–known as a
Wells submission–defending its position. However, it is not permitted to argue orally to the commission and is frequently not fully
informed of the facts that the enforcement division will use in making its case to the commissioners. Since most defendants know that in
these circumstances they will not be able to avoid a formal charge by the commission, they feel compelled to settle cases that they might
Few companies can suffer the adverse publicity associated with
litigating with the SEC after they have been formally charged, even if in the end they are
found not to have violated the securities laws. These settlements often result in very heavy monetary fines as well
otherwise win in court.
as injunctive remedies, and although the commission has recently begun to establish reasonable rules about the imposition of fines, the
pressure to settle remains. This
star chamber-like proceeding creates risks for companies offering
their securities in the United States and thus adds to the intangible cost of participating
in the U.S. securities markets. Of course, if a company is actually charged with wrongdoing, the tangible costs are
considerably higher, even if the company might ultimately be vindicated in a fair proceeding. Under these circumstances, companies
are reluctant to subject themselves to the jurisdiction of the SEC by offering securities or
having contacts with the U.S. securities markets. This attitude has been reinforced by
the Sarbanes-Oxley Act , which attempts in many instances to apply U.S. law extraterritorially, prompting foreign
companies to eliminate any jurisdictional basis on which the SEC or private plaintiff might move against them–a fact that explains the
striking decline in global offerings in the United States since 2000. Because of the mobility of capital, issuers of securities are able to attract
capital–even capital from the United States–in many other markets, without the risks of a U.S. offering.
Topicality
We meet—the plan ends market surveillance—the eliminates the collection
of intelligence information
US SEC 4 - US Security and Exchange Commission. (“ Enforcement Surveillance of Markets ,”
https://www.sec.gov/about/oig/audit/246fin.htm 8/18/2004) STRYKER
***This document was modified by the SEC on 8/8/2004—it was originally written on 1/7/1997***
The Office of Market Surveillance in the Division of Enforcement is an important
source of intelligence information for the Commission's Enforcement program. It
obtains information through referrals from Self-Regulatory Organizations (SROs), which have primary responsibility for
surveillance of their markets, and through its own surveillance , including reviews of filings and trading data (for
example, from blue sheets and external data bases). When the Office receives or identifies information on
suspicious trading patterns (insider trading or market manipulation), it conducts
additional analysis. If warranted, based on materiality and other considerations, the Office refers the
matter internally within the Division of Enforcement or to the appropriate region.
SOX is a new form of federal market surveillance analogous to counterterror surveillance
Backer, 10 – Professor of Law at Pennsylvania State University - Dickinson School of Law (Larry Catá, “Surveillance and Control:
Privatizing and Nationalizing Corporate Monitoring after Sarbanes-Oxley”, SSRN,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=508802, 8/25/10)//KTC
Abstract: This essay explores consequences flowing from the imposition of increasingly significant governmentally directed and enforced
surveillance obligations on private actors within the economic sphere. The
emerging public-private regime,
exemplified by the Sarbanes-Oxley Act, has more clearly revealed its character: surveillance and
control of the market and the firm by government in the name, and on behalf, of the private stakeholders traditionally charged with the
development and protection of their economic arrangements. Surveillance is privatized -- outside directors, auditors, outside counsel, and
corporate employees now increasingly serve as the eyes and ears of the state. Enforcement is nationalized. In lieu of private action by
stakeholders, the state offers 'fair funds' reimbursements and state enforcement. The
focus will be on the observer (who
observed (who must be monitored), the purpose of the surveillance (what must be
monitored), and the persons or entities to whom the monitors must report . The essay then sets out three
is required to survey), the
sets of archetypal factual narratives, the consequences of which are being currently litigated. The first relates to Chancellor Corp., the
second to Solucorp Industries, Ltd., and the third to part of the Enron litigation. Using these as archetypal narratives, the essay extracts a
series of norms for behavior applicable to both observer and observed. These are the beginnings of a system of standards ultimately
governed by and beholden to the state. The
essay then turns to an examination of the state, lying at the
very center of this web of surveillance. First it analyzes the role of the state as enforcer as evidenced by the state's role
in the cases considered. It considers the state as source of redress to stakeholder and market as evidenced by the SEC's campaign to widen
its legislative authority to seek damages from wrongdoers and return the recovered funds to investors. Second ,
it examines the
impact of SOX in the context of post-September 11, 2001 policies. In particular, it suggests that the
elevation of monitoring as a significant state policy after September 11, 2001, may explain certain parallels
between SOX and the anti-terrorism provisions adopted in 2001 and 2002. The essay ends with a
preliminary consideration of the consequences of the construction of this great panoptic system of disclosure, in which individuals, firms
and markets form the periphery and government lies at its center, and suggests that what may be emerging is a
system of surveillance mercantilism.
SEC surveillance is intelligence gathering
Shapiro 84 - Susan Shapiro is a sociologist who studies the social construction, social organization, and social control of fiduciary,
trust, and principal-agency relationships. She got her Ph.D in Sociology from Yale University. (“Detection and Enforcement Process,”
Wayward Capitalism, pp. 181, 1984) STRYKER
The examination of the artifacts of securities behaviors and transactions plays a part in SEC
surveillance activities. The SEC market surveillance program is well-organized,
complex, and sophisticated, probably the most refined of all SEC intelligence
activities . Yet even it is criticized as being primitive ("A Computer Watchdog" 1980, 42). Until the recent advent of a policitical
climate of deregulation and budgetary cutbacks, SEC officials campaigned hard for congressional
appropriations to fund a more sophisticated and comprehensive computerized market
surveil- lance oversight system (SEC Annual Report I980, xii, 17- 18). Under new leadership and increasing pressure from
Wall Street and self-regulatory agencies, which believed that the system would be costly, intrusive, and duplicative of current stock
exchange surveillance programs, the SEC has withdrawn proposals to improve its own market surveillance program (“SEC May Abandon
Proposals" 1982. 37). But data from an experimen- tal pilot program suggest that SEC and self-regulatory surveillance efforts are not
duplicative: a quarter of the unusual trading activities—especially stock manipulation and insider trading—discovered by SEC surveillance
was not detected by the exchanges (ibid.). It therefore appears that decisions to abandon updating SEC surveillance capacities are
premature and inappropriate, given current SEC priorities for the control of market- place violations particularly. The agency should further
explore the ways in which improvements in its own surveillance technology would continue to expose offenses relatively immune from selfregulatory agency surveil- lance.
Market surveillance collects information to prevent crime
GAO 81 - US Government Accountability Office “Securities and Exchange Commission Should Improve Procurement Practices for
Market Surveillance System Development,” http://www.gao.gov/products/AFMD-81-17 Mar 6, 1981) STRYKER
As part of the continuing effort to achieve greator economy in contracting for Government goods and services, GAO
reviewed the
procurement practices used by the Securities and Exchange Commission (SEC) to obtain an automated
market surveillance system. The computerized system will be used to support SEC market surveillance
efforts which detect trading practices that may violate securities laws and
regulations .
SEC collection of evidence is surveillance
Investopedia No Date (“Division Of Enforcement,” http://www.investopedia.com/terms/d/division-of-enforcement.asp
No Date) STRYKER
DEFINITION OF 'DIVISION OF ENFORCEMENT' The
Division of Enforcement is a branch of the U.S.
Securities and Exchange Commission which is responsible for collecting evidence of
possible securities law violations and recommending prosecution when necessary.
Evidence of possible violations is collected through market surveillance activities ,
investor complaints, other divisions of the SEC and other securities industry sources.
The SEC conducts surveillance
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
Finally, increasing
SEC surveillance theoretically can reduce corporate fraud. The SEC
traditionally has lacked the resources to do intensive review of corporate disclosures.
Sarbanes-Oxley addresses this by requiring increased SEC review of public
company filings 113 and increasing the SEC's funding. 114
Inherency
Former legislative review did not solve the unwarranted costs of section
404, repeal is necessary
Addington, 11 – Group vice president for research at The Heritage Foundation. Vice President for Domestic and
Economic Policy at the Heritage Foundation. Former Republican staff director, chief counsel or counsel for four
congressional committees (Senate intelligence committee, House intelligence committee, House foreign affairs committee
and House Iran-Contra committee). Former assistant general counsel of the Central Intelligence Agency and as special
assistant and then deputy assistant to the president for legislative affairs during the administration of President Ronald
Reagan. He went on to serve in the Department of Defense as special assistant to the secretary and deputy secretary of
defense and then general counsel during the administration of President George H.W. Bush. Addington served as counsel
to the vice president, and then chief of staff to the vice president, during Richard B. Cheney's two terms in that office.
Bachelor of Science in Foreign Service from the Georgetown University School of Foreign Service. He received a law
degree with distinction in 1981 from the Duke University School of Law. (David S., “Congress Should Repeal or Fix
Section 404 of the Sarbanes–Oxley Act to Help Create Jobs”, Heritage Foundation, 9/30/11,
http://www.heritage.org/research/reports/2011/09/congress-should-repeal-or-fix-section-404-of-the-sarbanes-oxleyact-to-help-create-jobs)//KTC
Congress Started Fixing Section 404 but Has Not Completed the Job Congress waited patiently from 2007 to 2010
for the SEC and the Public Company Accounting Oversight Board (PCAOB), whose rules the SEC approves, to
change
rules in a way that would solve the problem of unwarranted costs imposed on the private sector by the
rules implementing section 404 of the Sarbanes–Oxley Act.[7] While the SEC tinkered with the rules, it
did not solve the problem to the satisfaction of Congress.[8] Congress took action in 2010 to address part of the
problem, granting by statute to companies whose stock is publicly traded and whose aggregate worldwide value is $75
million or more an exemption from the requirement in section 404(b) for the company to have the registered public
accounting firm that does the company’s audit attest to, and report on, management’s assessment of the company’s
internal control structure and procedures.[9] While Congress took a laudable first step in exempting the smaller
companies from section 404(b), Congress should complete promptly the job of reviewing the full
impact of section 404, including on medium-sized and large-sized companies, and repealing section
404 or fixing it to eliminate unwarranted costs. Companies could use freed funds, no longer absorbed by
section 404 implementation, to invest in their lines of business, creating much-needed jobs. Congress Should Re-examine
Whether Section 404 Is Needed and, If So, How to Cut Its Costly Burden on Businesses Congress should
reconsider carefully the requirements in section 404 for company management to assess the
effectiveness of its internal control structure and procedures and then for the company’s registered
public accounting firm to attest to that management assessment. Given the traditional role of each state
in regulating the corporate governance of corporations incorporated in that state,[10] Congress should
first examine anew whether federal law should address those subjects, or whether they
should be left to state law. In a society based on limited government and free enterprise, and in light of the
traditional role of the states in our federal system, Congress should start its examination with a presumption in favor of
repealing section 404 and leaving the subjects addressed by section 404 to the states.
Economy Advantage
1AC—Economy (Short)
The US economy is stagnating and not self- sustainable
Reuters, 4/29/15- News agency (Lucia Mutikani, “US economy stumbles in first
quarter as weather, low energy prices weigh in”, Reuters, 4/29/15,
http://www.reuters.com/article/2015/04/29/us-usa-economyidUSKBN0NK08520150429)//KTC
U.S. economic growth nearly stalled in the first quarter as harsh weather dampened consumer
spending and energy companies struggling with low prices slashed spending. Gross domestic product
expanded at an only 0.2 percent annual rate, the Commerce Department said on Wednesday. That was a
big step down from the fourth quarter's 2.2 percent pace and marked the weakest reading in a year.
A strong dollar and a now-resolved labor dispute at normally busy West Coast ports also slammed
growth, the government said. While there are signs the economy is pulling out of the soft patch, the lack of a
vigorous growth rebound has convinced investors the U.S. Federal Reserve will wait until
late this year to start hiking interest rates. The recovery is the slowest on record and the
economy has yet to experience annual growth in excess of 2.5 percent. "The U.S. economy has
yet to demonstrate the self-sustaining resilience that the Fed wants to see before raising interest rates,"
said Diane Swonk, chief economist at Mesirow Financial in Chicago. "A June liftoff is now off the table, our forecast for a
September move holds but even that has become tenuous." Fed officials at the end of their two-day policy meeting on
Wednesday acknowledged the softer growth, but shrugged it off as "in part reflecting transitory factors." The dollar
hit a nine-week low against a basket of currencies. Prices for U.S. Treasury debt fell in line with a global bond selloff, sparked by a poorly received five-year German bond auction. U.S. stocks were trading lower.
Section 404 prevents effective job creation and discourages company
investment in stocks
Addington, 11 – Group vice president for research at The Heritage Foundation. Vice President for Domestic and
Economic Policy at the Heritage Foundation. Former Republican staff director, chief counsel or counsel for four
congressional committees (Senate intelligence committee, House intelligence committee, House foreign affairs committee
and House Iran-Contra committee). Former assistant general counsel of the Central Intelligence Agency and as special
assistant and then deputy assistant to the president for legislative affairs during the administration of President Ronald
Reagan. He went on to serve in the Department of Defense as special assistant to the secretary and deputy secretary of
defense and then general counsel during the administration of President George H.W. Bush. Addington served as counsel
to the vice president, and then chief of staff to the vice president, during Richard B. Cheney's two terms in that office.
Bachelor of Science in Foreign Service from the Georgetown University School of Foreign Service. He received a law
degree with distinction in 1981 from the Duke University School of Law. (David S., “Congress Should Repeal or Fix
Section 404 of the Sarbanes–Oxley Act to Help Create Jobs”, Heritage Foundation, 9/30/11,
http://www.heritage.org/research/reports/2011/09/congress-should-repeal-or-fix-section-404-of-the-sarbanes-oxleyact-to-help-create-jobs)//KTC
Americans need jobs. The private sector of the American economy will create jobs when government
removes the obstacles it has placed in the way of job creation and when the demand for goods and
services rises. The government should promptly review the vast increase in government
regulation of the economy that has occurred in recent decades and modify or repeal
statutes and override regulations that discourage the private sector from creating jobs.
Congress could start by reviewing and fixing section 404 of the Sarbanes–Oxley Act of 2002, as
amended in 2010 by the Dodd–Frank Wall Street Reform and Consumer Protection Act.[1] Section 404
Imposes Unwarranted Costs on the Private Sector Section 404 of the Sarbanes–Oxley Act, as amended, requires
the Securities and Exchange Commission (SEC) to issue rules to require companies whose stock is
publicly traded (for example, on the New York Stock Exchange) and whose aggregate worldwide value is
$75 million or more, to: (1) include in its annual report filed with the SEC a statement of
the responsibility of the company management for “establishing and maintaining an adequate internal
control structure and procedures for financial reporting” ; (2) include in its annual report filed with the SEC an
assessment of the effectiveness of the company’s internal control structure and procedures for
financial reporting; and (3) have the registered public accounting firm that does the company’s audit
report “attest to, and report on, the assessment made by the management . . . .”[2] To acquire
and verify the accuracy of information needed to write an assessment of internal controls in an
organization of any significant size and, further, to get an auditing firm to attest to that assessment, costs money—lots
of it. As New York City Mayor Michael Bloomberg and U.S. Senator Charles E. Schumer said jointly, referring to the U.S.
regulatory framework as “a thicket of complicated rules” in 2007, “[t]he flawed implementation of the 2002
Sarbanes–Oxley Act (SOX), which produced far heavier
costs than expected, has only aggravated
the situation . . . .”[3] Later that year, in calling for changes in the implementation of section 404 rather than changes
in section 404 itself, then-President George W. Bush said that “complying with certain aspects of the law, such as
Section 404, has been costly for businesses and may be discouraging
companies from listing on our stock exchanges . . . .”[4] The Heritage Foundation conducted
a study in 2008 that showed major increases in the audit fees companies paid as a result of section 404.[5] The costs of
implementing section 404 were many multiples of what the SEC had estimated.[6]
FDI is necessary for continued competitiveness and economic growth – it’s
on a down side in the status squo
Ikenson, 13 – director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, MA in Economics
from the George Washington University and a BA in Political Science from Susquehanna University (Daniel J.,
“Policymakers Must Remove the Barriers to Foreign Investment in the United States”, Cato Institute, 10/30/13,
http://www.cato.org/publications/commentary/policymakers-must-remove-barriers-foreign-investment-unitedstates)//KTC
No country has been a stronger magnet for foreign direct investment than the United States.
Roughly 17 percent of the world’s $22 trillion stock of FDI is deployed in the U.S. economy — triple the stock in the next
largest destination. With the world’s biggest economy, a skilled workforce, an innovative culture, and deep and broad
capital markets, the United States has enormous advantages in the intensifying global
competition to attract investment from the world’s best companies. But those advantages have
been eroding. In 1999, the U.S. share of global FDI stood at 39 percent — a full 22 percentage
points higher than today — and has been on a continuous down slide ever since. Economic
growth, improved labor skills, greater business transparency, and political stability in emerging economies have made
them more alluring investment destinations. Meanwhile, burgeoning regulations, policy incongruity,
and lingering uncertainty about the business and political climates have reduced
America’s appeal. “The United States has slipped considerably over the past decade in a variety
of areas that directly impact investment decisions.” Positioned as it is at the technological frontier, the U.S.
economy requires continuous investment to replenish the machinery, software, laboratories, research
centers, and high-end manufacturing facilities that harness its human capital, animate new ideas, create wealth, and raise
living standards. Over the years, foreign-headquartered companies have satisfied an important part
of those investment requirements, bringing capital, know-how, and fresh ideas, while creating synergies by
establishing new enterprises and acquiring existing U.S. firms. These U.S. affiliates of foreign-owned
companies — call them “insourcing” companies — have punched well above their weight,
contributing disproportionately to U.S. output, compensation, capital investment,
productivity, exports, research and development spending, and other determinants of
growth. As reported in a new study published by the Organization for International Investment, insourcing
companies represent less than 0.5 percent of U.S. companies with payrolls, yet they
account for 5.9 percent of private-sector value added; 5.4 percent of private-sector employment; 11.7
percent of new private-sector, non-residential capital investment, and; 15.2 percent of private-sector research and
development spending. They pay 13.8 percent of all corporate taxes; earn 48.7 percent more revenue from their fixed
capital than the U.S. private sector average, and; compensate their employees at a premium of 22.0 percent above the U.S.
private-sector average. Competitive jolts to established domestic firms, technology spillovers,
and the hybridization and evolution of ideas also result from the infusion of foreign direct
investment. One can only wonder whether the Detroit automakers would still be producing the likes of the Ford Pinto, the
AMC Pacer, and the Chrysler K-Car had foreign nameplate producers not begun investing in the United States in the early
1980s, helping to reinvigorate a domestic industry that had fallen asleep at the wheel. The competition inspired the Big
Three to improve quality and selection, and subsequent technology sharing within the industry has benefitted producers
and consumers alike. No wonder policymakers are abuzz about attracting more insourcing
companies to U.S. shores.
Jobs are the vital internal link to the economy
Dewan and Benhardt 11/5/12 (Sabina Dewan and Jordan Bernhardt - writers for the
America Progress and research analysts, “Creating Just Jobs Must Be Our Top Priority”
Center for American Progress,
https://www.americanprogress.org/issues/labor/news/2012/11/15/45121/creating-justjobs-must-be-our-top-priority/) CW
“Our top priority has to be jobs and growth. We’ve got to build on the progress that we’ve made because
this nation succeeds when we’ve got a growing, thriving middle class.” President Barack Obama started his press
conference yesterday—his first since winning a second term—with those words in reference to the United States, but they
apply equally to countries around the world. His choice to rhetorically place jobs before growth should not be overlooked.
The world needs to focus first and foremost on job creation because jobs are necessary to
drive shared and sustainable economic growth. Although job creation and economic growth are related,
too often people falsely assume that if you create economic growth, the jobs will follow. But for the past several years , too
many nations have seen economic growth without concomitant growth in employment.
Creating just jobs—the sort that come with good pay, good benefits, and
good working conditions, including the right to freedom of association and
collective bargaining—is the key to growing the global middle class and
creating the aggregate demand that we need to power the world economy.
Without good pay, workers cannot become powerful consumers. And without the rights
they deserve, workers lack the economic stability they need before making big
investments in themselves, their children, and their societies. But it’s not just a problem facing the
United States, which needs to add 9 million new jobs to accommodate those displaced by the Great Recession of 2007–
2009 and new entrants into the labor market. The World Bank estimates that more than 200 million people around the
world currently do not have a job but would like one. There are also 2 billion people, most of them women, who are of
working age but are neither employed nor looking for work. By 2020 the world will need to create 600
million more jobs than there were in 2005 just to hold the employment-to-working-age
population ratio constant. Creating jobs—and making sure they are the right jobs—will be how we lift
millions of people out of poverty and into the middle class, how we empower billions of
women and young people, and how we develop a strong, secure, and robust 21st century
global economy. Access to jobs will be what determines whether or not the United States
has a world of flourishing consumers to which to sell its goods and services. U.S. exports
already support 7 percent of American jobs and 25 percent of U.S. manufacturing jobs
are supported by exports. Creating good jobs for people in other countries is a
fundamental part of creating more jobs for Americans here at home. As the president sets out to
create more jobs and revitalize economic growth in the United States, it is important to recognize that achieving our goals
depends heavily on the world beyond our borders. The Just Jobs Network has long recognized the magnitude of the
world’s employment challenge. We have pushed policymakers to elevate just job creation to a top priority in the United
States and abroad, on domestic agendas as well as in arenas like the Group of 20 developed and developing nations. Just
jobs are not only a driver of economic growth—they are also the vehicle through which
economic growth is broadly shared to raise living standards worldwide. In committing to a
domestic job creation agenda, the president must sign on to pushing an international one as well.
Economic decline causes war – studies prove
Royal ‘10 (Jedediah, Director of Cooperative Threat Reduction at the U.S. Department of Defense, 2010, Economic
Integration, Economic Signaling and the Problem of Economic Crises, in Economics of War and Peace: Economic, Legal
and Political Perspectives, ed. Goldsmith and Brauer, p. 213-215)
Less intuitive is how periods of economic decline may increase the likelihood of external
conflict. Political science literature has contributed a moderate degree of attention to the impact of economic decline
and the security and defence behaviour of interdependent stales. Research in this vein has been considered at systemic,
dyadic and national levels. Several notable contributions follow. First, on the systemic level. Pollins (20081 advances
Modclski and Thompson's (1996) work on leadership cycle theory, finding that rhythms in the global economy
are associated with the rise and fall of a pre-eminent power and the often bloody
transition from one pre-eminent leader to the next. As such, exogenous shocks such as
economic crises could usher in a redistribution of relative power (see also Gilpin. 19SJ) that
leads to uncertainty about power balances, increasing the risk of miscalculation (Fcaron.
1995). Alternatively, even a relatively certain redistribution of power could lead to a permissive
environment for conflict as a rising power may seek to challenge a declining power (Werner.
1999). Separately. Pollins (1996) also shows that global economic cycles combined with parallel leadership cycles impact
the likelihood of conflict among major, medium and small powers, although he suggests that the causes and connections
between global economic conditions and security conditions remain unknown. Second, on a dyadic level. Copeland's (1996.
2000) theory of trade expectations suggests that 'future expectation of trade' is a significant variable in understanding
economic conditions and security behaviour of states. He argues that interdependent states arc likely to gain pacific
benefits from trade so long as they have an optimistic view of future trade relations. However, if the expectations
of future trade decline, particularly for difficult to replace items such as energy resources,
the likelihood for conflict increases, as states will be inclined to use force to gain access to
those resources. Crises could potentially be the trigger for decreased trade expectations either on its own or because
it triggers protectionist moves by interdependent states.4 Third, others have considered the link between
economic decline and external armed conflict at a national level. Mom berg and Hess (2002)
find a strong correlation between internal conflict and external conflict, particularly
during periods of economic downturn. They write. The linkage, between internal and
external conflict and prosperity are strong and mutually reinforcing. Economic conflict
lends to spawn internal conflict, which in turn returns the favour. Moreover, the presence of
a recession tends to amplify the extent to which international and external conflicts selfreinforce each other (Hlomhen? & Hess. 2(102. p. X9> Economic decline has also been linked with
an increase in the likelihood of terrorism (Blombcrg. Hess. & Wee ra pan a, 2004). which has the
capacity to spill across borders and lead to external tensions. Furthermore, crises generally
reduce the popularity of a sitting government. "Diversionary theory" suggests that, when
facing unpopularity arising from economic decline, sitting governments have increased
incentives to fabricate external military conflicts to create a 'rally around the flag' effect.
Wang (1996), DcRoucn (1995), and Blombcrg. Hess, and Thacker (2006) find supporting evidence showing that economic
decline and use of force arc at least indirecti) correlated. Gelpi (1997). Miller (1999). and Kisangani and Pickering (2009)
suggest that Ihe tendency towards diversionary tactics arc greater for democratic states than autocratic states, due to the
fact that democratic leaders are generally more susceptible to being removed from office due to lack of domestic support.
DeRouen (2000) has provided evidence showing that periods of weak economic performance in the United States, and
thus weak Presidential popularity, are statistically linked lo an increase in the use of force. In summary, rcccni
economic scholarship positively correlates economic integration with an increase in the
frequency of economic crises, whereas political science scholarship links economic
decline with external conflict al systemic, dyadic and national levels.' This implied connection between
integration, crises and armed conflict has not featured prominently in the economic-security debate and deserves more
attention.
Competitiveness prevent great power nuclear war
Zalmay Khalilzad was the United States ambassador to Afghanistan, Iraq, and the
United Nations during the presidency of George W. Bush and the director of policy
planning at the Defense Department from 1990 to 1992, “ The Economy and National
Security”, 2-8-11, http://www.nationalreview.com/articles/print/259024
We face this domestic challenge while other major powers are experiencing rapid economic growth. Even though
countries such as China, India, and Brazil have profound political, social, demographic, and economic problems, their
economies are growing faster than ours, and this could alter the global distribution of
power. These trends could in the long term produce a multi-polar world. If U.S. policymakers
fail to act and other powers continue to grow, it is not a question of whether but when a new
international order will emerge. The closing of the gap between the United States and its rivals could
intensify geopolitical competition among major powers, increase incentives for local
powers to play major powers against one another, and undercut our will to preclude or
respond to international crises because of the higher risk of escalation. The stakes are
high. In modern history, the longest period of peace among the great powers has been the era
of U.S. leadership. By contrast, multi-polar systems have been unstable, with their
competitive dynamics resulting in frequent crises and major wars among the great
powers. Failures of multi-polar international systems produced both world wars.
American retrenchment could have devastating consequences. Without an American
security blanket, regional powers could rearm in an attempt to balance against emerging
threats. Under this scenario, there would be a heightened possibility of arms races,
miscalc ulation, or other crises spiraling into all-out conflict. Alternatively, in seeking to
accommodate the stronger powers, weaker powers may shift their geopolitical posture
away from the United States. Either way, hostile states would be emboldened to make
aggressive moves in their regions. As rival powers rise, Asia in particular is likely to emerge as a
zone of great-power competition. Beijing’s economic rise has enabled a dramatic military
buildup focused on acquisitions of naval, cruise, and ballistic missiles, long-range stealth aircraft, and anti-satellite
capabilities. China’s strategic modernization is aimed, ultimately, at denying the United States access to the seas around
China. Even as cooperative economic ties in the region have grown, China’s expansive territorial claims — and provocative
statements and actions following crises in Korea and incidents at sea — have roiled its relations with South Korea, Japan,
India, and Southeast Asian states. Still, the United States is the most significant barrier facing Chinese
hegemony and aggression. Given the risks, the United States must focus on restoring its
economic and fiscal condition while checking and managing the rise of potential adversarial
regional powers such as China. While we face significant challenges, the U.S. economy still accounts for over 20
percent of the world’s GDP. American institutions — particularly those providing enforceable rule of law — set it
apart from all the rising powers. Social cohesion underwrites political stability. U.S. demographic
trends are healthier than those of any other developed country. A culture of innovation, excellent
institutions of higher education, and a vital sector of small and medium-sized enterprises propel the U.S. economy in ways
difficult to quantify. Historically, Americans have responded pragmatically, and sometimes through trial and error, to
work our way through the kind of crisis that we face today.
1AC—Economy (Long)
The US economy is stagnating and not self- sustainable
Reuters, 4/29/15- News agency (Lucia Mutikani, “US economy stumbles in first
quarter as weather, low energy prices weigh in”, Reuters, 4/29/15,
http://www.reuters.com/article/2015/04/29/us-usa-economyidUSKBN0NK08520150429)//KTC
U.S. economic growth nearly stalled in the first quarter as harsh weather dampened consumer
spending and energy companies struggling with low prices slashed spending. Gross domestic product
expanded at an only 0.2 percent annual rate, the Commerce Department said on Wednesday. That was a
big step down from the fourth quarter's 2.2 percent pace and marked the weakest reading in a year.
A strong dollar and a now-resolved labor dispute at normally busy West Coast ports also slammed
growth, the government said. While there are signs the economy is pulling out of the soft patch, the lack of a
vigorous growth rebound has convinced investors the U.S. Federal Reserve will wait until
late this year to start hiking interest rates. The recovery is the slowest on record and the
economy has yet to experience annual growth in excess of 2.5 percent. "The U.S. economy has
yet to demonstrate the self-sustaining resilience that the Fed wants to see before raising interest rates,"
said Diane Swonk, chief economist at Mesirow Financial in Chicago. "A June liftoff is now off the table, our forecast for a
September move holds but even that has become tenuous." Fed officials at the end of their two-day policy meeting on
Wednesday acknowledged the softer growth, but shrugged it off as "in part reflecting transitory factors." The dollar
hit a nine-week low against a basket of currencies. Prices for U.S. Treasury debt fell in line with a global bond selloff, sparked by a poorly received five-year German bond auction. U.S. stocks were trading lower.
SOX destroys the economy (2) internal links
First, is Compliance Costs
Indirect and direct costs of compliance with SOC are higher than anticipated
Lowenbrug, 05 –Ph.D. in Economics and Finance and adjunct faculty member in the School of Professional
Studies and Business Education at Johns Hopkins University. Manager in the Network Industries Strategies group of the
FTI Economic Consulting practice (Paul, “The Impact Of Sarbanes Oxley On Companies, Investors, & Financial Markets”,
Sarbanes-Oxley Compliance Journal, 12/6/05, http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=1141)//KTC
The cost of SOX compliance comes with a high price tag. Companies face both direct
(quantifiable) and indirect (non-quantifiable) costs
such as increased D&O insurance premiums,
higher directors fees as a result of greater time commitments and responsibilities, larger expenses
related to internal control software and higher costs relating to consulting fees. Both types of costs have
proven to be significantly higher than originally estimated by the Securities and Exchange
Commission (SEC). Since SOX was passed, much has been written about the costs and benefits of corporate compliance -specifically Section 404 which mandates an audit of internal accounting controls. Corporate
America and the government agree that restoring investor confidence is in the best interest of the economy, publicly
traded corporations, and investors; however, they disagree on the actual cost of SOX compliance. Investors know that final
solution is to create a moral and ethical environment in which corporate wrongdoing cannot occur. Will SOX create this
environment? Doubtful, however it can play a major role. Below is a discussion about the impact the high costs of
compliance and potential long-term benefits to companies, investors and the U.S. financial markets. COST OF
COMPLIANCE The direct and indirect cost of compliance can grouped into three sections:
Costs related to increases in personal liability obligations; costs associated with internal
control improvements; and costs to the U.S. financial markets. Through new substantive
requirements, increased penalties, and an increased emphasis on enforcement, SOX
regulations have increased the risk that corporate officers and directors will be subject to
personal civil and criminal liability. This risk results in increased legal fees; executive, board
and officer compensation; insurance premiums and outsourcing costs to help monitor internal
audits.
Section 404 high compliance costs generate lower job growth
John, 11 – lead analyst on issues relating to pensions, financial institutions, asset building, and Social Security
reform at the Heritage Foundation and Senior Fellow at the Heritage Foundation. Nonresident Senior Fellow at the
Brookings Institution and as the Deputy Director of the Retirement Security Project. MA in Economics from The
University of Georgia and MBA in Finance from the University of Georgia Terry College of Business (David C., “10 Years
After Enron, Time to Throw Out Sarbanes–Oxley’s Section 404”, The Daily Signal, 12/02/11,
http://dailysignal.com/2011/12/02/ten-years-after-enron-it-is-time-to-throw-outsarbanes%e2%80%93oxley%e2%80%99s-section-404/?ac=1)//KTC
Exactly 10 years ago today, the Enron Corporation filed for bankruptcy after it was revealed that it had blatantly falsified
its earnings statements for many years. Although most of the accounting irregularities that caused its collapse were
already illegal, Congress overreacted and passed Sarbanes–Oxley, a massive and deeply flawed
accounting reform law. A decade later, it is time for cooler heads to prevail, and to consider repealing
Section 404. This onerous provision is supposed to ensure that the financial reports of publicly traded
corporations meet certain standards, but in reality its major role is to greatly increase compliance costs. It
continued presence discourages growing companies from going public to raise capital by
imposing on them very high compliance costs in the name of protecting their shareholders.
The result is lower job growth by these companies and fewer workers hired by new businesses.
Congress partially recognized this in 2010 by granting an exemption to publicly traded companies
whose stock is worth a total of $75 million or less, but this threshold is far too low, and questions remain if
Section 404 is needed at all. Section 404 duplicates part of Section 302 and requires the management of
any publicly traded company to produce an internal control report describing the scope and
adequacy of its financial reporting procedures and internal financial control structures. The company is required
to include this information in its annual report, send it to investors, and file it with the SEC. In
addition, the company must produce “an assessment…of the effectiveness of the internal control structure
and procedures of the issuer for financial reporting.” In the same report, an outside auditor must both attest
to and report on the management’s assessment of the effectiveness of the company’s
internal controls and procedures. In short, Section 404 requires both an internal audit and
external audit of financial accounting controls, which has turned out to be costly and timeconsuming in practice.
Jobs are the vital internal link to the economy
Dewan and Benhardt 11/5/12 (Sabina Dewan and Jordan Bernhardt - writers for the
America Progress and research analysts, “Creating Just Jobs Must Be Our Top Priority”
Center for American Progress,
https://www.americanprogress.org/issues/labor/news/2012/11/15/45121/creating-justjobs-must-be-our-top-priority/) CW
“Our top priority has to be jobs and growth. We’ve got to build on the progress that we’ve made because
this nation succeeds when we’ve got a growing, thriving middle class.” President Barack Obama started his press
conference yesterday—his first since winning a second term—with those words in reference to the United States, but they
apply equally to countries around the world. His choice to rhetorically place jobs before growth should not be overlooked.
The world needs to focus first and foremost on job creation because jobs are necessary to
drive shared and sustainable economic growth. Although job creation and economic growth are related,
too often people falsely assume that if you create economic growth, the jobs will follow. But for the past several years , too
many nations have seen economic growth without concomitant growth in employment.
Creating just jobs—the sort that come with good pay, good benefits, and
good working conditions, including the right to freedom of association and
collective bargaining—is the key to growing the global middle class and
creating the aggregate demand that we need to power the world economy.
Without good pay, workers cannot become powerful consumers. And without the rights
they deserve, workers lack the economic stability they need before making big
investments in themselves, their children, and their societies. But it’s not just a problem facing the
United States, which needs to add 9 million new jobs to accommodate those displaced by the Great Recession of 2007–
2009 and new entrants into the labor market. The World Bank estimates that more than 200 million people around the
world currently do not have a job but would like one. There are also 2 billion people, most of them women, who are of
working age but are neither employed nor looking for work. By 2020 the world will need to create 600
million more jobs than there were in 2005 just to hold the employment-to-working-age
population ratio constant. Creating jobs—and making sure they are the right jobs—will be how we lift
millions of people out of poverty and into the middle class, how we empower billions of
women and young people, and how we develop a strong, secure, and robust 21st century
global economy. Access to jobs will be what determines whether or not the United States
has a world of flourishing consumers to which to sell its goods and services. U.S. exports
already support 7 percent of American jobs and 25 percent of U.S. manufacturing jobs
are supported by exports. Creating good jobs for people in other countries is a
fundamental part of creating more jobs for Americans here at home. As the president sets out to
create more jobs and revitalize economic growth in the United States, it is important to recognize that achieving our goals
depends heavily on the world beyond our borders. The Just Jobs Network has long recognized the magnitude of the
world’s employment challenge. We have pushed policymakers to elevate just job creation to a top priority in the United
States and abroad, on domestic agendas as well as in arenas like the Group of 20 developed and developing nations. Just
jobs are not only a driver of economic growth—they are also the vehicle through which
economic growth is broadly shared to raise living standards worldwide. In committing to a
domestic job creation agenda, the president must sign on to pushing an international one as well.
Second, is FDI
Personal liability discourages market investment – high costs generate risk
aversion
Lowenbrug, 05 –Ph.D. in Economics and Finance and adjunct faculty member in the School of Professional
Studies and Business Education at Johns Hopkins University. Manager in the Network Industries Strategies group of the
FTI Economic Consulting practice (Paul, “The Impact Of Sarbanes Oxley On Companies, Investors, & Financial Markets”,
Sarbanes-Oxley Compliance Journal, 12/6/05, http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=1141)//KTC
Personal Liability Obligations Auditors now face additional costs that are passed on to corporate
clients. For example, large accounting firms must undergo annual quality reviews, while smaller firms
must undergo a review every three years. SOX’s requirement that audit partners must rotate every
five years, and that outside auditors attest to and report on the management’s assessment of the internal controls of
each issuer also increases auditor costs. Due to heightened political and legal risks associated with
service as a CEO, CFO or board member, companies have been forced to increase compensation
to lure executives into running a company under intense scrutiny. Finding suitable individuals has become an
expensive undertaking and the fees for an executive search must be shared by companies,
investors and customers. Companies additionally face increased legal fees because boards
must hire outside lawyers and consultants for advice on their expanded role and help minimize risk. With
increased responsibility and accountability for directors and officers, D&O coverage has become more difficult to obtain
and thus more expensive. For many companies, outsourcing the compliance procedure is a better alternative than
managing the procedure with internal resources. Retaining a third-party helps ensure independence, achieve broader
coverage, and compensate for a lack of internal expertise and staff availability. As a result of the increase in
personal liability, companies may become more cautious and risk-adverse in the post-SOX
environment and this is where indirect costs come into play. Many corporate officers and directors might
be too fearful of personal liability to take business actions with risks. These individuals may
decide that it is far better for a company to restrain its growth and produce steady profits than to take the risks associated
with reaching for dominance in its market or entering entirely new areas of activity. This approach inevitably
stifles innovation, and the economic growth of both the company and the economy. Costs
associated with Internal Control Improvement In order to create strong internal controls, many companies must update
and refurbish their existing information technology systems to allow standardization and integration throughout all
applications company-wide. Time and money are limited resources for companies. Devoting time
and money to SOX compliance can limit other activities for which those resources could have been
used from research at a biotech plant, to analyst hiring at an asset management firm, to maintenance of an employee
benefit program. Additionally, as companies scrutinize their internal controls and become more conscious of the
process used to make decisions, they may become more
risk-adverse and slower to seize
opportunities. Some companies must pass their administrative costs of SOX compliance
onto customers by increasing prices, thus making the company less competitive in the
marketplace, especially to foreign competition not subject to SOX. Critics argue that although SOX has raised the level of
disclosure, the readjustment of costs affects a company’s global competitiveness.
Furthermore, the restraints
concerns.
from internal controls reduce the flexibility to respond to customer
SOX prevents companies from going public – decreases foreign and
domestic investment in the market
Lowenbrug, 05 –Ph.D. in Economics and Finance and adjunct faculty member in the School of Professional
Studies and Business Education at Johns Hopkins University. Manager in the Network Industries Strategies group of the
FTI Economic Consulting practice (Paul, “The Impact Of Sarbanes Oxley On Companies, Investors, & Financial Markets”,
Sarbanes-Oxley Compliance Journal, 12/6/05, http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=1141)//KTC
Conversely, fewer companies are willing to enter the market. SOX requirements make
“going public” costly and the maintenance required to “stay public” prohibitively expensive,
forcing companies to look elsewhere to raise capital. Foreign companies are also hesitant about the
requirements that SOX regulations would impose and are reluctant to commit to the U.S.
capital markets. U.S. institutional investors are becoming more willing to invest in foreign
markets. For some, the benefits of being on a U.S. exchange may not outweigh the costs of U.S. legal and regulatory
compliance (in addition to the typical international challenges of cultural and regulatory differences). For example,
Porsche AG elected not to list shares on the NYSE, reportedly due to its objection to the certification of financial
statements requirement of the SOX Act. In addition, SOX makes acquisitions of U.S. public companies
by foreign entities more expensive. U.S. laws require registration of the foreign company shares with the SEC
before the transaction can take place. Registration entails, among other things, full compliance with
SOX. Therefore, if the foreign acquirer is not listed in the U.S. it will be difficult to issue its own
shares to the selling shareholders of the U.S. firm.
SOX destroys foreign confidence in the US market
Lyons et al 8 (Erin, School of IR at Ohio State, along with Dr. Richard Dietrich,
Department of Accounting and Management Information Systems and Dr. Anthony
Mughan, Department of International Studies, “The Implications of the Sarbanes-Oxley
Act for U.S. Foreign Relations”, Ohio State University Press, 2008)
The international outrage toward Sarbanes-Oxley is best summarized by the following
statement: “SOX reaches beyond the registration and disclosure requirements first
established by the 1933 and 1934 Acts and forces foreign corporations to conform to a
model of corporate governance crafted by the U.S. Congress.” 67 Those who object to the Act are
wary of the increasing reach of the SEC and newly created PCAOB. International concern primarily
stems from Section 106 and there is a call to allow foreign exemptions for those firms that are cross-listed on U.S.
exchanges. 68 Many critics emphasize that they believe in the overall purpose of SarbanesOxley, but do not support the tedious requirements now demanded of foreign
corporations . Another common reaction to SOX is that many believe it was created to
clean up the mess of scandals that occurred in the U.S. during 2002 and that foreign firms should not
have to suffer the consequences of cleaning up the U.S. system. One source believes that
“extending this regulation beyond US firms is seen as an arrogant imposition from
American regulators.” 69 The negative foreign opinion stems from the fact that U.S. firms gain the upper
hand over international accounting firms who now must answer to multiple regulatory systems.
Disapproval of SOX is especially prevalent in the European Union, where governments
are currently trying to merge several economies, all with differing laws and regulatory bodies, into a single,
unified EU economic system. 70 Sarbanes-Oxley essentially deepens this burden for the EU
and the U.S. could possibly face future repercussions from the EU if it were to unify.
Answering to more than one accounting regulation system is an extreme
disadvantage for foreign firms and representatives of the Big Four Accounting firms abroad have readily
voiced their dissatisfaction with the new law. Aidan Walsh, an executive of KPMG International, has said that
SOX has made it tricky for the firm to implement abroad and believes that “the Act was put
together hastily and with little regard for the consequences to companies based outside of the
US.” 71 A European partner at Price Waterhouse Coopers echoes a similar attitude toward SOX and
explains international opposition by stating, “ No one wants to be a copy of the US. If there is
any country where something has gone wrong in the field of corporate governance, and
accounting and capital markets, it’s the US .” 72 Consequently, the international community is
now beginning to wonder if the U.S. capital market is really the place to
invest if companies are now forced to comply with a law that puts them at
an inherent disadvantage in the marketplace. 73 In some ways, it is surprising that there is
such opposition abroad because foreign corporations have traditionally followed U.S.
securities laws for years in the past. A careful look into the legal framework of securities regulation provides
valuable insight into this apparent anomaly. Although the creation of Regulation S, as mentioned in the preceding section,
calmed securities registration worries abroad, fraud regulation, despite the tests developed by the U.S. Courts, still
creates unstable conditions in the international marketplace.
FDI is necessary for continued competitiveness and economic growth – it’s
on a down side in the status squo
Ikenson, 13 – director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, MA in Economics
from the George Washington University and a BA in Political Science from Susquehanna University (Daniel J.,
“Policymakers Must Remove the Barriers to Foreign Investment in the United States”, Cato Institute, 10/30/13,
http://www.cato.org/publications/commentary/policymakers-must-remove-barriers-foreign-investment-unitedstates)//KTC
No country has been a stronger magnet for foreign direct investment than the United States.
Roughly 17 percent of the world’s $22 trillion stock of FDI is deployed in the U.S. economy — triple the stock in the next
largest destination. With the world’s biggest economy, a skilled workforce, an innovative culture, and deep and broad
capital markets, the United States has enormous advantages in the intensifying global
competition to attract investment from the world’s best companies. But those advantages have
been eroding. In 1999, the U.S. share of global FDI stood at 39 percent — a full 22 percentage
points higher than today — and has been on a continuous down slide ever since. Economic
growth, improved labor skills, greater business transparency, and political stability in emerging economies have made
them more alluring investment destinations. Meanwhile, burgeoning regulations, policy incongruity,
and lingering uncertainty about the business and political climates have reduced
America’s appeal. “The United States has slipped considerably over the past decade in a variety
of areas that directly impact investment decisions.” Positioned as it is at the technological frontier, the U.S.
economy requires continuous investment to replenish the machinery, software, laboratories, research
centers, and high-end manufacturing facilities that harness its human capital, animate new ideas, create wealth, and raise
living standards. Over the years, foreign-headquartered companies have satisfied an important part
of those investment requirements, bringing capital, know-how, and fresh ideas, while creating synergies by
establishing new enterprises and acquiring existing U.S. firms. These U.S. affiliates of foreign-owned
companies — call them “insourcing” companies — have punched well above their weight,
contributing disproportionately to U.S. output, compensation, capital investment,
productivity, exports, research and development spending, and other determinants of
growth. As reported in a new study published by the Organization for International Investment, insourcing
companies represent less than 0.5 percent of U.S. companies with payrolls, yet they
account for 5.9 percent of private-sector value added; 5.4 percent of private-sector employment; 11.7
percent of new private-sector, non-residential capital investment, and; 15.2 percent of private-sector research and
development spending. They pay 13.8 percent of all corporate taxes; earn 48.7 percent more revenue from their fixed
capital than the U.S. private sector average, and; compensate their employees at a premium of 22.0 percent above the U.S.
private-sector average. Competitive jolts to established domestic firms, technology spillovers,
and the hybridization and evolution of ideas also result from the infusion of foreign direct
investment. One can only wonder whether the Detroit automakers would still be producing the likes of the Ford Pinto, the
AMC Pacer, and the Chrysler K-Car had foreign nameplate producers not begun investing in the United States in the early
1980s, helping to reinvigorate a domestic industry that had fallen asleep at the wheel. The competition inspired the Big
Three to improve quality and selection, and subsequent technology sharing within the industry has benefitted producers
and consumers alike. No wonder policymakers are abuzz about attracting more insourcing
companies to U.S. shores.
Economic decline causes war – studies prove
Royal ‘10 (Jedediah, Director of Cooperative Threat Reduction at the U.S. Department of Defense, 2010, Economic
Integration, Economic Signaling and the Problem of Economic Crises, in Economics of War and Peace: Economic, Legal
and Political Perspectives, ed. Goldsmith and Brauer, p. 213-215)
Less intuitive is how periods of economic decline may increase the likelihood of external
conflict. Political science literature has contributed a moderate degree of attention to the impact of economic decline
and the security and defence behaviour of interdependent stales. Research in this vein has been considered at systemic,
dyadic and national levels. Several notable contributions follow. First, on the systemic level. Pollins (20081 advances
Modclski and Thompson's (1996) work on leadership cycle theory, finding that rhythms in the global economy
are associated with the rise and fall of a pre-eminent power and the often bloody
transition from one pre-eminent leader to the next. As such, exogenous shocks such as
economic crises could usher in a redistribution of relative power (see also Gilpin. 19SJ) that
leads to uncertainty about power balances, increasing the risk of miscalculation (Fcaron.
1995). Alternatively, even a relatively certain redistribution of power could lead to a permissive
environment for conflict as a rising power may seek to challenge a declining power (Werner.
1999). Separately. Pollins (1996) also shows that global economic cycles combined with parallel leadership cycles impact
the likelihood of conflict among major, medium and small powers, although he suggests that the causes and connections
between global economic conditions and security conditions remain unknown. Second, on a dyadic level. Copeland's (1996.
2000) theory of trade expectations suggests that 'future expectation of trade' is a significant variable in understanding
economic conditions and security behaviour of states. He argues that interdependent states arc likely to gain pacific
benefits from trade so long as they have an optimistic view of future trade relations. However, if the expectations
of future trade decline, particularly for difficult to replace items such as energy resources,
the likelihood for conflict increases, as states will be inclined to use force to gain access to
those resources. Crises could potentially be the trigger for decreased trade expectations either on its own or because
it triggers protectionist moves by interdependent states.4 Third, others have considered the link between
economic decline and external armed conflict at a national level. Mom berg and Hess (2002)
find a strong correlation between internal conflict and external conflict, particularly
during periods of economic downturn. They write. The linkage, between internal and
external conflict and prosperity are strong and mutually reinforcing. Economic conflict
lends to spawn internal conflict, which in turn returns the favour. Moreover, the presence of
a recession tends to amplify the extent to which international and external conflicts selfreinforce each other (Hlomhen? & Hess. 2(102. p. X9> Economic decline has also been linked with
an increase in the likelihood of terrorism (Blombcrg. Hess. & Wee ra pan a, 2004). which has the
capacity to spill across borders and lead to external tensions. Furthermore, crises generally
reduce the popularity of a sitting government. "Diversionary theory" suggests that, when
facing unpopularity arising from economic decline, sitting governments have increased
incentives to fabricate external military conflicts to create a 'rally around the flag' effect.
Wang (1996), DcRoucn (1995), and Blombcrg. Hess, and Thacker (2006) find supporting evidence showing that economic
decline and use of force arc at least indirecti) correlated. Gelpi (1997). Miller (1999). and Kisangani and Pickering (2009)
suggest that Ihe tendency towards diversionary tactics arc greater for democratic states than autocratic states, due to the
fact that democratic leaders are generally more susceptible to being removed from office due to lack of domestic support.
DeRouen (2000) has provided evidence showing that periods of weak economic performance in the United States, and
thus weak Presidential popularity, are statistically linked lo an increase in the use of force. In summary, rcccni
economic scholarship positively correlates economic integration with an increase in the
frequency of economic crises, whereas political science scholarship links economic
decline with external conflict al systemic, dyadic and national levels.' This implied connection between
integration, crises and armed conflict has not featured prominently in the economic-security debate and deserves more
attention.
Exts. FDI Low
FDI declining now, markets are being hamstringed – we assume their 2011
and 2010 studies
Jackson, 13 – Specialist in International Trade and Finance (James K., “Foreign Direct
Investment in the United States: An Economic Analysis”, Congressional Research
Service, 12/11/13,
Foreign direct investment in the United States dropped sharply in 2012 after rebounded slowly in
2010 and 2011 after falling from the $310 billion recorded in 2008. According to preliminary data,
foreign direct investment in the United States in 2013 could fall by 10% below the amount recorded
in 2012. (Note: The United States defines foreign direct investment as the ownership or control, directly or indirectly,
by one foreign person [individual, branch, partnership, association, government, etc.] of 10% or more of the voting
securities of an incorporated U.S. business enterprise or an equivalent interest in an unincorporated U.S. business
enterprise (15 CFR §806.15 [a][1]). In 2012, according to U.S. Department of Commerce data, foreigners
invested $166 billion in U.S. businesses and real estate, down 28% from the $230 billion invested
in 2011. Foreign direct investments are highly sought after by many state and local governments
that are struggling to create additional jobs in their localities. While some in Congress encourage
such investment to offset the perceived negative economic effects of U.S. firms investing abroad, others are concerned
about foreign acquisitions of U.S. firms that are considered essential to U.S. national and economic security.
AT: Alt Causes FDI
Alt causes don’t take out the aff, even if there are multiple other reforms
that could be done, focusing on some way to increase FDI is sufficient
Ikenson, 14- director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, MA in Economics
from the George Washington University and a BA in Political Science from Susquehanna University (Daniel J., “More and
Better Foreign Direct Investment”, Cato Institute, November 2014, http://www.cato.org/publications/cato-onlineforum/more-better-foreign-direct-investment)//KTC
There is probably no single elixir to reverse the declining long-term U.S. growth rate.
Getting significantly more mileage out of our labor and capital likely will require a variety
of reforms. Among them should be measures that expand the potential for economies of
scale, such as deepening global economic integration through harmonization of regulations and standards, removing
tariffs on industrial inputs and final goods, and eliminating barriers to services trade. Two “megaregional” trade negotiations that could yield that outcome are currently in progress. But the priority developed in
this essay is for policymakers to focus on making the United States a more attractive location
for foreign direct investment. The United States is competing with the rest of the world for
investment in domestic value-added activities, and foreign providers of that capital have
demonstrated the capacity to raise averages across a variety of economic metrics, including GDP.
FDI is key to the US economy, regulations are prevent investment, the aff is
sufficient to drive an increase
Ikenson, 14- director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, MA in Economics
from the George Washington University and a BA in Political Science from Susquehanna University (Daniel J., “More and
Better Foreign Direct Investment”, Cato Institute, November 2014, http://www.cato.org/publications/cato-onlineforum/more-better-foreign-direct-investment)//KTC
Last year, the Global Investment in American Jobs Act of 2013 was passed in the House of Representatives. The Senate
has not yet considered the bill, but one of its cosponsors, Senator Bob Corker (R-TN), remarked: “If we want the U.S. to be
the very best place in the world to do business, we need to take a close look at what we’re doing right, what we’re doing
wrong and how we can eliminate barriers that diminish investment in the U.S.” The “Findings” section of the
legislation states the importance of foreign direct investment to the U.S. economy,
acknowledges that the U.S. share has been declining in the face of growing competition
from other countries, and calls for a comprehensive assessment of the policies that both
repel and attract foreign investment. The bill’s premise is that U.S. policy and its accumulated residue
have contributed to a business climate that might be deterring foreign investment in the
United States, and that changes to those policies could serve to attract new investment. Whether through this bill or some
other vehicle, the concept of a comprehensive policy audit to identify the most fruitful reforms followed by quick
implementation makes good sense. Considering that the United States has the highest corporate tax rate among OECD
countries and an extraterritorial system that subjects corporate earnings abroad to punishingly high rates upon
repatriation, tax reform would likely make the list. The Peterson Institute’s Gary Hufbauer and Martin Vieiro argue in a
recent paper that “[r]educing the U.S. corporate tax rate is certainly the most efficient way to encourage domestic
investment and associated gains in production and jobs.” Investment deterrents can be found in the millions of pages of
the U.S. Code and the Federal Register. According to the Competitive Enterprise Institute, the cost of compliance
with federal regulations reached $1.863 trillion in 2013. In January 2011, President Obama issued
Executive Order 13563 under the heading “Improving Regulation and Regulatory Review.” Section 1 states: “Our
regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth,
innovation, competitiveness and job creation. It must be based on the best available science. It must allow for public
participation and an open exchange of ideas. It must promote predictability and reduce uncertainly. It must identify and
use the best, most innovative, and least burdensome tools for achieving regulatory ends. It must take into account benefits
and costs, both quantitative and qualitative. It must ensure that regulations are accessible, consistent, written in plain
language, and easy to understand. It must measure, and seek to improve, the actual results of regulatory requirements.”
Certainly, a comprehensive audit would identify regulatory overkill as an important
impediment to investment. President Obama (or his successor) should be prepared to reissue Executive Order
13536, but with a much greater sense of urgency and seriousness, including external reviews with goals and firm deadlines
included. If incoherent U.S. energy policies — policies that leaves investors guessing about whether and to what extent gas
and oil exports will be restricted next year or the year after, and about whether solar energy will be subsidized or taxed in
2015 — are found to be deterring investment, policy remedies must be implemented. If U.S.-based producers
are disadvantaged by higher production costs than their foreign competitors on account of
the customs duties they must pay for raw materials and components, permanently eliminating
all duties on production inputs should be an option on the table. If a dearth of skilled workers is cited as an investment
deterrent, the spotlight should be shone on U.S. education and immigration policy failures with the goal of finding the
right solutions. If liability risks on account of wayward class-action suits and legal system abuses are keeping investors at
bay, major tort reform should be seriously considered. Foreign direct investment is a verdict about the efficacy
of a country’s institutions, policies, and potential. Given the importance of FDI to
economic growth, understanding its determinants and crafting policy accordingly is a
matter of good governance and common sense.
FBI Advantage
This advantage is not great, but it is designed to get you to impacts other
than the economy and competitiveness
There is a lot of interaction between this advantage and the fraud DA (this is
the link turn)
1AC—FBI Advantage Stem
SOX regulations are ineffective—they don’t prevent fraud and crush market
self-regulation
Kuschnik 8 - Bernhard Kuschnik is a legal clerk at the Landgericht (Regional Court) in Düsseldorf, Germany; First State Exam in
Law (Higher Regional); LL.M. (University of Aberdeen, Scotland, UK), and PhD Candidate at the Eberhard Karls University of Tübingen,
Germany. (“THE SARBANES OXLEY ACT: “BIG BROTHER IS WATCHING YOU” OR ADEQUATE MEASURES OF CORPORATE
GOVERNANCE REGULATION?” http://businesslaw.newark.rutgers.edu/RBLJ_vol5_no1_kuschnik.pdf 2008) STRYKER
***MODIFIED FOR OBJECTIONABLE LANGUAGE***
Finally, SOX declares the state as being the overall watchdog of corporate governance.
Section 107(a) provides the SEC with oversight and enforcement authority over
the Board .89 If a company chooses to introduce a new governance rule, it has to ask the SEC if the new rule is consistent with SOX
before the new provision can be deemed effective.90 The Board is required to “promptly file any notice with the Commission of any final
sanction on any registered public accounting firm or on any associated person thereof,”91 and has the final word regarding the gravity of
disciplinary action against the outside auditor.92 Under certain circumstances the SEC is also able to amend the rules of the Board.93
Furthermore, SOX not only patronizes the decisions of the Board, but of shareholders as well. According to § 107(d) of SOX, the SEC has the
authority to “relieve the Board of any responsibility to enforce compliance with any provision of this Act, the securities laws, the rules of the
Board, or professional standards,” and to censure and limit the activity of the Board if it has violated SOX without reasonable justification.
If it is “in the public interest” or “for the protection of investors” the SEC even has the power to remove directors from office.94 This
scope of authority is justified with the assertion that the shareholder is not able to
effectively enforce [their] his rights on [their] his own. Since this is seen as a “failure of the
market,” there is a need for governmental regulation, which is achieved by a mix of
paternalism95 and the call for “shareholder empowerment.” The latter is supposed to be
realized by giving shareholders greater rights for the election to the Board of Directors.96
Yet, it is questionable if the SOX and SEC strategies turn out to be effective.
Managers would face discipline not only through the dynamics of the market for
corporate control, but also internally through shareholder action.97 And small investors, as
Pettet illustrates, are very often not interested in participating in the decision making process
because the amount of prospective profit compared to the required effort is
disproportionate,98 whereas institutional investors who have great influence in the decision
making process will probably not like the enhanced decision making power of SEC because it
undermines their own virtual rights. Hence, it is questionable if market selfregulatory processes are not more desirable. Small investors, in other words, can rely
on “self help remedies” such as derivative suits. Also, the market is able to react via
hostile takeover mechanisms .99
GO TO FOOTNOTE 99
99 Ribstein, supra note 4, at 5, 56 (noting that there is a problem of hostile takeover self regulating
approaches due to the extensive federal regulation). In 1968 the Williams Act was
put into force, which imposed disclosure requirements on bidders and required them to
structure their bids to give incumbent directors time to defend. Id. The adoption of SEC
Rule 14(e)-4 which covered disclosures of information about impending acquisition
makes it even harder to go for hostile takeover approaches .
BACK TO TEXT
Yet, the government chose to rely on governmentally steered countermeasures, which
destroys initial market regulation .
Market solutions are key to prevent fraud
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
The above discussion shows that regulatory
responses to corporate fraud are unlikely to do much
good and may do harm. At the same time, it seems clear that the frauds have
increased the general level of market risk and accordingly reduced market valuations, other
things, including corporate earnings, remaining constant. Since markets seem to have failed, regulation might seem to be worth trying even
if it is unlikely to help. But before
adopting regulatory solutions it is necessary to consider the
feasibility of market-based responses . Part IV shows that market-based approaches have
high prospects of success now that the risks of defective accounting have become as
obvious to investors as they have become to politicians and regulators. Indeed, it was
markets and not regulators that uncovered the problems and adjusted the share prices of
offending companies, while years of regulation of securities disclosures and
membership of boards of directors failed to prevent the frauds . In other words, dishonest
insiders were able to outrun the kinds of monitors that regulators favor, but not,
ultimately, the markets . If markets can react, there are significant benefits to allowing them to do so. Market
actors are likely to be better informed and motivated than regulators. Markets also lead
to a variety of competing solutions. As long as these solutions are evaluated in liquid securities markets, the most
efficient solutions are likely to dominate, and firms can pick the approaches that best suit their particular
circumstances. A political or regulatory approach will pick a particular solution that may not
be the most efficient overall for the reasons discussed in Part Ill.D, and may be unsuitable for many firms. Although
market responses are likely to be imperfect, it is necessary to compare market with
regulatory imperfections, rather than unrealistically assuming that only
markets are flawed . Moreover, it is important to keep in mind that markets have been
constrained by past regulation, particularly regulation of takeovers and of insider
trading. Although repeal of this regulation may be politically infeasible amid calls for more regulation of the securities markets, it is
worth reflecting on the contribution of past regulation to current problems when
considering whether additional regulation is appropriate.
High profile fraud diverts resources from FBI counterterrorism divisions
Dubner 9 - Stephen J. Dubner is an American journalist who has written four books and numerous articles. Dubner is best known as
co-author of Freakonomics. (“Did Anti-Terror Enforcement Help Fuel the Financial Meltdown?”
http://freakonomics.com/2009/01/06/did-anti-terror-enforcement-help-fuel-the-financial-meltdown/ 1/6/2009) STRYKER
The Times (of London) recently reported that “The F.B.I. has been forced to transfer
agents from its counter-terrorism divisions to work on Bernard Madoff‘s alleged $50 billion
fraud scheme.” This might lead you to ask an obvious counter-question: Has the anti-terror enforcement since
9/11 in the U.S. helped fuel the financial meltdown? That is, has the diversion of
resources, personnel, and mindshare toward preventing future terrorist attacks —
including, you’d have to say, the wars in Afghanistan and Iraq — contributed to a sloppy stewardship of the
financial industry? The Times (of New York) followed with an article by Eric Lichtblau that at least partially answered the
question: Federal officials are bringing far fewer prosecutions as a result of fraudulent stock
schemes than they did eight years ago, according to new data, raising further questions about whether the Bush
administration has been too lax in policing Wall Street. Legal and financial experts say that a loosening of enforcement
measures, cutbacks in staffing at the Securities and Exchange Commission, and a shift in resources toward
terrorism at the F.B.I. have combined to make the federal government something of a
paper tiger in investigating securities crimes. At a time when the financial news is being
dominated by the $50 billion Ponzi scheme that Bernard L. Madoff is accused of running, federal officials
are on pace this year to bring the fewest prosecutions for securities fraud since at least
1991, according to the data, compiled by a Syracuse University research group using Justice Department figures. The degree of cause and
effect here is an obviously broad and perhaps unanswerable question. Part of the problem is that we’ll never know how much something like
“security theater” may prevent an actual attack. Furthermore, just as it is hard to prove a negative in general, it is hard to prove that, e.g., a
governments in
particular have a hard time focusing on more than a few big problems at
once, so I don’t think it’s unreasonable to suspect that the anti-terror focus of the past
several years has meant that less attention was paid to far more typical issues like
financial fraud, etc.
terrorist attack didn’t happen because of certain preventive measures. What we do know, however, is that
Exts. Regulations Fail
One of the largest fraud schemes occurred after SOX – SEC couldn’t stop it
Kennedy, 12 – Writing for Senior Honors Thesis in Accounting (Kristin A., “An Analysis of Fraud: Causes,
Prevention, and Notable Cases”, University of New Hampshire Scholar’s Repository, Fall 2012, pdf)//KTC
V. Recent Case of Fraud The Sarbanes-Oxley Act has proven to be somewhat successful, but there
have still been
significant cases of fraud since it was enacted in 2002. Even with the act in place, audits are still only
performed on a sample basis, so there is always the possibility that fraud will not be
uncovered. Also, considering the nature of fraud, it is often harder to discover than errors because it is intentional. Someone is
actively trying to hide it from the auditors and other employees of the company. a. Bernie Madoff Ponzi Scheme Bernard Madoff, typically
referred to as Bernie Madoff, began working as a lifeguard on Long Island in his early years. Following his graduation from Hofstra
University and a brief stint at Brooklyn Law School, Madoff started Bernard L. Madoff Securities LLC on Wall Street in 1960 with the
money he had saved from lifeguarding (topics.nytimes.com). Over the next four decades, Madoff turned into a trading powerhouse, gaining
much notoriety on Wall Street throughout his long career. However, on
December 11, 2008, Bernie Madoff was
arrested for running the largest Ponzi scheme in history. A Ponzi scheme is a fraudulent investment
operation in which 39 investors are paid returns from either their own money or that of other investors. Although these schemes can
go on for a very long time, they will eventually collapse due to the fact that the actual earnings (if there even are any) are less than those
being paid to investors. At
the time the scandal was uncovered, the investor statements to
Madoff’s clients totaled almost $65 billion. However, it has since been revealed that only about $17.3
billion of this had actually been legitimate (topics.nytimes.com). The scheme had been going on
for around 20 years by the time it was uncovered. On March 12, 2009, Bernie Madoff pleaded guilty to all 11 federal felony charges
against him (topics.nytimes.com). These included charges of securities fraud, money laundering, and perjury. Madoff was eventually
sentenced to 150 years in prison, with the judge stating his crimes were “extraordinarily evil”. In the wake of the scandal, over 1,000
lawsuits have been filed in the U.S. Lawsuits totaling around $15.5 billion were settled with various banks outside the U.S. in May of 2010
(topics.nytimes.com). Irving H. Picard is the court-appointed trustee representing Madoff’s victims in the U.S. At first he was seeking $100
billion in damages, but it has since become clear that it will be a feat to even recover the $17.3 billion originally invested. It was ruled by a
federal judge that Picard cannot file claims against banks or other third parties on behalf of the victims, so the $20 billion sought from JP
Morgan Chase, UBS, and HSBC will not be recovered (topic.nytimes.com). So far, ar ound
$9 billion has been
recovered, but only around $330 has actually been paid to victims due to pending
appeals holding up the other funds. Much of the lawsuits involve recovering funds from “net winners”, investors who came out with
more than what they originally invested, and paying it to “net losers”, investors who ended up with less than they originally invested. The
largest example of this was when New York Mets owners Fred Wilpon and Saul Katz settled at $162 million (topics.nytimes.com). There had
also been a 40 willful blindness claim involved, stating they knew fraud was occurring but they did not act because of the large sums they
were receiving. This claim was dropped by Picard upon reaching the settlement.
There was plenty of evidence fraud existed, but investigations failed
Kennedy, 12 – Writing for Senior Honors Thesis in Accounting (Kristin A., “An Analysis of Fraud: Causes,
Prevention, and Notable Cases”, University of New Hampshire Scholar’s Repository, Fall 2012, pdf)//KTC
Eventually, it became clear that there was evidence of the fraud long before it was
uncovered. The SEC released a report with the findings that they had received six
substantive complaints since 1992, but that each investigation had failed due to lack of due
diligence 41 (topics.nytimes.com). It was also revealed that JP Morgan Chase had suspicions for up to 18 months prior to the
discovery, but had continued to do business with Madoff. When analyzing the fraud triangle elements with regards
to the Bernie Madoff’s ponzi scheme, it is clear that opportunity existed because he was the head of the
company. Although others had suspicions, no one seriously question him, allowing his scheme to go on for years. The
motivation behind the fraud was to continue to making the company look successful in
order to gain more clients and allow his vast personal income to continue. However, Madoff was forced to forfeit $170
million in personal assets following his criminal trial. Madoff may have rationalized that the investors were at least getting their returns for
now and he would be able to reach the reported assets eventually, so why destroy the company when it could be resolved in the future. That
was very unlikely though, considering was a nearly $50 billion difference between actual and reported assets.
Regulations and monitoring are bad
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
In Enron and other notorious recent fraud cases, many
levels of market and monitoring devices
simultaneously failed. Proregulatory theorists argue that this demonstrates that
securities markets cannot be trusted to work on their own without strong regulatory support and
that new regulation is needed to restore investor confidence. However, this Article has shown that the case for
significantly increased regulation has not been made. While Enron exposed gaps in the
existing monitoring structure, the benefits of eliminating those gaps are not as clear as
they might seem to be. The substantial existing regulatory framework was breached by aggressive outsiders who seemed
determined to ignore the risks of their actions, including their personal exposure to punishment. Promoting more
independent monitors with lower-powered incentives to scrutinize the actions of highly
informed and motivated insiders cannot solve this problem. Moreover, the costs of
increased regulation could be significant. On the one hand, the Act may reduce the incentives of both insiders and
monitors to increase shareholder value. Even if the Act is ineffective, as this Article suggests may be the case, the Act could cause
harm simply by misleading the market that regulation can solve its problems .
377 In fact, as history has often shown, from the South Sea Bubble 378 to the Great Crash, 379
market abuses manage to stay one step ahead of the regulators. The endless cycle of
boom-bust-regulation accomplishes little in the long run. Finally, even if some highly sophisticated and
nuanced regulation theoretically could increase social welfare, it is not likely that this type of reform will arise
out of the present highly charged political environment. Markets are capable of
responding more quickly and precisely than regulation to corporate fraud, as long as
regulation does not impede or mislead them. Although markets will remain
imperfect, the potential for a market response, combined with the likely costs of
regulation, make the case for additional regulation dubious.
SEC monitoring is ineffective and bad
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
This Article argues that, despite
all the appearances of market failure, the recent corporate frauds
do not justify a new era of corporate regulation . Indeed, the fact that the frauds
occurred after seventy years of securities regulation shows that more regulation is not
the answer. 10 Rather, with all their imperfections, contract and market-based approaches are more
likely than regulation to reach efficient results. Post-Enron reforms, including SarbanesOxley, rely on increased monitoring by independent directors, auditors, and
regulators who have both weak incentives and low-level access to information. This
monitoring has not been , and cannot be, an effective way to deal with fraud by
highly motivated insiders. Moreover, the laws are likely to have significant costs,
including perverse incentives of managers, increasing distrust and bureaucracy in firms,
and impeding information flows. The only effective antidotes to fraud are active and
vigilant markets and professionals with strong incentives to investigate corporate managers and dig
up corporate information.
Regulations don’t solve—the cause isn’t greed and regulations are ineffective
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
In order to fix the markets, it is necessary to understand why the insiders who pulled accounting
scams at major public corporations thought they could get away with them in efficient and regulated
securities markets. A thorough understanding of the perpetrators' motives would seem to be essential in designing regulation that
has a significant chance of preventing future frauds. It is too simplistic to ascribe these frauds to
"greed" without accounting for the risk of detection . Notably, in contrast to notorious crooks
such as Robert Vesco, none of the main characters in the recent scandals tried to flee. Moreover, the
alleged perpetrators were not shady criminals but seemingly responsible business people
who had earned the trust of their, even more respectable, monitors. For example, Scott Sullivan,
who is accused of manipulating WorldCom's books in order to meet earnings targets, was regarded as "one of the best
chief financial officers around" and "the key to WorldCom Inc.'s financial credibility."' 130
How could such a man have engaged in large-scale financial manipulation if this is
proved to be the case? Similar questions arise regarding the seemingly more blatant behavior of some Enron
insiders, particularly Andrew Fastow. Indeed, the
insiders' conduct seems particularly puzzling, at least at
first glance, given agents' usual incentives. Since agents bear severe penalties in firms if
they fail, including loss of job and reputation, but normally do not get the full benefit of
success, it follows that they would tend to be more cautious than their employers would
want them to be, rather than the reverse. To begin with, there is a large literature on judgment biases
that lead at least some people to tend to be more optimistic about the future and more
confident in their judgment and ability to control future events, than would an actor who objectively
processed the relevant data. 13 1 For example, traders generally overestimate their ability to judge
the true value of the company-i.e., the value of their private information. 132 These biases
may be bolstered over time by the self-esteem-maximizing device of emphasizing
positive returns as an indication of ability and downplaying trading losses as
irrelevant.133 Moreover, even rational people arguably would be more likely than a third party
observer to attribute their own failures to luck and their own successes to skill given their
tendency to select actions they think will be successful. 134 Actors' judgment biases may depend somewhat
on their self-esteem, in the sense that those with the highest self-esteem are the most likely to misjudge their control and skill. But
managers' attributes in this respect are not randomly distributed. Donald Langevoort argues that successful
firms tend to
reward and promote a particular type of individual-one who is highly, perhaps unrealistically,
optimistic about the firm's prospects, confident in his abilities, 13 5 seemingly loyal to the firm and its senior
management, and distrustful of outsiders. 1 36 These judgment biases and miscalculations might be
enhanced by external cues. In particular, legal rules hold that managers are better
able to judge the value of their companies than markets. This view emerges
most clearly in cases involving takeovers or sale of the company, in which courts have
given managers the power to defend against above-market-value takeovers. 137 The courts'
acceptance of managers' arguments that market prices are systematically too low is particularly striking given
managers' power to release positive information and ability to delay the release of
negative information. The law's disregard of markets may have helped confirmed managers' beliefs that their actions were
benefiting the firm, regardless of what markets, or earnings, might be saying at the moment. The above story seems to fit
some recent corporate frauds. New methods of doing business such as the provision of alternative markets (Enron),
consolidation of long distance telephone service (WorldCom), or the power of downsizing (Sunbeam) produced initial successes and high
market valuations based on optimistic estimates of future earnings. Stock prices built on hope were highly susceptible to negative earnings
Hypermotivated and superoptimistic
insiders might be able to persuade themselves that any setbacks were temporary, so that
cover-ups need only work for a little while to be successful. On the one hand, they might
conclude that markets that spiked in defiance of modest, or no, earnings confirmed their
firms' high inherent value, and therefore the validity of their business plans. On the other hand, stocks that
fell on bad earnings did not reflect even publicly available information about the firms'
abiding value. Thus, hyperoptimistic insiders might be able to convince themselves that
earnings manipulations "corrected" the market's misimpressions of their companies. But
even these misjudgments do not seem fully to explain why insiders would risk jail and
loss of all of their wealth and future business prospects by engaging in fraud that a
rational person would surely realize was likely to be detected, all without apparently having a Vesco-type
shocks, providing an incentive to prevent these shocks at all costs.
end game strategy. It has been argued that, once having begun their conduct, insiders managed to deceive themselves that their actions
were right. 138 But surely
at some point insiders would realize that the probability discounted
cost of severe sanctions outweighs the potential benefit. Indeed, it would seem that insiders who disregarded
the risk of punishment because they were convinced they were right were behaving altruistically rather than greedily. The solution to the
puzzle may lie in the shift of agent incentives that occurs when agents perceive the risk that they may lose everything. This is probably
before the agents have committed any wrongdoing, which helps explain why they would engage in wrongdoing in the first place.
Insiders face punishment in the form of job and reputation loss even for lawful conduct
that fails to meet investor expectations-that is, for their firm's failure to meet investors'
earnings expectations. 139 At this point insiders may enter a final period in which they are
no longer susceptible to potential discipline by their firms or the employment market
because failure to distort earnings also will result in loss of their job and
reputation . 140 Since insiders are convinced that they are doing the right thing in defending their company's value from
destruction by misguided markets, they
are also not subject to a significant moral constraint. As soon
as insiders begin engaging in fraud, their incentives change. At this point, insiders risk
loss of wealth and even personal freedom unless they continue the cover-up. Indeed, the
consequences of discovery may be so severe that even a small chance of success might
lead a rational actor to cover up. This calculus may be reinforced by a psychological tendency to prefer risk when choosing
between present loss and a chance to avoid loss. 14 1 This brief summary should be enough to indicate that strong measures may be
necessary to significantly reduce the risk of future fraud. Insiders
who think that they are doing the right
thing may be harder to detect and deter than those who are simply greedy.
Deterrence that is effective also may be very costly . Moreover, given the shift in incentives
discussed above when the end seems near, increasing punishment may actually
increase the risk of a cover-up, even as it has little effect on the fraud itself. All of
this suggests significant uncertainty about how best to craft the law to prevent future
frauds.
Regulations and independent monitoring fails
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
As discussed in Part II.A, corporate
reformers have emphasized independent directors as a way to
curb insider abuse. However, the emphasis on the monitoring board over the last thirty
years has demonstrated the inherent limitations on independent directors'
effectiveness . Myles Mace, in his famous 1971 study of directors, summarized these limitations as constraints on
time, information, and inclination to participate effectively in management. 166 Outside
directors lack the time to do more than review, rather than make, business decisions.
They also must depend on insiders for critical information. With respect to inclination,
independent directors traditionally are nominated by insiders and, in any event,
generally are selected from the business community to ensure that they will have
adequate expertise and, therefore, usually will be unwilling to second guess managers. Not surprisingly,
board independence has done little to prevent past mismanagement and
fraud . For example, thirty years ago the SEC cast much of the blame for the collapse of the Penn Central Company on the passive
nonmanagement directors. 167 No corporate boards could be much more independent than those of
Amtrak, which have managed that company into chronic failure and government
dependence. Enron had a fully functional audit committee operating under the SEC's
expanded rules on audit committee disclosure. 168 The substantial data on boards of directors that
has been compiled over the last twenty years offers little basis for relying on
regulation of board composition as the solution to corporate fraud. 169 The evidence shows that
there is no overall positive relationship between various measures of firm welfare, including earnings, Tobin's q, and stock price, and the
degree of independence of corporate boards. 1 70 While there is evidence that independent boards may be better at some tasks, such as
removing poorly performing managers, 171 there
is also evidence that independent directors are
correlated with worse corporate performance . 172 This evidence indicates that insiders may have
some value on boards, perhaps in adding important expertise. 1 73 In general, firms seem to be making the right decisions as to how much
board independence is appropriate. If anything, evidence of a negative correlation between corporate performance and board independence
may indicate that, even
prior to the post-Enron regulation, corporations were being forced to
err on the side of independence. 1 74 This data does not necessarily mean that board independence is irrelevant to
corporate fraud. First, independent directors arguably are better at certain types of decisions, perhaps including supervising their firms'
financial disclosures and relationships with auditors. Enron and related scandals arguably make the data cited above obsolete because they
uncovered pervasive fraud that increases the need for this type of supervision. Second, although the overall proportion of independent
directors may not affect corporate performance, the independence of certain "trustee" committees such as audit, nominating and
compensation committees, may be particularly important. 175 Third, post-Enron regulation
might usefully tweak the
definition of independence so that it precludes at least some directors, particularly those on
sensitive "trustee" board committees, from receiving favors such as donations to pet charities with which insiders can
buy director loyalty. 176 For example, Ross Johnson at RJR-Nabisco sought to buy board member Juanita Kreps by endowing two chairs at
her school, Duke, one of them named after Kreps.1 77 Nevertheless, it
seems unlikely that a relatively minor
donation could influence a director with a strong reputation to protect. Even given these caveats,
more independence is not necessarily correlated with better monitoring. In
order to avoid suspect relationships and connections, corporations may have to appoint
more directors from outside the business community. Board members such as law
professors, 178 with little hands-on business experience and no formal connection with a
company may not be sophisticated enough to spot problems or be able or willing to stand
up to a powerful executive. Moreover, there are significant limits on what even the best audit
committee can do if, as is typically the case, it meets only a few times a year. 179 These problems of
board independence may be exacerbated by other proposals to reform the board,
particularly including proposals to have directors represent multiple constituencies in the
company, such as workers, rather than the shareholders exclusively. 180 Encouraging or requiring directors to
focus on goals other than financial performance increases the risk that directors will miss signs of misbehavior, if only because of the
limitations on directors' time discussed above. Directors who are specifically selected to represent particular constituencies may be useless
in protecting against insider fraud because of their lack of business sophistication or their interest only in looking after a particular
constituency. 18 1 To be sure, firms might minimize these problems by delegating financial monitoring to a specific audit committee that is
focused on this task. But even in this situation, a
multiconstituency board might interfere with
monitoring by nominating financially unsophisticated directors or by impeding full
disclosure to and discussion by the full board. 182 It has been argued that, other things
being equal, independent directors would be more attentive to corporate interests if they
held stock in their companies. 183 Indeed, there is evidence that firms with independent boards that get incentive
compensation are more likely to fire bad managers. 184 On the other hand, the WorldCom directors were heavy
investors in WorldCom, having received both their stock and board memberships in
WorldCom's earlier acquisitions of MCI and other companies.185
Government auditing fails
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
For present purposes, the
more serious issue is whether even strong regulation will change
auditors' practical ability to find corporate fraud when determined corporate insiders
want to hide it. In the wake of the WorldCom disclosure, an accounting expert pointed out that
accountants do not do "forensic audits" designed to uncover wrongdoing, but rather only
sampling audits that may entirely miss the problem. 20 2 The AICPA draft standard on auditing for fraud
observes that "[i]dentifying individuals with the requisite attitude to commit fraud, or
recognizing the likelihood that management or other employees will rationalize to justify
committing the fraud, is difficult. ' 20 3 The draft notes that "[c]haracteristics of fraud include concealment through (a)
collusion by both internal and third parties; (b) withheld, misrepresented, or falsified documentation; and (c) the ability of management to
override or instruct others to override what otherwise 20 4 appear to be effective controls." To be sure, there
is much auditors
can do to spot fraud, including developing cross- check procedures and identifying risky situations, as is made clear by the
extensive discussion in the AICPA's Exposure Draft.205 However, requiring auditors to do significantly more
than they are doing now may involve more than just changing their incentives and
making them more independent, but also may involve changing the basic scope of what
they do. The benefits of increased auditing may not exceed the costs. If
investors cannot rely on auditors to find fraud, it is even less realistic for them to
rely on government regulators . Sarbanes-Oxley establishes a Public Company Accounting Oversight Board to
scrutinize auditors. 20 6 However, as indicated by the controversy over picking the chair of the board,20 7 simply designating a
new regulatory overseer is unlikely to be a panacea. Sarbanes-Oxley also instructs the
SEC to increase its review of financial statements and increases the SEC's budget.20 8
However, the SEC faces formidable problems in monitoring for fraud . 20 9 The
SEC is charged with a wide range of tasks in addition to spotting fraud in financial
statements, including oversight of securities firms, exchanges, investment advisors, and
mutual funds, and of market trading, including insider trading. Its staff is perennially too small for these
mammoth 210 tasks. Sarbanes-Oxley hopes to enlist others to help in the fight against fraud. Lawyers will now be required to report
"evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent" to executives
and possibly to the board.2 11 The Act also includes strong protection for whistleblowers. 2 12 As discussed below in Part llI.C, these rules
may be costly because they inhibit efficient information flows within the firm and
perversely affect the relationship between corporations and their lawyers. The main point for
present purposes is that these rules are also ineffective for purposes of uncovering fraud. Those involved in a fraudulent scheme are unlikely
to discuss it with nonparticipants. The new rules may inhibit even innocuous conversations that might have helped indirectly in uncovering
frauds by making them fodder for federal litigation and investigations.
SEC tactics are retroactive—can’t stop the next area of fraud
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
The recent corporate frauds were attributable less to firms' silence or misleading than to
the falsity of their disclosures. Thus, it is not clear how much difference the SarbanesOxley requirements concerning disclosure of off-balance-sheet transactions, pro forma earnings,
and material changes in financial condition 2 15 will make in preventing future fraud. To be sure, burying information
in financial statements can make it difficult for individual investors to determine a firm's financial condition. But misleading legions of
these provisions deal with
yesterday's problem. Recent events have cast so much light on these specific matters
that additional wattage is unlikely to make any difference in these particular areas. The
next great fraud probably will occur elsewhere .
analysts, reporters, and others in an active market requires greater opacity. In any event,
SEC regulations fail
Murphy 9 - Robert P. Murphy is an Associated Scholar with the Mises Institute. His other positions include Senior Economist for
the Institute for Energy Research, Senior Fellow with the Fraser Institute, and Research Fellow with the Independent Institute. Murphy
earned his PhD in economics from New York University. He taught for three years at Hillsdale College before entering the financial sector,
working for Laffer Associates on research papers as well as portfolio management. Dr. Murphy is now the president of Consulting By RPM
and runs the economics blog Free Advice. (“The SEC Makes Wall Street More Fraudulent,” https://mises.org/library/sec-makes-wallstreet-more-fraudulent 1/5/2009) STRYKER
***MODIFIED FOR OBJECTIONABLE LANGUAGE***
The mainstream reaction to the Bernard Madoff scandal was inevitable. Whenever a government
regulatory agency proves itself to be incredibly incompetent or corrupt, the respectable
media swoop in to declare that the "free market" has failed and the agency in question
obviously needs more money and power. Whether it's the Department of Education's failure to produce kids who can read,
the FBI's accusations against innocent people in high-profile cases, or the FDA cracking down on tomatoes, the answer is always
the same: proponents of bigger government argue that yes, mistakes were made, but the solution of
course is to shovel more taxpayer money into the agencies in question. In the private
sector, when a firm fails, it ceases operations. The opposite happens in government. There is
literally nothing a government agency could do that would make the talking heads on the Sunday shows ask, "Should we just abolish this
agency? Is it doing more harm than good?" It's not just Fannie Mae and Freddie Mac: throughout
history, virtually every
agency created by the federal government has been deemed too important to fail . (I
vaguely remember some Republicans in the mid-1990s holding a press conference and declaring that the Department of Commerce was
done, and that voters could "stick a fork in it." I guess they found it was still pink inside.) Madoff's Ponzi Scheme The pattern plays out
perfectly with the SEC and the Madoff bombshell. Suppose a few years ago, I told a group of MBAs to imagine the worst screwup that the
SEC could possibly perform, something so monumentally incompetent that members of Congress might openly question whether the
agency should continue. I think that at least half of the class would have come up with something far less outrageous than what has
happened in fact. Everyone who reads the headlines knows that Bernard Madoff is accused of running a massive Ponzi scheme that, for over
a decade, has ripped off investors to the tune of $50 billion. But those who dig a bit deeper learn that Harry Markopolos, who used to work
for a Madoff rival, has been writing the SEC since at least May 1999, urging them to put a stop to Madoff's Ponzi scheme. (Markopolos
examined the options markets that Madoff told investors he used to hedge his positions and yield his steady stream of dividends, and
Markopolos concluded that Madoff's results were impossible.) Incredibly, the SEC apparently had evidence in front of its face sixteen years
ago (in relation to another case) that Madoff was a crook. Yet it gets worse. As the Wall Street Journal and others dig into the story, they
find that Madoff's
family had close ties to the SEC. His sons, brother, and niece, for
example, worked with or advised financial regulators on certain matters—no doubt
telling them the best way to protect investors from fraud. But the pièce de résistance is that Madoff wasn't
caught; his own sons turned him in after he came to them and admitted what he'd done. (Let's assume they are telling the truth and didn't
realize what their father was up to all along.) And even Madoff's confession was not because of a visit from the ghost of Christmas future.
No, Madoff's scheme simply ran out of gas, because of large redemption claims that his clients filed, due to the collapse of the financial
markets. Had it not been for the bursting of the credit bubble, Madoff would likely still be bilking new investors — and advising the SEC.
Laissez-Faire Ideology to Blame? Even though George Bush has presided over the most interventionist government since FDR's New Deal,
he somehow has a reputation for being a free marketeer. (It's funny that his political opponents take him at his word when it comes to
economic rhetoric, yet they don't universally refer to Bush as a lover of world democracy and peace.) Naturally, the Madoff Ponzi scheme is
blamed on the Bush administration's failure to adequately fund and staff the beleaguered SEC. "Bush thinks markets are self-regulating,
and look what happened!" This is complete balderdash. The SEC under George Bush has the biggest budget and the most personnel in its
history. The charts below show the annual budgets and "full-time-equivalent" staff for the SEC by fiscal year. These numbers were obtained
from the annual SEC reports archived here. (Note that there might be a slight discontinuity in the budget series in the year 2003, when the
report format changed.) It's even more interesting to break down the growth rates in budget and staff by presidential administration. For
the following table, I have assumed that an incoming president doesn't really influence the SEC's operations for that (partial) fiscal year. For
example, Ronald Reagan won the election in November 1980, and was sworn in the following January 1981. To gauge how much he
increased the SEC budget and staff, I look at the annualized growth from FY 1981 (which ran through September 1981) to FY 1989.
However, I also ran the numbers going from FY 1980 through FY 1988 etc., and it doesn't really affect the results. Administration
Annualized SEC Budget Growth (not inflation-adjusted) Annualized SEC Full-Time Staff Growth Jimmy Carter 9.3% -1.2% Ronald Reagan
7.5% 1.4% George H.W. Bush 15.3% 6.7% Bill Clinton 6.8% 1.4% George W. Bush 11.3% 1.0% As the table shows, clearly the person who
hated the free-wheeling market most was the first President Bush, followed up by his son. And especially when we consider the high
inflation rate, it's obvious that Jimmy Carter was a laissez-faire ideologue. Bill Clinton, in contrast, had the same attitude towards
speculators as Ronald Reagan. Naturally we can quibble with these conclusions. Maybe Bill Clinton's numbers would have been a lot higher
had Newt Gingrich remained a history professor. Maybe George W. Bush used the Enron scandal to beef up the SEC's budget, while he gave
orders behind the scenes to use the cash for pizza and beer rather than enforcement. But whatever the excuse, it just proves my point: it
is
foolish to give the task of ensuring financial integrity to DC politicians. The SEC was
supposedly retooled after the Enron fiasco in order to do its job. And it failed
miserably. Some heads may roll and budgets balloon, but if history is any guide, there
will be another huge financial fraud within another decade. Conclusion The SEC clearly
botched its alleged job in the case of the Madoff Ponzi scheme. Taxpayers are certainly entitled to ask,
"What exactly are we getting for our (now) $900 million per year?" It is not simply that the SEC failed to help. On
the contrary, the SEC is actively harmful . For one thing, its implicit blessing of Madoff probably
reassured some investors; surely the SEC would have shut him down if his returns
were bogus! Beyond that, the SEC has been horrible during the financial crisis .
In the summer it engaged in a phony ban on "naked" short selling that was already
illegal, and then a few months later it banned short selling outright on hundreds of
financial stocks, a move that paralyzed [destroyed] that particular sector even more. And lately,
they've decided to launch a witch hunt on Mark Cuban—those 3,000+ employees have to do something. Democrats should not take away
from the Madoff scandal the lesson that Republicans cannot be trusted to regulate financial markets. Even if it were true that Democrats
would run it more honorably and competently, eventually another Republican will win the White House. Rather than pitting each party
against the other, it
is wiser to conclude that Washington politicians and bureaucrats will never
put the average taxpayer or investor's interests above those of billionaire financiers. The
SEC should be abolished, and investors should rely on private-sector watchdog
groups to spot swindlers.
Exts. Self-Regulation Solves
Self regulation is better
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
Modern regulatory theories of corporate governance begin with Adolf Berle and Gardiner
Means, who argued in the wake of the 1929 crash that owners of publicly held corporations could
not effectively control their corporations. 44 This lack of control effectively involves two problems. First, as Adam
Smith observed, corporate managers do not watch over "other people's money" with the "anxious vigilance with which the partners in a
private copartnery frequently watch over their own."'45 In other words, public corporations involve agency costs. Second, agency costs are
high because it is impractical for shareholders with small, dispersed interests to invest much time and money in monitoring managers.
The antiregulatory response to Berle and Means is essentially that shareholders cannot be as
vulnerable to misappropriation as the regulatory model would suggest because no one
can force them to invest in firms that will squander their money. The capital markets
therefore can be expected to develop devices that overcome the problems Berle
and Means discussed. These devices include hostile takeovers and other devices that
aggregate shareholder voting power and facilitate shareholder monitoring, alignment of
managers' and shareholders' interests through incentive compensation, and monitors
such as independent directors and large accounting and law firms. Efficient securities
markets, in turn, provide both an effective valuation device to enable these devices to operate and a
mechanism for pricing and testing the efficacy of the devices. The takeover market
functions because the price of a suboptimally managed firm drops enough to make it
worthwhile for better managers to buy the stock and replace the incumbents. Stock
compensation is an efficient incentive because it aligns managers' interests with
shareholder welfare. A company's stock price can be viewed as measuring the value of its bundle of contracts. Even if the
market cannot know the evil that lies within managers' hearts, it can observe the contracts that tend to keep
them honest. Investment dollars will tend to flow to the firms with the most
efficient governance devices .
Exts. Zero Sum
Empirics prove the trade off
Jagger 8 - Suzy Jagger is a reporter for The Times (British). (“ FBI diverts anti-terror agents to Bernard
Madoff $50 billion swindle,” https://rainbowwarrior2005.wordpress.com/2008/12/22/fbi-diverts-anti-terror-agents-to-bernard-madoff50-billion-swindle/ 12/22/2008) STRYKER
The FBI has been forced to transfer agents from its counter-terrorism
divisions to work on Bernard Madoff’s alleged $50 billion fraud scheme as victims of the biggest
scam in the world continue to emerge. Only ten days after Mr Madoff confessed to his two sons that he had created a
giant fraud, the FBI and the Securities and Exchange Commission (SEC), the Wall Street regulator, have narrowed the
focus of their inquiries to ascertain which individuals and funds helped him. They are
questioning other employees of Madoff Securities and are also examining the role of feeder funds that provided Mr Madoff with clients and
capital. It is understood that the US authorities believe it would have been impossible for the financier to have sustained a fraud of such
magnitude over a number of years without significant assistance. While the
FBI and SEC trawled through
documentation seized from three floors of the Manhattan headquarters of Mr Madoff, 70,
more individuals and organisations who had fallen prey to the scheme were discovered. Members of the Fifth Avenue Synagogue, on the
wealthy Upper East Side of Manhattan, are estimated to have lost about $2 billion (£1.4 billion) between them. Of these Ira Rennert, the
chairman of the synagogue board, had about $200 million invested in the fund. It is believed that J. Ezra Merkin, the president of the
synagogue, introduced clients to Mr Madoff and gave him access to prominent Jewish charities and universities. The fund of Mr Merkin,
Ascot Partners, had about $1.8 billion invested in the schemes. At the weekend it emerged that Burt Ross, a former banker at LF Rothschild,
and once the mayor of Fort Lee, New Jersey, was another victim. Mr Ross estimated that he had lost about $5 million, the bulk of his
personal wealth. Two classes of victim are emerging in the Madoff scandal: those who had a direct relationship with him and fund of funds
investors, where one hedge fund invests in another. The biggest of the latter – so far – appears to be Walter M. Noel, who founded Fairfield
Greenwich Group in 1983. Mr Noel marketed his investment services to the upper crust of the financial elite, introducing his international
clients to Madoff funds. Mr Noel ran his business from Connecticut, but about 95 per cent of his business was derived from overseas money.
It is estimated that Fairfield Greenwich stands to lose $7.5 billion from the collapse of the Madoff scheme. At the other end of the spectrum
the town pension scheme in Fairfield, Connecticut — apparently unconnected to the fund belonging to Mr Noel – suffered a $45 million loss
for its firefighters, police officers and teachers. American regulators have sought to compile evidence against Mr Madoff, who is now
electronically tagged and this weekend was placed on 24-hour curfew in his East 64th Street New York apartment. The
FBI and
SEC are under increasing pressure from Washington to explain how they could have
allowed a scam of such magnitude to operate and flourish – especially after a preliminary
inquiry within the SEC found that it had been tipped off several times in the past decade
about Mr Madoff’s schemes.
The trade-off is zero sum
Shukovsky et al 7 - Paul Shukovsky is a staff correspondent for Bloomberg BNA based in the Pacific Northwest. Tracy
Johnson is a Seattle Post-Intelligencer Reporter. Daniel Lathrop is an investigative projects reporter currently at The Dallas Morning News.
(“The FBI's Terrorism Trade-Off,” Available online at: http://www.truth-out.org/archive/item/69882:the-fbis-terrorism-tradeoff
4/11/2007) STRYKER
Thousands of white-collar criminals across the country are no longer being prosecuted in
federal court - and, in many cases, not at all - leaving a trail of frustrated victims and potentially billions of dollars in fraud and theft
losses. It is the untold story of the Bush administration's massive restructuring of the FBI
after the terrorism attacks of 9/11. Five-and-a-half years later, the White House and the Justice Department have failed
to replace at least 2,400 agents transferred to counterterrorism squads, leaving far fewer agents on the trail of identity
thieves, con artists, hatemongers and other criminals. Two successive attorneys general have rejected the
FBI's pleas for reinforcements behind closed doors. While there hasn't been a terrorism strike on American soil since the realignment, few
are aware of the hidden cost: a
dramatic plunge in FBI investigations and case referrals in many of
the crimes that the bureau has traditionally fought, including sophisticated fraud,
embezzlement schemes and civil rights violations. " Politically, this trade-off has been accepted ," said
Charles Mandigo, a former FBI congressional liaison who retired four years ago as special agent in charge in Seattle. "But do the American
people know this trade-off has been made?" Among the findings of a six-month Seattle P-I investigation, analyzing more than a quartermillion cases touched by FBI agents and federal prosecutors before and after 9/11: Overall, the
number of criminal cases
investigated by the FBI nationally has steadily declined. In 2005, the bureau brought slightly more than
20,000 cases to federal prosecutors, compared with about 31,000 in 2000 - a 34 percent drop. White-collar crime
investigations by the bureau have plummeted in recent years. In 2005, the FBI sent prosecutors 3,500
cases - a fraction of the more than 10,000 cases assigned to agents in 2000. In Western Washington, the drop has been even more dramatic.
Records show that the FBI
sent 28 white-collar cases to prosecutors in 2005, down 90 percent
from five years earlier. Civil rights investigations, which include hate crimes and police abuse, have continued a steady decline
since the late 1990s. FBI agents pursued 65 percent fewer cases in 2005 than they did in 2000. Already hit hard by the shift
of agents to terrorism duties, Washington state's FBI offices suffer from staffing levels
that are significantly below the national average. While other federal agencies have stepped in to pick up more of
the load in drug enforcement, and the FBI has worked to keep agents on Indian reservations, the gaps created by the Bush administration's
war on terrorism are troubling to criminal justice experts, police chiefs - even many current and former FBI officials and agents.
"There's
a niche of fraudsters that are floating around unprosecuted," said one recently retired top
are not going to jail. There is no law enforcement
solution in sight." In most cases, local law enforcement agencies haven't been able to
take up the slack . Seattle police Chief Gil Kerlikowske said his department isn't as equipped to handle
complex white-collar investigations - particularly when officers must also join antiterrorism efforts and when federal funding for local police departments has shrunk. Whether the solution is to hire more FBI
agents or shift some away from the counterterrorism effort, he said, more resources should be devoted to solving
white-collar crime. "This is like the perfect storm," Kerlikowske said. "It's now five years later. We should be rethinking our
priorities." A solution can't come soon enough for a growing number of discouraged fraud
victims: A 75-year-old Issaquah woman who was allegedly swindled out of more than $1 million. A cancer patient whose identity was
FBI official, who spoke on condition of anonymity. "They
stolen from a Seattle hospital. People who fell victim to a nationwide investment scam worth about $70 million. They all sought the FBI's
help. They got little or none. "As far as I'm concerned, the
FBI has no interest in protecting people from
these kinds of crimes," said Lloyd Martindale Jr., a Bellingham man who put $500,000 into an investment con and is still
fighting to get some of it back. "They were not responsive to this at all." If the FBI had continued investigating financial crimes at the same
rate as it had before the World Trade Center came down, about 2,000 more white-collar criminals would be behind bars, according to the P-
Since 9/11, the number of
white-collar convictions in federal courts has dropped about 30 percent . White-
I analysis, which was based on Justice Department data from 1996 through June 2006.
collar crimes often affect the people least able to afford it - lower-income and elderly people, according to Peter Henning, a former Justice
prosecutor who teaches law at Wayne State University in Detroit. "If you keep it small, and act quickly and get out of the jurisdiction, you
can avoid being prosecuted," he said. "Scam artists know that." Large numbers of FBI agents also were transferred out of violent-crime
programs because bureau officials knew that local police - who have overlapping jurisdiction in violent crimes - would have to help. The
retired FBI official said the Bush
administration is forcing the bureau to "cannibalize" its
traditional crime-fighting units in the name of fighting terrorism. "The administration is
starving the criminal program," the former official said. "Fairly Awful Situation" Margarita MacDonald, a 75-year-old
widow who has Parkinson's disease, may never get back more than $1 million from a man who helped her with household tasks and then
allegedly betrayed her trust. She was nearly deaf, all alone and living in Canada when he befriended her. He began helping her with chores
and errands in exchange for room and board. He won her trust and persuaded her to move to Issaquah with him. The man told her that he
had her best interests at heart, but he began manipulating her, persuading her to sign documents and threatening that he wouldn't bring
her food or medicine if she didn't do what he wanted, MacDonald stated in court documents. He gradually stole about $1 million from her,
buying furniture, electronics, jewelry - even vacations to Banff, Alberta, and Hawaii, she wrote. Larry Gold, a lawyer in Vancouver, B.C., who
represented her, called the Seattle office of the FBI in January 2005. The duty officer seemed interested and told him to put the information
in writing, he said. Gold did. In several carefully detailed pages, he explained that the man stole most of MacDonald's savings and even got
his hands on $400,000 worth of gold she kept in a safe deposit box in Canada. He said the FBI never responded. "It was a fairly awful
situation, and I thought they might be interested in it," Gold said. "What can I say? They weren't." Frustrated, Gold sought help from
Issaquah police, but Lynnwood attorney John Tollefsen took over the case and made getting MacDonald's money back, not prosecution, his
main priority. He is still fighting to help MacDonald get back her savings. A judge ordered the man to pay MacDonald more than $1.4
million last year. The man filed for bankruptcy. He hasn't been charged with a crime. "Dead on Arrival" Tensions were growing inside
Robert Mueller's inner circle. In
the months after 9/11, when the first waves of agents were funneled
into counterterrorism, the FBI director was made aware of the consequences to come.
Without a major influx of new agents, there was no way to maintain the bureau's grip on
a long list of traditional crimes, particularly time-consuming fraud
investigations . Mueller asked for help from two attorneys general - John Ashcroft and his successor, Alberto Gonzales - only to
be rebuffed each time. "We were told to do more with less," said David Szady, a former FBI assistant director who stepped down last year as
head of counterintelligence. "There was always discussion on backfilling," Szady said. "Always the push that we need to ask for more
bodies." Dale Watson, who left in 2002 as the FBI's executive assistant director over counterterrorism programs, also blames the White
House Office of Management and Budget and the Justice Department for failing to heed the warnings. "The budget should be backfilled
with additional agents," Watson said. "We've got to do this. But you could request 2,000 agents for white collar, and it would never see the
light of day at OMB." By the time the bureau started putting together its fiscal 2007 budget in mid-2005, "we
realized we were
going to have to pull out of some areas - bank fraud, investment fraud, ID theft - cases
that protect the financial infrastructure of the country," the retired top FBI official said.
1AC—Counterterrorism Scenario
FBI counterterrorism works and is improving, but every resource is key to
prevent likely terrorist threats
Sink and Wilber 15 - Justin Sink is a White House reporter for Bloomberg. Del Quentin Wilber covers the federal courts and
federal law enforcement. A graduate of Georgetown Prep and Northwestern University, he worked at the Baltimore Sun before joining the
Washington Post in 2004. Wilber is also the author of the New York Times best-seller Rawhide Down: The Near Assassination of Ronald
Reagan. (“Lone Wolf Terrorists, Cyber Threats Put New Pressure on FBI,” http://www.bloomberg.com/politics/articles/2015-03-25/fbimust-evolve-to-tackle-lone-wolf-online-threats-report-says 3/25/2015) STRYKER
The FBI urgently needs to accelerate intelligence-gathering capabilities at home and abroad
to confront evolving terrorist threats , a panel reviewing the bureau’s response since the Sept. 11 attacks said.
Returning foreign fighters, extremists acting alone, and a new breed of criminals in
cyberspace mean the agency needs to build up its domestic intelligence operation, the
yearlong review of the F ederal B ureau of I nvestigation found. “The FBI has not yet met its potential -— or its
(Bloomberg) --
mandate from the president and Congress -— to develop a ‘specialized and integrated national security workforce’ that can serve as the hub
of America’s domestic intelligence agency,” according to the report, which was presented to FBI Director James Comey. The review was
undertaken at the request of Congress, which sought an update on how the FBI is fulfilling its mission since the 2001 terrorist attacks in
New York and Washington. It was led by Edwin Meese, attorney general under President Ronald Reagan, former Representative Tim
Roemer, an Indiana Democrat, and Georgetown University counterterrorism expert Bruce Hoffman. The report was released during a press
conference with Comey and members of the panel Wednesday at FBI headquarters in Washington. Counterterrorism Priority The
panel found that the FBI had largely succeeded at transforming itself after Sept.
11, developing a workforce attuned to the importance of intelligence-gathering and
putting a priority on counterterrorism. The FBI needs to do more to support, train and equip agents and analysts with
the latest technologies to combat the changing nature of threats from jihadist groups such as Islamic State, it said. “ Some things
are necessary, we feel, to keep pace with the accelerating threat we find around
the world,” Meese said. “So there has to be an acceleration, obviously, in the amount of effort and the changes being made to bring the
FBI” up to date, he said. Comey said that he generally agrees with the report’s findings, including the recommendation that the agency must
change further. Leadership at the agency isn’t “unified or consistent in driving cultural change,” partially because of frequent turnover,
according to the report. An office dedicated to countering violent extremism is underfunded and should be moved under the Department of
Homeland Security, and the agency’s efforts to counter cyberthreats aren’t integrated well enough with other agencies, according to the
report. Intelligence Integration The review said the FBI needs to invest more in collaborative relationships with foreign partners as it seeks
to combat terrorist threats. In the U.S., the FBI isn’t “sufficiently integrated” into the intelligence community, to the detriment of its own
criminal investigations, according to the report. Regional FBI leaders were found to often give competing interests priority over
intelligence-collection and coordination with other agencies. The panel urged Comey to work more closely with Director of National
Intelligence James Clapper to help the U.S. national security community. FBI agents and analysts should also participate in interagency
collaboration and training assignments, according to the panel. “The FBI must better use its strategic processes to drive the intelligence
cycle for its law enforcement and intelligence missions,” according to the review. More Pressure Pressure
on the FBI to
combat terrorism within the U.S. has intensified since the Islamic State emerged, with
top administration officials repeatedly warning that the terror group could target the
U.S. homeland. Last month, the White House hosted a summit on countering violent extremism, and President Barack Obama has
pushed efforts at the United Nations to target foreign fighters. The panel recommended that FBI leaders
communicate to Congress the value of laws integral to several successful
investigations since 2008, such as the USA Patriot Act, the Electronic
Communications Privacy Act, and the Foreign Intelligence Surveillance Act. Privacy advocates
and some companies are opposed to some provisions of those laws. The FBI showed lax communication, coordination, collaboration and
use of human intelligence in five case studies analyzed by the review commission. Those included U.S. Army Major Nidal Hasan and the
Fort Hood shooting, Faisal Shahzad and the bungled Times Square car-bomb attack, and Tamerlan and Dzhokhar Tsarnaev and the Boston
Marathon bombing. “ The
FBI will fulfill its domestic intelligence role when its analysts
and collectors, like its special agents, are grounded in criminal investigation; have ready
access to state-of-the-art technology; continuously exploit the systems, tools, and
relationships of the national intelligence agencies,” the report concluded.
[Terrorism Impact(s)]
Exts. Counterterrorism Internal
The FBI is effective now, but resources are crucial
Steinberg 15 - Scott Steinberg is a bestselling leadership and business keynote speaker and one of the world’s most celebrated
futurists and strategic innovation consultants, as seen in 600+ outlets from CNN to The Wall St. Journal, and the author of Make Change
Work for You: 10 Ways to Future-Proof Yourself, Fearlessly Innovate and Succeed Despite Uncertainty. (“The FBI: Tomorrow's Leading
Innovator,” http://www.huffingtonpost.com/scott-steinberg/the-fbi-tomorrows-leading_b_7284164.html 5/15/2015) STRYKER
Innovators, beware: The
FBI is watching you. Happily, it's making major strides towards combating
terrorism and driving game-changing breakthroughs in national security as a result of
these efforts as well. Credit the agency's recent establishment of a new internal innovation team designed to address the
increasingly complex challenges of battling criminal elements in an age of big data, online communications and social media. (And the
organization's burning desire to better understand tomorrow's fast-changing business and high-tech environments.) Over
FBI 250
employees and contractors are now assigned to better comprehending the role that
current and futuristic communications networks will play in tomorrow's world, how to
analyze the mountains of raw data they'll generate, and how the use of more innovative
concepts can help the agency more successfully navigate these waters, and defuse
terrorist threats. We recently sat down with Jane Rhodes-Wolfe to find out more about the FBI's interest in the space, and its
singular approach to staying ahead of the curve. Q: How and why is the FBI embracing the concept of
innovation -- and what does this mean in practical terms (implementation)? A: The FBI's Counterterrorism
Innovation Team is always seeking for better ways to identify and address terrorist
threats, often in a fast-paced, dynamic environment . In a world where virtually everyone
communicates across the digital spectrum, those challenges are made exponentially more difficult when
you factor in the complexity and dynamic nature of current communication tools, changes
within the telecommunications industry, the use of social media, etc. To maintain our ability to identify and address threats nimbly, we
must always be seeking to leverage the latest technology, and always in a manner that
respects privacy and the rule of law. Q: In what ways is the organization itself like a startup, and what lessons in
leadership and entrepreneurial thinking are you learning from leaders in fast moving, highly competitive industries that are being applied
back to bureau operations? A: Although we have been "in business" for 107 years, we are constantly responding and adapting to new threats
and national security concerns, just like successful industries that change over time. Over the years the FBI's priorities have diversified and
evolved, from organized crime, drugs, financial fraud and other criminal enterprises, to today's focus on threats to national security. This
flexibility stems in large part from our ability to adapt along with a dedicated workforce and sense of public service. Today's
counterterrorism threats include activities at home and abroad, so innovation, ingenuity, imagination, and teamwork are the key
components needed to be successful, as is the case with most successful corporations. Q: You've mentioned the importance of learning from
leaders in private sectors -- why is this important, and what types of initiatives are underway? A: Defeating
terrorism
requires incredible focus, efficient use of resources, adaptive and creative
thinking, and collaboration. Successful industry leaders also exhibit these traits and are always seeking to improve their
business processes. While not a business, the FBI is no different in that we are constantly seeking innovative solutions to challenging
problems. Just
as industry leaders focus and prioritize resources to respond to the
needs of the marketplace, we in the FBI focus and prioritize our resources in the defense
of the country. Industry and government also face the common challenge of recruiting and hiring unique skill sets across various
demographics. Innovation in recruiting and hiring the "best of the best" is a worthy challenge both industry and government must rise to
meet in order to achieve our respective goals. We value our partnerships with members of the private sector for the insight they give us. The
FBI, in turn, seeks to educate industry leaders about threats relating to their particular sectors, and through this education process, both
government and industry are better able to align resources to achieve their goals. Q: What sectors -- technology, big data, communications,
etc -- are of most interest to the bureau as of late, and why? A: Within the Counterterrorism Division, we are focused on quickly identifying
and disrupting terrorist threats. This job has become increasingly difficult given the advances in technology, pervasiveness of digital
communications and worldwide reach of the internet. To that end, we work closely with all sectors to understand the threats unique to each,
and leverage their experience in addressing a common goal. Like many other government agencies and private sector enterprises, it's
important to develop and maintain communication and understanding across all sectors in order to address an ever evolving and
complicated threat. Q: How has the pursuit of innovation provided benefits to the bureau in the past, and what sorts of advancements has it
produced? What sorts of benefits do you see this process providing? A: Our
internal innovation team was formed
earlier this year and we are confident this team will allow us to more quickly and
efficiently respond to terrorist threats . A collateral benefit includes a better educated workforce
empowered to effect change and implement solutions.
Trade-off is empirically proven—its zero-sum
GIBSON 9 [KATE, Reporter at MarketWatch, “Madoff and mini-Madoffs a black eye for
regulators”, Mar 12, 2009, http://www.marketwatch.com/story/correct-analyst-saysmadoff-case-turned] alla
NEW YORK (MarketWatch) -- With disgraced financier Bernard Madoff now facing a long prison
term, analysts on Thursday assessed the damage to investor confidence in a system that allowed
the former Nasdaq Stock Market chairman's crime to go undetected for years. "Everybody knew about the bucket banks,
the boiler rooms, everything you saw in the movie 'Wall Street.' But this guy [Madoff] was chairman of Nasdaq. It's like
reading history and finding out that George Washington was actually Benedict Arnold's contact in a huge spy ring," said
The issue extends beyond
Madoff, given other recent cases that while smaller, give the same
impression of regulators asleep at the wheel , said Roberts. He pointed to Allen
Stanford, the Texas tycoon whose alleged fraud was shut down in late February by the
Securities and Exchange Commission, and Arthur Nadel, the Florida fund manager who
allegedly lost millions of investors' dollars. "It's a colossal failure for the Securities
and Exchange Commission when you can have a scheme of 20-plus years go
undetected , even after the agency has investigated several times," said Karl Buch, a former
assistant U.S. attorney now at law firm Chadbourne & Park. Part of the trouble is that after 9-11,
"the focus of much of the Department of Justice and FBI resources were
shifted to counter-terrorism. You had experienced agents who had worked
white-collar prosecutions moved to counter-terrorism, which in my opinion
played a big part" in Madoff's crimes going undetected for so long, said Buch, who
worked in the securities fraud unit as well as counter-terrorism during his nearly five
years as assistant U.S. attorney, starting in 2003.
Doug Roberts, chief investment strategist at ChannelCapitalResearch.com.
1AC—Money Laundering Scenario
FBI anti-money laundering is an effective part of our counter-terror
strategy, but new threats requires resources—the impact is economic
decline, instability, organized crime, and terrorism
Morehart 6 - Michael Morehart is a Section Chief of the Terrorist Financing Operations in the Counterterrorism Division at the
Federal Bureau of Investigation. (“Dismantling Global Money Laundering Operations,” https://www.fbi.gov/news/testimony/dismantlingglobal-money-laundering-operations 5/18/2006) STRYKER
Chief among the investigative responsibilities of the FBI is the mission to proactively
neutralize threats to the economic and national security of the United States of America.
Whether motivated by criminal greed or a radical ideology, the activity underlying both criminal and
counterterrorism investigations is best prevented by access to financial information by
law enforcement and the intelligence community. In the “criminal greed” model, the FBI utilizes a
two-step approach to deprive the criminal of the proceeds of crime. The first step involves aggressively
investigating the underlying criminal activity, which establishes the specified unlawful
activity requirement of the federal money laundering statutes, and the second step
involves following the money to identify the financial infrastructures used to launder
proceeds of criminal activity. In the counterterrorism model, the keystone of the FBI's strategy
against terrorism is countering the manner in which terror networks recruit, train, plan,
and effect operations, each of which requires a measure of financial support . The
FBI established the Terrorist Financing Operations Section (TFOS) of the Counterterrorism Division on the premise that the required
financial support of terrorism inherently includes the generation, movement, and expenditure of resources, which are oftentimes
identifiable and traceable through records created and maintained by financial institutions. The
analysis of financial
records provides law enforcement and the intelligence community real opportunities to
proactively identify criminal enterprises and terrorist networks and disrupt their
nefarious designs. Traditional Criminal Money Laundering Investigations Money laundering has a
significant impact on the global economy and can contribute to political and
social instability, especially in developing countries or those historically associated
with the drug trade. The International Monetary Fund estimates that money laundering could account for 2 percent to 5 percent
of the world’s gross domestic product. In some countries, people eschew formal banking systems in favor of Informal Value Transfer
systems such as hawalas or trade-based money laundering schemes such as the Colombian Black Market Peso Exchange, which the Drug
Enforcement Administration estimates is responsible for transferring $5 billion in drug proceeds per year from the United States to
Colombia. Hawalas are centuries-old remittance systems located primarily in ethnic communities and based on trust. In countries where
modern financial services are unavailable or unreliable, hawalas fill the void for immigrants wanting to remit money home to family
members, and unfortunately, for the criminal element to launder the proceeds of illegal activity. There are several more formalized venues
that criminals use to launder the proceeds of their crimes, the most common of which is the U.S. banking system, followed by cash intensive
businesses like gas stations and convenience stores, offshore banking, shell companies, bulk-cash smuggling operations, and casinos.
Money services businesses such as money transmitters and issuers of money orders or stored value cards serve an important and useful role
in our society, but are also particularly vulnerable to money laundering activities. A recent review of Suspicious Activity Reports filed with
the Financial Crimes Enforcement Network (FinCEN) indicated that approximately 73 percent of money services business filings involved
money laundering or structuring. The
transfer of funds to foreign bank accounts continues to present
a major problem for law enforcement. Statistical analysis indicates that the most common destinations for
international fund transfers are Mexico, Switzerland, and Colombia. As electronic banking becomes more
common, traditional fraud detection measures become less effective, as customers open accounts,
transfer funds, and layer their transactions via the Internet or telephone with little regulatory oversight. The farther removed an individual
or business entity is from a traditional bank, the more difficult it is to verify the customer’s identity. With the relatively new problem of
“nesting” through correspondent bank accounts, a whole array of unknown individuals suddenly have access to the U.S. banking system
through a single correspondent account. Nesting occurs when a foreign bank uses the U.S. correspondent account of another foreign bank
to accommodate its customers. A foreign bank can conduct dollar-denominated transactions and move funds into and out of the United
States by simply paying a wire processing fee to a U.S. bank. This eliminates the need for the foreign bank to maintain a branch in the
United States. For example, a foreign bank could open a correspondent account at a U.S. bank and then invite other foreign banks to use
that correspondent account. The second-tier banks then solicit individual customers, all of whom get signatory authority over the single
U.S. correspondent account. The
FBI currently has over 1,200 pending cases involving some
aspect of money laundering, with proceeds drawn from criminal activities including
organized crime, drug trafficking , fraud against the government, securities fraud, health care
fraud, mortgage fraud, and domestic and international terrorism . By first addressing
the underlying criminal activity and then following the money, the FBI has made significant inroads into
the financial infrastructure of domestic and international criminal and terrorist
organizations, thereby depriving the criminal element of illegal profits from their
schemes.
[Insert terminal impacts]
Exts. Money Laundering Internal
Every tool is necessary to successful AML
Schroeder 1 - William Schroeder, former chief of the FBI's Legal Forfeiture Unit, now serves as president of a private law
enforcement consultant company in Woodbridge,Virginia, and is a technical advisor for the U.S. Department of the Treasury regarding
money laundering and asset forfeiture and corruption. (“Money Laundering,” https://www2.fbi.gov/publications/leb/2001/may01leb.pdf
May 2001) STRYKER
The global threat of money laundering poses unique challenges to the law
enforcement community. To pursue the evidentiary trail of a money launderer, law
enforcement agencies must identify and use tools and techniques that can help them when
crossing international boundaries. Multilateral agreements that require participants to adopt antilaundering measures and
the regional and world organizations that have developed and encouraged a standardized approach to addressing laundering all have
contributed to the strides made in addressing the challenges posed.40 Efforts undertaken by nations
independent of the international community often result in significant variations from the accepted standard and have the effect of
facilitating laundering activity rather than combating it.41 For example, the government of Antigua and Barbuda weakened its laws relating
to money laundering, resulting in the U.S. Department of the Treasury issuing an advisory warning banks and other financial institutions to
be wary of all financial transactions routed into, or out of, that jurisdiction.42 The changes in the law strengthened bank secrecy, inhibited
the scope of laundering investigations, and impeded international cooperation. A common, harmonized approach will prevent launderers
from using the different laws and practices among the jurisdictions to their advantage both at the expense and disadvantage of countries
interested in pursuing them.43 Only
with laws that have been harmonized can law enforcement
agencies, working together with financial institution administrators and regulators,
combat this ever-increasing problem .
AML is effective now, but it relies on sufficient resources
Ensign 14 - Rachel Louise Ensign is a banking reporter in New York. She covers regional banks including U.S. Bancorp, SunTrust,
PNC and Ally. (“Anti-Money Laundering Reports Don’t Fall Into “Black Hole,” Officials Say,”
http://blogs.wsj.com/riskandcompliance/2014/10/02/anti-money-laundering-reports-dont-fall-into-black-hole-officials-say/ 10/2/2014)
STRYKER
The anti-money laundering reports filed by banks are consistently being used by
law enforcement to make cases , current and former law-enforcement officials said at an industry conference.
People “think their [suspicious activity reports] fall into a black hole. I’m here to tell you that that
doesn’t happen ,” said Dennis Lormel, president and chief executive of DML Associates LLC and a former top Federal Bureau
of Investigation official. He was speaking at an Association of Certified Anti-Money Laundering Specialists conference in Las Vegas. Angela
Byers, section chief of the FBI’s criminal investigative division’s financial crimes section, reiterated this point, saying that anti-money
laundering data “applies to almost all investigations conducted by the FBI.” The agency
uses the reports in a variety of ways, including an alert system that searches the reports
for names of individuals under investigation monthly, she said. More than 1.6 million
suspicious activity reports, or SARs, were filed in 2013, an increase of about 3% from the year prior, the Treasury
Department’s Financial Crimes Enforcement Network has said. The number of SARs filed has steadily
grown since 2010. The reports may not even come in handy until years after they are
filed, said Bryan Smith, unit chief in the FBI’s criminal investigative division’s financial institution fraud unit. “SARs that you put out
there sometimes don’t mean anything until six years later,” said Mr. Smith.
Exts. Terrorism Impact
Money laundering enables successful terrorism
Baradaran et al 14 - Shima Baradaran Associate Professor of Law, University of Utah College of Law. Michael Findley
Assistant Professor of Government, University of Texas at Austin. Daniel Nielson Associate Professor of Political Science, Brigham Young
University. Jason Sharman Professor of Political Science, Center for Governance and Public Policy, Griffith University, Australia. (“Funding
Terror,” University of Pennsylvania Law Review, 162 U. Pa. L. Rev. 477, Lexis Nexis, February, 2014) STRYKER
Though the United States has spent enormous sums to fight terrorism with its military
might, many are concerned that it has not invested sufficient resources in cutting off
the true lifeline of terrorism: its clandestine network of global financing . n15 As this Article
examines in great detail, one of the most dangerous and accessible financial tools used by
terrorists today is the anonymous shell company. n16 These companies allow terrorists to disguise their
identities and covertly transfer funds - even within U.S. banks - toward illegal activities. Shell companies pose particularly vexing problems
for law enforcement because there is often no way to trace them to individuals. n17 The [*483] only tangible component of a shell company
may be a post office box; in other words, shell corporations are often "hollow" companies. n18 Shell corporations can serve some legitimate
purposes, such as facilitating mergers, enabling international joint ventures, and serving as asset-holding companies. n19 However,
because they are "hollow," they are commonly used as vehicles for corruption, money
laundering, and, more recently, terrorism. Although many of these organizations seem harmless when they are
created, posing as charities or legitimate businesses, they often become involved in illicit activities and
frequently lead law enforcement investigations to dead ends. n20 In an effort to combat
terrorist financing, policymakers have begun identifying vulnerabilities in financial
institutions and the ways in which terrorists have exploited them. n21 New legislation has
pushed for financial [*484] transparency as a way to avoid corruption and obstruct
terrorist financing both within the United States and globally, n22 but the effectiveness of
these efforts is debatable, given terrorist organizations' ability to adapt quickly. n23 While
others have commented about how easy it is to form anonymous shell companies, n24 no study thus far has determined how effective
domestic and international regulations have been at curbing their proliferation and use. n25
Exts. Economy Impact
Current Money Laundering efforts are succeeding, but if they decline money
laundering will threaten the global economy
McDowell and Novis, 2001 (John McDowell, Senior Policy Adviser of the Bureau of International Narcotics and Law
Enforcement Affairs, U.S. Department of State. Gary Novis, Program Analyst of the Bureau of International Narcotics and Law
Enforcement Affairs, U.S. Department of State. “THE CONSEQUENCES OF MONEY LAUNDERING AND FINANCIAL CRIME”
https://www.hsdl.org/?view&did=3549) // IL
Money laundering is the criminal’s way of trying to ensure that, in the end, crime pays. It is necessitated by the requirement that criminals
— be they drug traffickers, organized criminals, terrorists, arms traffickers, blackmailers, or credit card swindlers — disguise the origin of
their criminal money so they can avoid detection and the risk of prosecution when they use it. Money
laundering is critical
to the effective operation of virtually every form of transnational and organized crime.
Anti-money-laundering efforts, which are designed to prevent or limit the ability of
criminals to use their ill- gotten gains, are both a critical and effective component of anticrime programs. Money laundering generally involves a series of multiple transactions used to disguise the source of financial
assets so that those assets may be used without compromising the criminals who are seeking to use them. These transactions typically fall
into three stages: (1) placement — the process of placing unlawful proceeds into financial institutions through deposits, wire transfers, or
other means; (2) layering — the process of separating the proceeds of criminal activity from their origin through the use of layers of complex
financial transactions; and (3) integration — the process of using an apparently legitimate transaction to disguise illicit proceeds. Through
these processes, a criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal
source. Money
laundering has potentially devastating economic, security, and social consequences. It provides the fuel
for drug dealers, terrorists, illegal arms dealers, corrupt public officials, and others to
operate and expand their criminal enterprises. Crime has become increasingly
international in scope, and the financial aspects of crime have become more complex due
to rapid advances in technology and the globalization of the financial services industry.
Modern financial systems, in addition to facilitating legitimate commerce, also allow criminals to order the transfer of millions of dollars
instantly using personal computers and satellite dishes. Because money laundering relies to some extent on existing financial systems and
operations, the criminal’s choice of money laundering vehicles is limited only by his or her creativity. Money is laundered through currency
exchange houses, stock brokerage houses, gold dealers, casinos, automobile dealerships, insurance companies, and trading companies.
Private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all can mask illegal
activities. In doing so, criminals manipulate financial systems in the United States and abroad. Unchecked,
money
laundering can erode the integrity of a nation’s financial institutions. Due to the high
integration of capital markets, money laundering can also adversely affect currencies and
interest rates. Ultimately, laundered money flows into global financial systems, where it
can undermine national economies and currencies. Money laundering is thus not only a
law enforcement problem; it poses a serious national and international security threat as
well.
Money laundering destroys the economy, encourages crime and corruption,
and distorts the economy’s external sector – effective AML key
Bartlett, 2002 (Brent L. Barlett, International Economics Group, Dewey Ballantine LLP. “The negative effects of money
laundering on economic development” http://www.afp.gov.au/~/media/afp/pdf/m/money-laundering-02.pdf) // IL
The negative economic effects of money
laundering on economic development are difficult to quantify. It is clear
the financial-sector institutions that are critical to economic
growth, reduces productivity in the economy’s real sector by diverting resources and
encouraging crime and corruption, which slow economic growth, and can distort the
economy’s external sector – international trade and capital flows – to the detriment of
long-term economic development. Developing countries’ strategies to establish off- shore financial centres
that such activity damages
(OFCs) as vehicles for economic development are also impaired by significant money-laundering activity through OFC
channels. Effective anti-money-laundering policies, on the other hand, reinforce a variety
of
other good-governance policies that help sustain economic development, particularly
through the strengthening of the financial sector. The financial sector A broad range of recent
economic analyses points to the conclusion that strong developing-country financial
institutions – such as banks, non-bank financial institutions (NBFIs) and equity markets – are critical to
economic growth. Such institutions allow for the concentration of capital resources from domestic savings – and
perhaps even funds from abroad – and the efficient allocation of such resources to investment projects that generate
sustained economic development. Money laundering impairs the development of these important financial
institutions for two reasons. First, it erodes financial institutions themselves. Within these institutions, there is
often a correlation between money laundering and fraudulent activities undertaken by employees. At higher volumes of
money-laundering activity, entire financial institutions in developing countries are vulnerable to
corruption by criminal elements seeking to gain further influence over their moneylaundering channels. Second, particularly in developing countries, customer trust is fundamental to
the growth of sound financial institutions, and the perceived risk to depositors and
investors from institutional fraud and corruption is an obstacle to such trust. By contrast,
beyond protecting such institutions from the negative effects of money laundering itself, the adoption of anti-moneylaundering policies by government financial supervisors and regulators, as well as by banks, NBFIs, and equity markets
them- selves, reinforce the other good-governance practices that are important to the development of these economically
critical institutions. Indeed, several of the basic anti-money-laundering policies – such as know-your-customer rules and
strong internal controls – are also fundamental, long- standing principles of prudential banking operation, supervision,
and regulation.
Money Laundering Kills the economy-hampers government revenue, erodes
the economy and funds criminals
FIU No Date (Financial Intelligence Unit of the Republic of Mauritius, It is the central Mauritian agency for the request, receipt,
analysis and dissemination of financial information regarding suspected proceeds of crime and alleged money laundering offences as well as
the financing of any activities or transactions related to terrorism to relevant authorities, Consequences of Money Laundering, Financial
Intelligence Unit Mauritius, http://www.fiumauritius.org/index.php?option=com_content&view=article&id=18%3Amoneylaundering&catid=3&lang=en&limitstart=3//ghs-SG)
Money laundering impairs the development of the legitimate private sector through the
supply of products priced below production cost, making it therefore difficult for
legitimate activities to compete. Criminals may also turn enterprises which were initially productive into sterile ones to launder their
funds leading ultimately to a decrease in the overall productivity of the economy. Furthermore, the laundering of money can also
cause unpredictable changes in money demand as well as great volatility in international
capital flows and exchange rates. While the financial sector is an essential constituent in the financing of the legitimate economy, it can
be a low-cost vehicle for criminals wishing to launder their funds. Consequently, the flows of large sums of laundered funds poured
in or out of financial institutions might undermine the stability of financial markets. In addition,
money laundering may damage the reputation of financial institutions involved in the scheming
resulting to a loss in trust and goodwill with stakeholders. In worst case scenarios, money laundering may also result in bank
failures and financial crises. Money laundering also reduces tax revenue as it becomes
difficult for the government to collect revenue from related transactions which
frequently take place in the underground economy. The socio-economic effects of money laundering are various because
as dirty money generated from criminal activities are laundered into legitimate funds;
they are used to expand existing criminal operations and finance new ones. Further to that
money laundering may lead to the transfer of economic power from the market, the
government and the citizens to criminals, abetting therefore crimes and corruption.
Exts. Instability Impact
This poses an existential threat
Luna 12 (David, October/26/2012, Director for Anticrime Programs, Bureau of International Narcotics and Law Enforcement Affairs,
The Destructive Impact of Illicit Trade and the Illegal Economy on Economic Growth, Sustainable Development, and Global Security, US
Department of State, http://www.state.gov/j/inl/rls/rm/199808.htm//ghs-SG)
The illegal economy poses an existential threat when it begins to create criminalized markets and captured states,
which launches a downward, entropic spiral towards greater insecurity and instability. In
economies that have been corrupted by criminal networks, market- and state-building become more unattainable,
economic growth is stunted, efforts towards development and poverty eradication are
stifled, and foreign direct investment is deterred.
Money Laundering threatens the stability of government and the economy
Luna 12 (David, October/26/2012, Director for Anticrime Programs, Bureau of International Narcotics and Law Enforcement Affairs,
The Destructive Impact of Illicit Trade and the Illegal Economy on Economic Growth, Sustainable Development, and Global Security, US
Department of State, http://www.state.gov/j/inl/rls/rm/199808.htm//ghs-SG)
From an economic perspective, all of these illicit activities divert money from the balance
sheets of legitimate businesses and put cash in the hands of criminals, who build larger
and larger illicit networks. These networks threaten the stability of governments and the
prosperity of our economies. National revenue and assets intended to finance the future are instead
embezzled and stashed away for private gain, impairing the ability of communities and businesses to make the investments
necessary to create resilient pathways for economic growth and give people hope for a brighter tomorrow. Illicit trade and the illegal
economy also undermine the social stability and socioeconomic welfare of our communities. Illicit
enterprises not only divert opportunities from the legal economy, they also divert revenue
threatening economic growth and development and preventing the equitable distribution of public
goods. But this goes beyond just the economic harm. The illegal economy also incurs a significant negative social cost. Consider how
criminals undermine fair labor conditions through exploitation of persons in the illegal economy such as coca and
heroin cultivation and in industries as varied as manufacturing counterfeits, agriculture, tourism, and elder hostels. Equally
damaging is the environmental damage resulting from criminals’ penetration into illegal
logging, wildlife trafficking, waste hauling, and fishing. Instead of producing wage earners for tomorrow’s
markets and investments, the communities most at risk of exploitation by illicit networks are saddled with the negative externalities of the
illicit economy. The
grim reality is that revenue that could be used to build roads to facilitate commerce, hospitals to save
lost to kleptocrats, criminals,
and terrorists whose only interest in the future may be to destroy it.
lives, homes to raise and protect families, or schools to educate our future leaders are
Money laundering poses a serious threat to nation and international
security and unchecked will undermine national economies and curriences
McDowell and Novis, 2001 (John McDowell, Senior Policy Adviser of the Bureau of International Narcotics and Law
Enforcement Affairs, U.S. Department of State. Gary Novis, Program Analyst of the Bureau of International Narcotics and Law
Enforcement Affairs, U.S. Department of State. “THE CONSEQUENCES OF MONEY LAUNDERING AND FINANCIAL CRIME”
https://www.hsdl.org/?view&did=3549) // IL
Money laundering is the criminal’s way of trying to ensure that, in the end, crime pays. It is necessitated by the
requirement that criminals — be they drug traffickers, organized criminals, terrorists, arms traffickers, blackmailers, or
credit card swindlers — disguise the origin of their criminal money so they can avoid detection and the risk of prosecution
when they use it. Money laundering is critical to the effective operation of virtually every form
of transnational and organized crime. Anti-money-laundering efforts, which are
designed to prevent or limit the ability of criminals to use their ill- gotten gains, are both
a critical and effective component of anti-crime programs. Money laundering generally involves a
series of multiple transactions used to disguise the source of financial assets so that those assets may be used without
compromising the criminals who are seeking to use them. These transactions typically fall into three stages: (1) placement
— the process of placing unlawful proceeds into financial institutions through deposits, wire transfers, or other means; (2)
layering — the process of separating the proceeds of criminal activity from their origin through the use of layers of
complex financial transactions; and (3) integration — the process of using an apparently legitimate transaction to disguise
illicit proceeds. Through these processes, a criminal tries to transform the monetary proceeds derived from illicit activities
into funds with an apparently legal source. Money laundering has potentially devastating economic, security, and
social consequences. It provides
the fuel for drug dealers, terrorists, illegal arms dealers,
corrupt public officials, and others to operate and expand their criminal enterprises.
Crime has become increasingly international in scope, and the financial aspects of crime
have become more complex due to rapid advances in technology and the globalization of
the financial services industry. Modern financial systems, in addition to facilitating legitimate commerce, also
allow criminals to order the transfer of millions of dollars instantly using personal computers and satellite dishes. Because
money laundering relies to some extent on existing financial systems and operations, the criminal’s choice of money
laundering vehicles is limited only by his or her creativity. Money is laundered through currency exchange houses, stock
brokerage houses, gold dealers, casinos, automobile dealerships, insurance companies, and trading companies. Private
banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all can mask
illegal activities. In doing so, criminals manipulate financial systems in the United States and abroad. Unchecked,
money laundering can erode the integrity of a nation’s financial institutions. Due to the
high integration of capital markets, money laundering can also adversely affect
currencies and interest rates. Ultimately, laundered money flows into global financial
systems, where it can undermine national economies and currencies. Money laundering
is thus not only a law enforcement problem; it poses a serious national and international
security threat as well.
Money laundering is a threat to the economic and political stability of
international security, affecting all countries regardless of their level of
development
France Diplomatie, 2014 (France Diplomatie, French Ministry of Foreign Affairs and International Development.
“France and the fight against money-laundering, financing of terrorism and corruption” http://www.diplomatie.gouv.fr/en/french-foreignpolicy/defence-security/money-laundering-and-corruption) // IL
The fight against illicit financial flows is a priority for the French authorities. Money
laundering is central to
criminal activities and is a threat to the economic and political stability of countries and
international security. The rise of terrorism has made it necessary to strengthen the
surveillance of financial circuits that could fund it. To address these facts, France has adopted a
considerable legal arsenal and actively participates in improving standards in this field, both at international level,
through its contribution to the work of the Financial Action Task Force (FATF) and at regional level, as a contributor to
the legislative work carried out by the European Commission and to the conventions of the Council of Europe.
Corruption affects all countries, regardless of their level of development. It is a barrier to
sustainable economic development and an obstacle to good governance and
strengthening the rule of law, especially when it affects sectors such as policing, justice
and prison administration. Corruption also provides fertile ground for the development
of criminal and/or terrorist activities in certain vulnerable countries. The poorest people
are those most affected by its consequences. According to a World Bank study, the sum of bribes paid
each year amounts to $1000 billion, representing 9% of global trade.
Money laundering is identified as a threat to global peace and freedom – it
undermines political stability, increases crime, encourages corruption
Schroeder, 2001 (William R. Schroeder, Associate Professor of Philosophy at the University of Illinois at Urbana-Champaign.
He is the author of Sartre and His Predecessors (1984) and co-editor, with Simon Critchley, of A Companion to Continental Philosophy
(Blackwell, 1998). “Money Laundering”
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB4QFjAA&url=http%3A%2F%2Fwww.unl.edu%2Feskrid
ge%2Fcj394laundering.doc&ei=RbmZVZrqGMb6AGvrYLICw&usg=AFQjCNFZVdsCNkiPQlS2lOGICAb4W3wDNQ&bvm=bv.96952980,d.cWw&cad=rja) // IL
Money laundering has become a global problem as a result of the confluence of several
remarkable changes in world markets (i.e., the globalization of markets). The growth in
international trade, the expansion of the global financial system, the lowering of barriers
to international travel, and the surge in the internalization of organized crime have
combined to provide the source, opportunity, and means for converting illegal proceeds
into what appears to be legitimate funds. Money laundering can have devastating effects
on the soundness of financial institutions and undermine the political stability of
democratic nations. Criminals quickly transfer large sums of money to and from countries through financial
systems by wire and personal computers.5 Such transfers can distort the demand for money on a macroeconomic level
and produce an unhealthy volatility in international capital flows and exchange rates.6 A recent and highly publicized case
prosecuted in New York provides an example of the ease with which criminals can launder large amounts of money in a
short time period.7 Several individuals and three companies pleaded guilty to federal money laundering charges in that
case in connection with a scheme that funneled more than $7 billion from the Russian through a bank in New York over a
2-year period. The laundering scheme involved the transfer of funds by wire from Moscow to the United States and then
to offshore financial institutions. Additionally, in 1998, federal authorities in Florida announced arrests in an
international fraud and money laundering scheme involving victims from 10 countries, with losses up to $60 million
laundered through two banks on the Caribbean island of Antigua.8 Emerging market countries9 are particularly
vulnerable to laundering as they begin to open their financial sectors, sell government owned assets, and establish
fledgling securities markets.10 The economic changes taking place in the former Soviet States in Eastern Europe create
opportunities for unscrupulous individuals where money laundering detection, investigation, and prosecution tools slowly
take shape. Indeed, as most emerging markets began the process of privatizing public monopolies, the scope of money
laundering increased dramatically. The international community of governments and organizations that have studied
money laundering recognize it as a serious international threat.11 The United Nations and the Organization of American
States (OAS) have determined that the laundering of money derived from serious crime represents a threat to the
integrity, reliability, and stability of financial, as well as government, structures around the world.12 In October 1995, the
President of the United States, in an address to the United Nations General Assembly, identified money
laundering, along with drug trafficking and terrorism, as a threat to global peace and
freedom. Immediately thereafter, he signed Presidential Directive 42, ordering U.S. law
enforcement agencies and the intelligence community to increase an integrate their
efforts against international crime syndicates in general and against money laundering in
particular.13 The U.S. Department of the Treasury Deputy Secretary summed up the seriousness of the domestic and
international threat when he testified before the U.S. Congress on March 9, 2000. During his testimony before the House
Committee on Banking and Financial Services, he advised that money laundering encouraged corruption
in foreign governments, risked undermined the integrity of the U.S. financial system,
weakened the effects of U.S. diplomatic efforts, and facilitated the growth of serious
crime.14 These assessments make it clear that money laundering presents not only a formidable law enforcement
problem, but also a serious national and international security threat as well. Money laundering threatens jurisdictions
from three related perspectives. First, on the enforcement level, laundering increases the threat posed by serious crime,
such as drug trafficking, racketeering, and smuggling, by facilitating the underlying crime and providing funds for
reinvestment that allow the criminal enterprise to continue its operations. Second, laundering poses a threat
from an economic perspective by reducing tax revenues and establishing substantial
underground economies, which often stifle legitimate businesses and destabilize financial sectors and
institutions.15 Finally, money laundering undermines democratic institutions and threatens good
governance by promoting public corruption through kickbacks, bribery, illegal campaign
contributions, collection of referral fees, and misappropriation of corporate taxes and
license fees.16
Small Business Add-On
2AC
SOX hurts small businesses
Kamar et al 5 - Ehud Kamar Associate Professor, University of Southern California Gould School of Law; Visiting Professor, New
York University School of Law. Pinar Karaca-Mandic is an Economist, RAND Corporation. Eric Talley is a Professor, University of Southern
California Gould School of Law and Senior Economist, RAND Corporation; Visiting Professor, University of California at Berkeley (Boalt
Hall) School of Law. (“Going Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analysis,” PDF for E-Scholarship
Sept, 2005) STRYKER
In this article, we
have reported evidence consistent with the hypothesis that the SarbanesOxley Act of 2002 disproportionately burdens small firms . In particular, using foreign firms as
a control group, we have found that the propensity of small public American firms to be
acquired by private acquirers rather than public ones increased substantially in the first
year after enactment of SOX. By contrast, we have not found a similar effect for large firms. These results have
been robust in a number of alternative specifications. We have offered two complementary interpretations of
these findings. According to the “new sales hypothesis,” the enactment of SOX induced
struggling small firms to be sold. The acquirers of these firms, in turn, tended to be financial
acquirers for reasons unrelated to SOX. According to the “all sales hypothesis,” SOX
reduced the price that public acquirers would pay for target firms without affecting the
price that private acquirers would pay because only public acquirers would inherit any
firm-specific compliance costs associated with the target firm. These compliance
costs are relatively higher for small firms . Our findings bear on the ongoing debate about the desirability
of SOX and the regulatory regime it catalyzed. To the extent that SOX induced small firms to exit the
public capital market, it represents a burden on entrepreneurship that
transcends the immediate effects we have estimated. Creating an environment
in which entrepreneurship can flourish is seen by many as a fundamental virtue of
the American economy . In the words of a recent newspaper report: “How else could a small software
company become a Microsoft, or its founder become a famous millionaire?” (Deutsch 2005).
While this consideration should not drive all policy decisions, neither should it be ignored.
Small businesses are key to biotech
Wyse 7 [Roger, Managing Director and General Partner, Burrill & Company, U.S.A.,
“What the Public Sector Should Know about Venture Capital”, ipHandbook of Best
Practices, http://www.iphandbook.org/handbook/ch13/p03/] alla
Ready access to venture capital investments is vital to the success of start-up companies in the
capital intensive high-technology sectors such as biotechnology . But there is a
common misconception that an abundance of venture capital will spawn the formation of new companies. In fact, the
opposite is true: new companies actually attract venture capital. This chapter provides an overview of the
venture capital system, explains its importance, and identifies what qualities of a company make it attractive to venture
capital investors. Some of the factors can be influenced by government action, so the chapter offers several ways that
governments can encourage venture capital investment. 1. Introduction Commercialization of biotechnology
research is a long, expensive process that requires highly trained staff, sophisticated
laboratory facilities, and costly regulatory approvals. A growing amount of this work is
done by small companies. They are the primary source of innovation in
biotechnology and are performing an ever-increasing share of total U.S. R&D. According to
data from the National Science Foundation, the value of small -company R&D rose to US$40 billion,
accounting for 20.7% of the value of all private sector R&D. These small start-up companies rely on
venture capital investment to fund their R&D activities. As pharmaceutical and agriculture companies
merge and become larger, they increasingly focus on development and marketing, and
lose their agility and ability to innovate. Thus, large companies increasingly gain access
to the innovations of small companies through licensing agreements, R&D partnerships,
and acquisitions. Prior to the 1980s, most agricultural innovation in the U.S. originated at land-grant universities;
there were very few small start-up companies. Innovation was offered directly to farmers and to large agriculture
companies via products and license agreements. Then with the onset of the go-go genomics era in the late 1990’s
agriculture went through two major restructuring cycles. The first cycle was based on the premise that understanding of
life processes at the molecular level could be leveraged across agriculture and pharmaceuticals. So-called life science
companies were formed. Small agriculture biotechnology (agri-biotech) companies were started based on new genetic
technologies; these small companies were quickly acquired by larger companies as they raced
to converted into life sciences companies through the acquisition of genomics
technologies and germplasm. However, these large life science companies soon
discovered the complexities inherent in managing business units with very different cost
structures, market sizes, margins, and regulatory paths. Within two to three years, therefore, the large
companies spun off freestanding pharmaceutical and agriculture companies. These rapid cycles of restructuring negatively
affected small companies, because very few partnerships and acquisitions took place between 1998 and 2004. Fortunately,
the trend now seems to be reversing and large agri-biotech companies are again acquiring innovation from small
companies, particularly in an era when agriculture increasingly includes food production and biomass for fuels and
materials. The ongoing challenge now is to create an environment that encourages
entrepreneurship, the formation of small innovative companies and venture capital investment.
Biotech solves Extinction
Trewavas 2K [Anthony, is a Professor at the University of Edinburgh, best known for
his research in the fields of plant physiology and molecular biology, “GM Is the Best
Option We Have”, June 5, 2000, http://www.agbioworld.org/biotechinfo/articles/biotech-art/best_option.html]
In 535A.D. a volcano near the present Krakatoa exploded with the force of 200 million
Hiroshima A bombs. The dense cloud of dust so reduced the intensity of the sun that for at
least two years thereafter, summer turned to winter and crops here and elsewhere in the
Northern hemisphere failed completely. The population survived by hunting a rapidly vanishing
population of edible animals. The after-effects continued for a decade and human history was changed irreversibly. But
the planet recovered. Such examples of benign nature's wisdom, in full flood as it were, dwarf
and make miniscule the tiny modifications we make upon our environment. There are
apparently 100 such volcanoes round the world that could at any time unleash forces as
great. And even smaller volcanic explosions change our climate and can easily threaten
the security of our food supply. Our hold on this planet is tenuous. In the present day an
equivalent 535A.D. explosion would destroy much of our civilisation. Only those with
agricultural technology sufficiently advanced would have a chance at survival. Colliding
asteroids are another problem that requires us to be forward-looking accepting that
technological advance may be the only buffer between us and annihilation. When people
say to me they do not need GM, I am astonished at their prescience, their ability to read a
benign future in a crystal ball that I cannot. Now is the time to experiment; not when a holocaust is upon
us and it is too late. GM is a technology whose time has come and just in the nick of time. With each billion that
mankind has added to the planet have come technological advances to increase food
supply. In the 18th century, the start of agricultural mechanisation; in the 19th century knowledge of crop mineral
requirements, the eventual Haber Bosch process for nitrogen reduction. In the 20th century plant genetics and breeding,
and later the green revolution. Each time population growth has been sustained without
enormous loss of life through starvation even though crisis often beckoned. For the 21st
century, genetic manipulation is our primary hope to maintain developing and complex
technological civilisations. When the climate is changing in unpredictable ways, diversity
in agricultural technology is a strength and a necessity not a luxury. Diversity helps
secure our food supply. We have heard much of the precautionary principle in recent
years; my version of it is "be prepared".
AT//Regulations Good
Note: Many of these cards are already in the “Long” version of the Economy
1ac Advantage. Other cards may be duplicated with 2AC to the Fraud DA.
2AC—Regulations Good
SOX regulations are ineffective—they don’t prevent fraud and crush market
self-regulation
Kuschnik 8 - Bernhard Kuschnik is a legal clerk at the Landgericht (Regional Court) in Düsseldorf, Germany; First State Exam in
Law (Higher Regional); LL.M. (University of Aberdeen, Scotland, UK), and PhD Candidate at the Eberhard Karls University of Tübingen,
Germany. (“THE SARBANES OXLEY ACT: “BIG BROTHER IS WATCHING YOU” OR ADEQUATE MEASURES OF CORPORATE
GOVERNANCE REGULATION?” http://businesslaw.newark.rutgers.edu/RBLJ_vol5_no1_kuschnik.pdf 2008) STRYKER
***MODIFIED FOR OBJECTIONABLE LANGUAGE***
Finally, SOX declares the state as being the overall watchdog of corporate governance.
Section 107(a) provides the SEC with oversight and enforcement authority over
the Board .89 If a company chooses to introduce a new governance rule, it has to ask the SEC if the new rule is consistent with SOX
before the new provision can be deemed effective.90 The Board is required to “promptly file any notice with the Commission of any final
sanction on any registered public accounting firm or on any associated person thereof,”91 and has the final word regarding the gravity of
disciplinary action against the outside auditor.92 Under certain circumstances the SEC is also able to amend the rules of the Board.93
Furthermore, SOX not only patronizes the decisions of the Board, but of shareholders as well. According to § 107(d) of SOX, the SEC has the
authority to “relieve the Board of any responsibility to enforce compliance with any provision of this Act, the securities laws, the rules of the
Board, or professional standards,” and to censure and limit the activity of the Board if it has violated SOX without reasonable justification.
If it is “in the public interest” or “for the protection of investors” the SEC even has the power to remove directors from office.94 This
scope of authority is justified with the assertion that the shareholder is not able to
effectively enforce [their] his rights on [their] his own. Since this is seen as a “failure of the
market,” there is a need for governmental regulation, which is achieved by a mix of
paternalism95 and the call for “shareholder empowerment.” The latter is supposed to be
realized by giving shareholders greater rights for the election to the Board of Directors.96
Yet, it is questionable if the SOX and SEC strategies turn out to be effective.
Managers would face discipline not only through the dynamics of the market for
corporate control, but also internally through shareholder action.97 And small investors, as
Pettet illustrates, are very often not interested in participating in the decision making process
because the amount of prospective profit compared to the required effort is
disproportionate,98 whereas institutional investors who have great influence in the decision
making process will probably not like the enhanced decision making power of SEC because it
undermines their own virtual rights. Hence, it is questionable if market selfregulatory processes are not more desirable. Small investors, in other words, can rely
on “self help remedies” such as derivative suits. Also, the market is able to react via
hostile takeover mechanisms .99
GO TO FOOTNOTE 99
99 Ribstein, supra note 4, at 5, 56 (noting that there is a problem of hostile takeover self regulating
approaches due to the extensive federal regulation). In 1968 the Williams Act was
put into force, which imposed disclosure requirements on bidders and required them to
structure their bids to give incumbent directors time to defend. Id. The adoption of SEC
Rule 14(e)-4 which covered disclosures of information about impending acquisition
makes it even harder to go for hostile takeover approaches .
BACK TO TEXT
Yet, the government chose to rely on governmentally steered countermeasures, which
destroys initial market regulation .
Section 404 high compliance costs generate lower job growth
John, 11 – lead analyst on issues relating to pensions, financial institutions, asset building, and Social Security
reform at the Heritage Foundation and Senior Fellow at the Heritage Foundation. Nonresident Senior Fellow at the
Brookings Institution and as the Deputy Director of the Retirement Security Project. MA in Economics from The
University of Georgia and MBA in Finance from the University of Georgia Terry College of Business (David C., “10 Years
After Enron, Time to Throw Out Sarbanes–Oxley’s Section 404”, The Daily Signal, 12/02/11,
http://dailysignal.com/2011/12/02/ten-years-after-enron-it-is-time-to-throw-outsarbanes%e2%80%93oxley%e2%80%99s-section-404/?ac=1)//KTC
Exactly 10 years ago today, the Enron Corporation filed for bankruptcy after it was revealed that it had blatantly falsified
its earnings statements for many years. Although most of the accounting irregularities that caused its collapse were
already illegal, Congress overreacted and passed Sarbanes–Oxley, a massive and deeply flawed
accounting reform law. A decade later, it is time for cooler heads to prevail, and to consider repealing
Section 404. This onerous provision is supposed to ensure that the financial reports of publicly traded
corporations meet certain standards, but in reality its major role is to greatly increase compliance costs. It
continued presence discourages growing companies from going public to raise capital by
imposing on them very high compliance costs in the name of protecting their shareholders.
The result is lower job growth by these companies and fewer workers hired by new businesses.
Congress partially recognized this in 2010 by granting an exemption to publicly traded companies
whose stock is worth a total of $75 million or less, but this threshold is far too low, and questions remain if
Section 404 is needed at all. Section 404 duplicates part of Section 302 and requires the management of
any publicly traded company to produce an internal control report describing the scope and
adequacy of its financial reporting procedures and internal financial control structures. The company is required
to include this information in its annual report, send it to investors, and file it with the SEC. In
addition, the company must produce “an assessment…of the effectiveness of the internal control structure
and procedures of the issuer for financial reporting.” In the same report, an outside auditor must both attest
to and report on the management’s assessment of the effectiveness of the company’s
internal controls and procedures. In short, Section 404 requires both an internal audit and
external audit of financial accounting controls, which has turned out to be costly and timeconsuming in practice.
Personal liability discourages market investment – high costs generate risk
aversion
Lowenbrug, 05 –Ph.D. in Economics and Finance and adjunct faculty member in the School of Professional
Studies and Business Education at Johns Hopkins University. Manager in the Network Industries Strategies group of the
FTI Economic Consulting practice (Paul, “The Impact Of Sarbanes Oxley On Companies, Investors, & Financial Markets”,
Sarbanes-Oxley Compliance Journal, 12/6/05, http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=1141)//KTC
Personal Liability Obligations Auditors now face additional costs that are passed on to corporate
clients. For example, large accounting firms must undergo annual quality reviews, while smaller firms
must undergo a review every three years. SOX’s requirement that audit partners must rotate every
five years, and that outside auditors attest to and report on the management’s assessment of the internal controls of
each issuer also increases auditor costs. Due to heightened political and legal risks associated with
service as a CEO, CFO or board member, companies have been forced to increase compensation
to lure executives into running a company under intense scrutiny. Finding suitable individuals has become an
expensive undertaking and the fees for an executive search must be shared by companies,
investors and customers. Companies additionally face increased legal fees because boards
must hire outside lawyers and consultants for advice on their expanded role and help minimize risk. With
increased responsibility and accountability for directors and officers, D&O coverage has become more difficult to obtain
and thus more expensive. For many companies, outsourcing the compliance procedure is a better alternative than
managing the procedure with internal resources. Retaining a third-party helps ensure independence, achieve broader
coverage, and compensate for a lack of internal expertise and staff availability. As a result of the increase in
personal liability, companies may become more cautious and risk-adverse in the post-SOX
environment and this is where indirect costs come into play. Many corporate officers and directors might
be too fearful of personal liability to take business actions with risks. These individuals may
decide that it is far better for a company to restrain its growth and produce steady profits than to take the risks associated
with reaching for dominance in its market or entering entirely new areas of activity. This approach inevitably
stifles innovation, and the economic growth of both the company and the economy. Costs
associated with Internal Control Improvement In order to create strong internal controls, many companies must update
and refurbish their existing information technology systems to allow standardization and integration throughout all
applications company-wide. Time and money are limited resources for companies. Devoting time
and money to SOX compliance can limit other activities for which those resources could have been
used from research at a biotech plant, to analyst hiring at an asset management firm, to maintenance of an employee
benefit program. Additionally, as companies scrutinize their internal controls and become more conscious of the
process used to make decisions, they may become more
risk-adverse and slower to seize
opportunities. Some companies must pass their administrative costs of SOX compliance
onto customers by increasing prices, thus making the company less competitive in the
marketplace, especially to foreign competition not subject to SOX. Critics argue that although SOX has raised the level of
disclosure, the readjustment of costs affects a company’s global competitiveness.
Furthermore, the restraints
concerns.
from internal controls reduce the flexibility to respond to customer
1AR—Over-confidence
Independently, SEC regulations create over-confidence in the market
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
This view of investor complacency suggests a possible cost of regulation in addition to those
discussed below in Part III.C. The market may have been misled not only by defrauding insiders,
but also by years of regulators' and reformers' exaggerated claims about the
efficacy of regulation . In other words, regulation sends a signal to investors that helps
shape their behavior and, specifically, that may mislead them into inaction . 16 1 If this hypothesis
is correct, then additional regulation, accompanied by new exaggerated claims for its efficacy, might inhibit
markets from self-adjusting to fraud by giving investors a reason for continued
complacency. 162 For example, Sarbanes-Oxley provisions calling for increased SEC review of
corporate filings and a significantly increased SEC budget 163 may give investors the impression that
the SEC is effectively guarding against fraud. This is an additional reason for
concern about the effectiveness of these and other proposed regulatory responses to
corporate fraud, discussed in more detail in Part III.B.
1AR—Investor Confidence
SOX destroys foreign confidence in the US market
Lyons et al 8 (Erin, School of IR at Ohio State, along with Dr. Richard Dietrich,
Department of Accounting and Management Information Systems and Dr. Anthony
Mughan, Department of International Studies, “The Implications of the Sarbanes-Oxley
Act for U.S. Foreign Relations”, Ohio State University Press, 2008)
The international outrage toward Sarbanes-Oxley is best summarized by the following
statement: “SOX reaches beyond the registration and disclosure requirements first
established by the 1933 and 1934 Acts and forces foreign corporations to conform to a
model of corporate governance crafted by the U.S. Congress.” 67 Those who object to the Act are
wary of the increasing reach of the SEC and newly created PCAOB. International concern primarily
stems from Section 106 and there is a call to allow foreign exemptions for those firms that are cross-listed on U.S.
exchanges. 68 Many critics emphasize that they believe in the overall purpose of SarbanesOxley, but do not support the tedious requirements now demanded of foreign
corporations . Another common reaction to SOX is that many believe it was created to
clean up the mess of scandals that occurred in the U.S. during 2002 and that foreign firms should not
have to suffer the consequences of cleaning up the U.S. system. One source believes that
“extending this regulation beyond US firms is seen as an arrogant imposition from
American regulators.” 69 The negative foreign opinion stems from the fact that U.S. firms gain the upper
hand over international accounting firms who now must answer to multiple regulatory systems.
Disapproval of SOX is especially prevalent in the European Union, where governments
are currently trying to merge several economies, all with differing laws and regulatory bodies, into a single,
unified EU economic system. 70 Sarbanes-Oxley essentially deepens this burden for the EU
and the U.S. could possibly face future repercussions from the EU if it were to unify.
Answering to more than one accounting regulation system is an extreme
disadvantage for foreign firms and representatives of the Big Four Accounting firms abroad have readily
voiced their dissatisfaction with the new law. Aidan Walsh, an executive of KPMG International, has said that
SOX has made it tricky for the firm to implement abroad and believes that “the Act was put
together hastily and with little regard for the consequences to companies based outside of the
US.” 71 A European partner at Price Waterhouse Coopers echoes a similar attitude toward SOX and
explains international opposition by stating, “ No one wants to be a copy of the US. If there is
any country where something has gone wrong in the field of corporate governance, and
accounting and capital markets, it’s the US .” 72 Consequently, the international community is
now beginning to wonder if the U.S. capital market is really the place to
invest if companies are now forced to comply with a law that puts them at
an inherent disadvantage in the marketplace. 73 In some ways, it is surprising that there is
such opposition abroad because foreign corporations have traditionally followed U.S.
securities laws for years in the past. A careful look into the legal framework of securities regulation provides
valuable insight into this apparent anomaly. Although the creation of Regulation S, as mentioned in the preceding section,
calmed securities registration worries abroad, fraud regulation, despite the tests developed by the U.S. Courts, still
creates unstable conditions in the international marketplace.
1AR—FDI
SOX prevents companies from going public – decreases foreign and
domestic investment in the market
Lowenbrug, 05 –Ph.D. in Economics and Finance and adjunct faculty member in the School of Professional
Studies and Business Education at Johns Hopkins University. Manager in the Network Industries Strategies group of the
FTI Economic Consulting practice (Paul, “The Impact Of Sarbanes Oxley On Companies, Investors, & Financial Markets”,
Sarbanes-Oxley Compliance Journal, 12/6/05, http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=1141)//KTC
Conversely, fewer companies are willing to enter the market. SOX requirements make
“going public” costly and the maintenance required to “stay public” prohibitively expensive,
forcing companies to look elsewhere to raise capital. Foreign companies are also hesitant about the
requirements that SOX regulations would impose and are reluctant to commit to the U.S.
capital markets. U.S. institutional investors are becoming more willing to invest in foreign
markets. For some, the benefits of being on a U.S. exchange may not outweigh the costs of U.S. legal and regulatory
compliance (in addition to the typical international challenges of cultural and regulatory differences). For example,
Porsche AG elected not to list shares on the NYSE, reportedly due to its objection to the certification of financial
statements requirement of the SOX Act. In addition, SOX makes acquisitions of U.S. public companies
by foreign entities more expensive. U.S. laws require registration of the foreign company shares with the SEC
before the transaction can take place. Registration entails, among other things, full compliance with
SOX. Therefore, if the foreign acquirer is not listed in the U.S. it will be difficult to issue its own
shares to the selling shareholders of the U.S. firm.
1AR—Compliance Costs
Government regulations of Section 404 tradeoff with job creation and
product
Addington, 11 – Group vice president for research at The Heritage Foundation. Vice President for Domestic and
Economic Policy at the Heritage Foundation. Former Republican staff director, chief counsel or counsel for four
congressional committees (Senate intelligence committee, House intelligence committee, House foreign affairs committee
and House Iran-Contra committee). Former assistant general counsel of the Central Intelligence Agency and as special
assistant and then deputy assistant to the president for legislative affairs during the administration of President Ronald
Reagan. He went on to serve in the Department of Defense as special assistant to the secretary and deputy secretary of
defense and then general counsel during the administration of President George H.W. Bush. Addington served as counsel
to the vice president, and then chief of staff to the vice president, during Richard B. Cheney's two terms in that office.
Bachelor of Science in Foreign Service from the Georgetown University School of Foreign Service. He received a law
degree with distinction in 1981 from the Duke University School of Law. (David S., “Congress Should Repeal or Fix
Section 404 of the Sarbanes–Oxley Act to Help Create Jobs”, Heritage Foundation, 9/30/11,
http://www.heritage.org/research/reports/2011/09/congress-should-repeal-or-fix-section-404-of-the-sarbanes-oxleyact-to-help-create-jobs)//KTC
Congress Should Review Section 404 Promptly Congress should take promptly every step it reasonably can
to discourage unwarranted regulations and encourage economic growth and job
creation. The government should not force businesses to use their funds to meet the costs of
compliance with excessive government regulation when companies could invest those funds to
create jobs and meet demand for their products or services. Congress should proceed immediately to
reexamine section 404 of the Sarbanes–Oxley Act of 2002 and repeal or modify it as necessary, to
free businesses to invest more of their funds in creating jobs and economic growth rather
than in complying with government overregulation.
AT//Fraud Disadvantage
2AC—Fraud Disadvantage
SOX regulations are ineffective—they don’t prevent fraud and crush market
self-regulation
Kuschnik 8 - Bernhard Kuschnik is a legal clerk at the Landgericht (Regional Court) in Düsseldorf, Germany; First State Exam in
Law (Higher Regional); LL.M. (University of Aberdeen, Scotland, UK), and PhD Candidate at the Eberhard Karls University of Tübingen,
Germany. (“THE SARBANES OXLEY ACT: “BIG BROTHER IS WATCHING YOU” OR ADEQUATE MEASURES OF CORPORATE
GOVERNANCE REGULATION?” http://businesslaw.newark.rutgers.edu/RBLJ_vol5_no1_kuschnik.pdf 2008) STRYKER
***MODIFIED FOR OBJECTIONABLE LANGUAGE***
Finally, SOX declares the state as being the overall watchdog of corporate governance.
Section 107(a) provides the SEC with oversight and enforcement authority over
the Board .89 If a company chooses to introduce a new governance rule, it has to ask the SEC if the new rule is consistent with SOX
before the new provision can be deemed effective.90 The Board is required to “promptly file any notice with the Commission of any final
sanction on any registered public accounting firm or on any associated person thereof,”91 and has the final word regarding the gravity of
disciplinary action against the outside auditor.92 Under certain circumstances the SEC is also able to amend the rules of the Board.93
Furthermore, SOX not only patronizes the decisions of the Board, but of shareholders as well. According to § 107(d) of SOX, the SEC has the
authority to “relieve the Board of any responsibility to enforce compliance with any provision of this Act, the securities laws, the rules of the
Board, or professional standards,” and to censure and limit the activity of the Board if it has violated SOX without reasonable justification.
If it is “in the public interest” or “for the protection of investors” the SEC even has the power to remove directors from office.94 This
scope of authority is justified with the assertion that the shareholder is not able to
effectively enforce [their] his rights on [their] his own. Since this is seen as a “failure of the
market,” there is a need for governmental regulation, which is achieved by a mix of
paternalism95 and the call for “shareholder empowerment.” The latter is supposed to be
realized by giving shareholders greater rights for the election to the Board of Directors.96
Yet, it is questionable if the SOX and SEC strategies turn out to be effective.
Managers would face discipline not only through the dynamics of the market for
corporate control, but also internally through shareholder action.97 And small investors, as
Pettet illustrates, are very often not interested in participating in the decision making process
because the amount of prospective profit compared to the required effort is
disproportionate,98 whereas institutional investors who have great influence in the decision
making process will probably not like the enhanced decision making power of SEC because it
undermines their own virtual rights. Hence, it is questionable if market selfregulatory processes are not more desirable. Small investors, in other words, can rely
on “self help remedies” such as derivative suits. Also, the market is able to react via
hostile takeover mechanisms .99
GO TO FOOTNOTE 99
99 Ribstein, supra note 4, at 5, 56 (noting that there is a problem of hostile takeover self regulating
approaches due to the extensive federal regulation). In 1968 the Williams Act was
put into force, which imposed disclosure requirements on bidders and required them to
structure their bids to give incumbent directors time to defend. Id. The adoption of SEC
Rule 14(e)-4 which covered disclosures of information about impending acquisition
makes it even harder to go for hostile takeover approaches .
BACK TO TEXT
Yet, the government chose to rely on governmentally steered countermeasures, which
destroys initial market regulation .
Market solutions are key to solve fraud
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
The above discussion shows that regulatory
responses to corporate fraud are unlikely to do much
good and may do harm. At the same time, it seems clear that the frauds have
increased the general level of market risk and accordingly reduced market valuations, other
things, including corporate earnings, remaining constant. Since markets seem to have failed, regulation might seem to be worth trying even
if it is unlikely to help. But before
adopting regulatory solutions it is necessary to consider the
feasibility of market-based responses . Part IV shows that market-based approaches have
high prospects of success now that the risks of defective accounting have become as
obvious to investors as they have become to politicians and regulators. Indeed, it was
markets and not regulators that uncovered the problems and adjusted the share prices of
offending companies, while years of regulation of securities disclosures and
membership of boards of directors failed to prevent the frauds . In other words, dishonest
insiders were able to outrun the kinds of monitors that regulators favor, but not,
ultimately, the markets . If markets can react, there are significant benefits to allowing them to do so. Market
actors are likely to be better informed and motivated than regulators. Markets also lead
to a variety of competing solutions. As long as these solutions are evaluated in liquid securities markets, the most
efficient solutions are likely to dominate, and firms can pick the approaches that best suit their particular
circumstances. A political or regulatory approach will pick a particular solution that may not
be the most efficient overall for the reasons discussed in Part Ill.D, and may be unsuitable for many firms. Although
market responses are likely to be imperfect, it is necessary to compare market with
regulatory imperfections, rather than unrealistically assuming that only
markets are flawed . Moreover, it is important to keep in mind that markets have been
constrained by past regulation, particularly regulation of takeovers and of insider
trading. Although repeal of this regulation may be politically infeasible amid calls for more regulation of the securities markets, it is
worth reflecting on the contribution of past regulation to current problems when
considering whether additional regulation is appropriate.
Independently, SEC regulations create over-confidence in the market
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
This view of investor complacency suggests a possible cost of regulation in addition to those
discussed below in Part III.C. The market may have been misled not only by defrauding insiders,
but also by years of regulators' and reformers' exaggerated claims about the
efficacy of regulation . In other words, regulation sends a signal to investors that helps
shape their behavior and, specifically, that may mislead them into inaction . 16 1 If this hypothesis
is correct, then additional regulation, accompanied by new exaggerated claims for its efficacy, might inhibit
markets from self-adjusting to fraud by giving investors a reason for continued
complacency. 162 For example, Sarbanes-Oxley provisions calling for increased SEC review of
corporate filings and a significantly increased SEC budget 163 may give investors the impression that
the SEC is effectively guarding against fraud. This is an additional reason for
concern about the effectiveness of these and other proposed regulatory responses to
corporate fraud, discussed in more detail in Part III.B.
Fraud is only bad because of investor over-confidence—regulations
exacerbate the harm
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
Why did not securities markets reflect skepticism about the companies' numbers and
basic business plans even after public signs of problems emerged? 142 For example, no one seems to have
considered the implications of WorldCom's meeting earnings projections by small
fractions of a penny per share, or why Enron did not owe any taxes. 14 3 These phenomena are
at least partly attributable to investor judgment biases that lead them to
underestimate the risk that bad things will occur. Investors, like others, may be overly
optimistic in the sense of discounting risks, including the risk of fraud. 144 This
optimism may have been exacerbated in the present circumstances by a confirmation or
conservatism bias
that tended to discount evidence contrary to the long-running bubble
market. 145 Assuming these observations are accurate, their implications are ambiguous. On the one hand, given investor
biases, perhaps stock prices do not efficiently reflect inherent value, thereby increasing
investors' need for disclosure. 146 On the other hand, even if factors other than inherent value
influence stock prices, this should not matter to investors unless they can consistently
outguess the market. 14 7 There is little, if any, evidence that they can. Moreover, even if investors
are irrational, it is not clear what disclosure law can or should do about it. Why would investors
want more information about inherent value if their more emotional colleagues will ignore this evidence and take the price in a different
direction? Indeed, critics of market efficiency argue that even
well-financed arbitrageurs would not want to
bear the risk of investing contrary to investor momentum and, for this reason, do not move the
market toward efficiency. 14 8 More information alone cannot cure investors of the
judgment biases that supposedly lead them to misuse the information. Perhaps clear disclosures of
risks would provide the sort of salient warnings necessary to break through investors' excessive optimism or conservatism bias. But
requiring such disclosures carries the cost of forcing firms to make characterizations that
are not necessarily supported by the available facts. This could make stock prices more
volatile and expose firms and insiders to liability for excessive pessimism. Moreover, mandatory
disclosure designed in light of investors' judgment biases may present different problems in bear and in bull markets. As discussed below in
Part IV.A, in a bear market investors may be overly skeptical, suggesting that in this context firms need to be more careful with negative
than with positive information. It is not clear how a single set of rules can deal with creating considerable uncertainty. In short,
regulation that simply ensures that markets will have more accurate information will not
solve the problem of corporate fraud if, as many commentators suggest, investors do not know what
to do with the information when they get it. A more promising approach is encouraging investors to be more
skeptical of firms' disclosures and more alert to fraud than they seem to have been in the recent corporate frauds. Yet, as discussed in the
next part,
regulation may actually contribute to these problems .
Exts. Regulations Fail
Regulations and monitoring are bad
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
In Enron and other notorious recent fraud cases, many
levels of market and monitoring devices
simultaneously failed. Proregulatory theorists argue that this demonstrates that
securities markets cannot be trusted to work on their own without strong regulatory support and
that new regulation is needed to restore investor confidence. However, this Article has shown that the case for
significantly increased regulation has not been made. While Enron exposed gaps in the
existing monitoring structure, the benefits of eliminating those gaps are not as clear as
they might seem to be. The substantial existing regulatory framework was breached by aggressive outsiders who seemed
determined to ignore the risks of their actions, including their personal exposure to punishment. Promoting more
independent monitors with lower-powered incentives to scrutinize the actions of highly
informed and motivated insiders cannot solve this problem. Moreover, the costs of
increased regulation could be significant. On the one hand, the Act may reduce the incentives of both insiders and
monitors to increase shareholder value. Even if the Act is ineffective, as this Article suggests may be the case, the Act could cause
harm simply by misleading the market that regulation can solve its problems .
377 In fact, as history has often shown, from the South Sea Bubble 378 to the Great Crash, 379
market abuses manage to stay one step ahead of the regulators. The endless cycle of
boom-bust-regulation accomplishes little in the long run. Finally, even if some highly sophisticated and
nuanced regulation theoretically could increase social welfare, it is not likely that this type of reform will arise
out of the present highly charged political environment. Markets are capable of
responding more quickly and precisely than regulation to corporate fraud, as long as
regulation does not impede or mislead them. Although markets will remain
imperfect, the potential for a market response, combined with the likely costs of
regulation, make the case for additional regulation dubious.
SEC monitoring is ineffective and bad
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
This Article argues that, despite
all the appearances of market failure, the recent corporate frauds
do not justify a new era of corporate regulation . Indeed, the fact that the frauds
occurred after seventy years of securities regulation shows that more regulation is not
the answer. 10 Rather, with all their imperfections, contract and market-based approaches are more
likely than regulation to reach efficient results. Post-Enron reforms, including SarbanesOxley, rely on increased monitoring by independent directors, auditors, and
regulators who have both weak incentives and low-level access to information. This
monitoring has not been , and cannot be, an effective way to deal with fraud by
highly motivated insiders. Moreover, the laws are likely to have significant costs,
including perverse incentives of managers, increasing distrust and bureaucracy in firms,
and impeding information flows. The only effective antidotes to fraud are active and
vigilant markets and professionals with strong incentives to investigate corporate managers and dig
up corporate information.
Regulations don’t solve—the cause isn’t greed and regulations are ineffective
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
In order to fix the markets, it is necessary to understand why the insiders who pulled accounting
scams at major public corporations thought they could get away with them in efficient and regulated
securities markets. A thorough understanding of the perpetrators' motives would seem to be essential in designing regulation that
It is too simplistic to ascribe these frauds to
"greed" without accounting for the risk of detection . Notably, in contrast to notorious crooks
such as Robert Vesco, none of the main characters in the recent scandals tried to flee. Moreover, the
alleged perpetrators were not shady criminals but seemingly responsible business people
who had earned the trust of their, even more respectable, monitors. For example, Scott Sullivan,
who is accused of manipulating WorldCom's books in order to meet earnings targets, was regarded as "one of the best
chief financial officers around" and "the key to WorldCom Inc.'s financial credibility."' 130
How could such a man have engaged in large-scale financial manipulation if this is
proved to be the case? Similar questions arise regarding the seemingly more blatant behavior of some Enron
insiders, particularly Andrew Fastow. Indeed, the insiders' conduct seems particularly puzzling, at least at
first glance, given agents' usual incentives. Since agents bear severe penalties in firms if
they fail, including loss of job and reputation, but normally do not get the full benefit of
success, it follows that they would tend to be more cautious than their employers would
want them to be, rather than the reverse. To begin with, there is a large literature on judgment biases
that lead at least some people to tend to be more optimistic about the future and more
confident in their judgment and ability to control future events, than would an actor who objectively
processed the relevant data. 13 1 For example, traders generally overestimate their ability to judge
the true value of the company-i.e., the value of their private information. 132 These biases
may be bolstered over time by the self-esteem-maximizing device of emphasizing
positive returns as an indication of ability and downplaying trading losses as
irrelevant.133 Moreover, even rational people arguably would be more likely than a third party
observer to attribute their own failures to luck and their own successes to skill given their
tendency to select actions they think will be successful. 134 Actors' judgment biases may depend somewhat
has a significant chance of preventing future frauds.
on their self-esteem, in the sense that those with the highest self-esteem are the most likely to misjudge their control and skill. But
managers' attributes in this respect are not randomly distributed. Donald Langevoort argues that successful
firms tend to
reward and promote a particular type of individual-one who is highly, perhaps unrealistically,
optimistic about the firm's prospects, confident in his abilities, 13 5 seemingly loyal to the firm and its senior
management, and distrustful of outsiders. 1 36 These judgment biases and miscalculations might be
enhanced by external cues. In particular, legal rules hold that managers are better
able to judge the value of their companies than markets. This view emerges
most clearly in cases involving takeovers or sale of the company, in which courts have
given managers the power to defend against above-market-value takeovers. 137 The courts'
acceptance of managers' arguments that market prices are systematically too low is particularly striking given
managers' power to release positive information and ability to delay the release of
negative information. The law's disregard of markets may have helped confirmed managers' beliefs that their actions were
benefiting the firm, regardless of what markets, or earnings, might be saying at the moment. The above story seems to fit
some recent corporate frauds. New methods of doing business such as the provision of alternative markets (Enron),
consolidation of long distance telephone service (WorldCom), or the power of downsizing (Sunbeam) produced initial successes and high
market valuations based on optimistic estimates of future earnings. Stock prices built on hope were highly susceptible to negative earnings
Hypermotivated and superoptimistic
insiders might be able to persuade themselves that any setbacks were temporary, so that
cover-ups need only work for a little while to be successful. On the one hand, they might
conclude that markets that spiked in defiance of modest, or no, earnings confirmed their
firms' high inherent value, and therefore the validity of their business plans. On the other hand, stocks that
fell on bad earnings did not reflect even publicly available information about the firms'
abiding value. Thus, hyperoptimistic insiders might be able to convince themselves that
earnings manipulations "corrected" the market's misimpressions of their companies. But
even these misjudgments do not seem fully to explain why insiders would risk jail and
loss of all of their wealth and future business prospects by engaging in fraud that a
rational person would surely realize was likely to be detected, all without apparently having a Vesco-type
shocks, providing an incentive to prevent these shocks at all costs.
end game strategy. It has been argued that, once having begun their conduct, insiders managed to deceive themselves that their actions
were right. 138 But surely
at some point insiders would realize that the probability discounted
cost of severe sanctions outweighs the potential benefit. Indeed, it would seem that insiders who disregarded
the risk of punishment because they were convinced they were right were behaving altruistically rather than greedily. The solution to the
puzzle may lie in the shift of agent incentives that occurs when agents perceive the risk that they may lose everything. This is probably
before the agents have committed any wrongdoing, which helps explain why they would engage in wrongdoing in the first place.
Insiders face punishment in the form of job and reputation loss even for lawful conduct
that fails to meet investor expectations-that is, for their firm's failure to meet investors'
earnings expectations. 139 At this point insiders may enter a final period in which they are
no longer susceptible to potential discipline by their firms or the employment market
because failure to distort earnings also will result in loss of their job and
reputation . 140 Since insiders are convinced that they are doing the right thing in defending their company's value from
destruction by misguided markets, they are also not subject to a significant moral constraint. As soon
as insiders begin engaging in fraud, their incentives change. At this point, insiders risk
loss of wealth and even personal freedom unless they continue the cover-up. Indeed, the
consequences of discovery may be so severe that even a small chance of success might
lead a rational actor to cover up. This calculus may be reinforced by a psychological tendency to prefer risk when choosing
between present loss and a chance to avoid loss. 14 1 This brief summary should be enough to indicate that strong measures may be
necessary to significantly reduce the risk of future fraud. Insiders
who think that they are doing the right
thing may be harder to detect and deter than those who are simply greedy.
Deterrence that is effective also may be very costly . Moreover, given the shift in incentives
discussed above when the end seems near, increasing punishment may actually
increase the risk of a cover-up, even as it has little effect on the fraud itself. All of
this suggests significant uncertainty about how best to craft the law to prevent future
frauds.
Regulations and independent monitoring fails
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
As discussed in Part II.A, corporate
reformers have emphasized independent directors as a way to
curb insider abuse. However, the emphasis on the monitoring board over the last thirty
years has demonstrated the inherent limitations on independent directors'
effectiveness . Myles Mace, in his famous 1971 study of directors, summarized these limitations as constraints on
time, information, and inclination to participate effectively in management. 166 Outside
directors lack the time to do more than review, rather than make, business decisions.
They also must depend on insiders for critical information. With respect to inclination,
independent directors traditionally are nominated by insiders and, in any event,
generally are selected from the business community to ensure that they will have
adequate expertise and, therefore, usually will be unwilling to second guess managers. Not surprisingly,
board independence has done little to prevent past mismanagement and
fraud . For example, thirty years ago the SEC cast much of the blame for the collapse of the Penn Central Company on the passive
nonmanagement directors. 167 No corporate boards could be much more independent than those of
Amtrak, which have managed that company into chronic failure and government
dependence. Enron had a fully functional audit committee operating under the SEC's
expanded rules on audit committee disclosure. 168 The substantial data on boards of directors that
has been compiled over the last twenty years offers little basis for relying on
regulation of board composition as the solution to corporate fraud. 169 The evidence shows that
there is no overall positive relationship between various measures of firm welfare, including earnings, Tobin's q, and stock price, and the
degree of independence of corporate boards. 1 70 While there is evidence that independent boards may be better at some tasks, such as
removing poorly performing managers, 171 there
is also evidence that independent directors are
correlated with worse corporate performance . 172 This evidence indicates that insiders may have
some value on boards, perhaps in adding important expertise. 1 73 In general, firms seem to be making the right decisions as to how much
board independence is appropriate. If anything, evidence of a negative correlation between corporate performance and board independence
may indicate that, even
prior to the post-Enron regulation, corporations were being forced to
err on the side of independence. 1 74 This data does not necessarily mean that board independence is irrelevant to
corporate fraud. First, independent directors arguably are better at certain types of decisions, perhaps including supervising their firms'
financial disclosures and relationships with auditors. Enron and related scandals arguably make the data cited above obsolete because they
uncovered pervasive fraud that increases the need for this type of supervision. Second, although the overall proportion of independent
directors may not affect corporate performance, the independence of certain "trustee" committees such as audit, nominating and
compensation committees, may be particularly important. 175 Third, post-Enron regulation
might usefully tweak the
definition of independence so that it precludes at least some directors, particularly those on
sensitive "trustee" board committees, from receiving favors such as donations to pet charities with which insiders can
buy director loyalty. 176 For example, Ross Johnson at RJR-Nabisco sought to buy board member Juanita Kreps by endowing two chairs at
her school, Duke, one of them named after Kreps.1 77 Nevertheless, it
seems unlikely that a relatively minor
donation could influence a director with a strong reputation to protect. Even given these caveats,
more independence is not necessarily correlated with better monitoring. In
order to avoid suspect relationships and connections, corporations may have to appoint
more directors from outside the business community. Board members such as law
professors, 178 with little hands-on business experience and no formal connection with a
company may not be sophisticated enough to spot problems or be able or willing to stand
up to a powerful executive. Moreover, there are significant limits on what even the best audit
committee can do if, as is typically the case, it meets only a few times a year. 179 These problems of
board independence may be exacerbated by other proposals to reform the board,
particularly including proposals to have directors represent multiple constituencies in the
company, such as workers, rather than the shareholders exclusively. 180 Encouraging or requiring directors to
focus on goals other than financial performance increases the risk that directors will miss signs of misbehavior, if only because of the
limitations on directors' time discussed above. Directors who are specifically selected to represent particular constituencies may be useless
in protecting against insider fraud because of their lack of business sophistication or their interest only in looking after a particular
constituency. 18 1 To be sure, firms might minimize these problems by delegating financial monitoring to a specific audit committee that is
focused on this task. But even in this situation, a
multiconstituency board might interfere with
monitoring by nominating financially unsophisticated directors or by impeding full
disclosure to and discussion by the full board. 182 It has been argued that, other things
being equal, independent directors would be more attentive to corporate interests if they
held stock in their companies. 183 Indeed, there is evidence that firms with independent boards that get incentive
compensation are more likely to fire bad managers. 184 On the other hand, the WorldCom directors were heavy
investors in WorldCom, having received both their stock and board memberships in
WorldCom's earlier acquisitions of MCI and other companies.185
Government auditing fails
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
For present purposes, the
more serious issue is whether even strong regulation will change
auditors' practical ability to find corporate fraud when determined corporate insiders
want to hide it. In the wake of the WorldCom disclosure, an accounting expert pointed out that
accountants do not do "forensic audits" designed to uncover wrongdoing, but rather only
sampling audits that may entirely miss the problem. 20 2 The AICPA draft standard on auditing for fraud
observes that "[i]dentifying individuals with the requisite attitude to commit fraud, or
recognizing the likelihood that management or other employees will rationalize to justify
committing the fraud, is difficult. ' 20 3 The draft notes that "[c]haracteristics of fraud include concealment through (a)
collusion by both internal and third parties; (b) withheld, misrepresented, or falsified documentation; and (c) the ability of management to
override or instruct others to override what otherwise 20 4 appear to be effective controls." To be sure, there
is much auditors
can do to spot fraud, including developing cross- check procedures and identifying risky situations, as is made clear by the
extensive discussion in the AICPA's Exposure Draft.205 However, requiring auditors to do significantly more
than they are doing now may involve more than just changing their incentives and
making them more independent, but also may involve changing the basic scope of what
they do. The benefits of increased auditing may not exceed the costs. If
investors cannot rely on auditors to find fraud, it is even less realistic for them to
rely on government regulators . Sarbanes-Oxley establishes a Public Company Accounting Oversight Board to
scrutinize auditors. 20 6 However, as indicated by the controversy over picking the chair of the board,20 7 simply designating a
new regulatory overseer is unlikely to be a panacea. Sarbanes-Oxley also instructs the
SEC to increase its review of financial statements and increases the SEC's budget.20 8
However, the SEC faces formidable problems in monitoring for fraud . 20 9 The
SEC is charged with a wide range of tasks in addition to spotting fraud in financial
statements, including oversight of securities firms, exchanges, investment advisors, and
mutual funds, and of market trading, including insider trading. Its staff is perennially too small for these
mammoth 210 tasks. Sarbanes-Oxley hopes to enlist others to help in the fight against fraud. Lawyers will now be required to report
"evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent" to executives
and possibly to the board.2 11 The Act also includes strong protection for whistleblowers. 2 12 As discussed below in Part llI.C, these rules
may be costly because they inhibit efficient information flows within the firm and
perversely affect the relationship between corporations and their lawyers. The main point for
present purposes is that these rules are also ineffective for purposes of uncovering fraud. Those involved in a fraudulent scheme are unlikely
to discuss it with nonparticipants. The new rules may inhibit even innocuous conversations that might have helped indirectly in uncovering
frauds by making them fodder for federal litigation and investigations.
SEC tactics are retroactive—can’t stop the next area of fraud
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
The recent corporate frauds were attributable less to firms' silence or misleading than to
the falsity of their disclosures. Thus, it is not clear how much difference the SarbanesOxley requirements concerning disclosure of off-balance-sheet transactions, pro forma earnings,
and material changes in financial condition 2 15 will make in preventing future fraud. To be sure, burying information
in financial statements can make it difficult for individual investors to determine a firm's financial condition. But misleading legions of
these provisions deal with
yesterday's problem. Recent events have cast so much light on these specific matters
that additional wattage is unlikely to make any difference in these particular areas. The
next great fraud probably will occur elsewhere .
analysts, reporters, and others in an active market requires greater opacity. In any event,
SEC regulations fail
Murphy 9 - Robert P. Murphy is an Associated Scholar with the Mises Institute. His other positions include Senior Economist for
the Institute for Energy Research, Senior Fellow with the Fraser Institute, and Research Fellow with the Independent Institute. Murphy
earned his PhD in economics from New York University. He taught for three years at Hillsdale College before entering the financial sector,
working for Laffer Associates on research papers as well as portfolio management. Dr. Murphy is now the president of Consulting By RPM
and runs the economics blog Free Advice. (“The SEC Makes Wall Street More Fraudulent,” https://mises.org/library/sec-makes-wallstreet-more-fraudulent 1/5/2009) STRYKER
***MODIFIED FOR OBJECTIONABLE LANGUAGE***
The mainstream reaction to the Bernard Madoff scandal was inevitable. Whenever a government
regulatory agency proves itself to be incredibly incompetent or corrupt, the respectable
media swoop in to declare that the "free market" has failed and the agency in question
obviously needs more money and power. Whether it's the Department of Education's failure to produce kids who can read,
the FBI's accusations against innocent people in high-profile cases, or the FDA cracking down on tomatoes, the answer is always
the same: proponents of bigger government argue that yes, mistakes were made, but the solution of
course is to shovel more taxpayer money into the agencies in question. In the private
sector, when a firm fails, it ceases operations. The opposite happens in government. There is
literally nothing a government agency could do that would make the talking heads on the Sunday shows ask, "Should we just abolish this
agency? Is it doing more harm than good?" It's not just Fannie Mae and Freddie Mac: throughout
history, virtually every
agency created by the federal government has been deemed too important to fail . (I
vaguely remember some Republicans in the mid-1990s holding a press conference and declaring that the Department of Commerce was
done, and that voters could "stick a fork in it." I guess they found it was still pink inside.) Madoff's Ponzi Scheme The pattern plays out
perfectly with the SEC and the Madoff bombshell. Suppose a few years ago, I told a group of MBAs to imagine the worst screwup that the
SEC could possibly perform, something so monumentally incompetent that members of Congress might openly question whether the
agency should continue. I think that at least half of the class would have come up with something far less outrageous than what has
happened in fact. Everyone who reads the headlines knows that Bernard Madoff is accused of running a massive Ponzi scheme that, for over
a decade, has ripped off investors to the tune of $50 billion. But those who dig a bit deeper learn that Harry Markopolos, who used to work
for a Madoff rival, has been writing the SEC since at least May 1999, urging them to put a stop to Madoff's Ponzi scheme. (Markopolos
examined the options markets that Madoff told investors he used to hedge his positions and yield his steady stream of dividends, and
Markopolos concluded that Madoff's results were impossible.) Incredibly, the SEC apparently had evidence in front of its face sixteen years
ago (in relation to another case) that Madoff was a crook. Yet it gets worse. As the Wall Street Journal and others dig into the story, they
find that Madoff's
family had close ties to the SEC. His sons, brother, and niece, for
example, worked with or advised financial regulators on certain matters—no doubt
telling them the best way to protect investors from fraud. But the pièce de résistance is that Madoff wasn't
caught; his own sons turned him in after he came to them and admitted what he'd done. (Let's assume they are telling the truth and didn't
realize what their father was up to all along.) And even Madoff's confession was not because of a visit from the ghost of Christmas future.
No, Madoff's scheme simply ran out of gas, because of large redemption claims that his clients filed, due to the collapse of the financial
markets. Had it not been for the bursting of the credit bubble, Madoff would likely still be bilking new investors — and advising the SEC.
Laissez-Faire Ideology to Blame? Even though George Bush has presided over the most interventionist government since FDR's New Deal,
he somehow has a reputation for being a free marketeer. (It's funny that his political opponents take him at his word when it comes to
economic rhetoric, yet they don't universally refer to Bush as a lover of world democracy and peace.) Naturally, the Madoff Ponzi scheme is
blamed on the Bush administration's failure to adequately fund and staff the beleaguered SEC. "Bush thinks markets are self-regulating,
and look what happened!" This is complete balderdash. The SEC under George Bush has the biggest budget and the most personnel in its
history. The charts below show the annual budgets and "full-time-equivalent" staff for the SEC by fiscal year. These numbers were obtained
from the annual SEC reports archived here. (Note that there might be a slight discontinuity in the budget series in the year 2003, when the
report format changed.) It's even more interesting to break down the growth rates in budget and staff by presidential administration. For
the following table, I have assumed that an incoming president doesn't really influence the SEC's operations for that (partial) fiscal year. For
example, Ronald Reagan won the election in November 1980, and was sworn in the following January 1981. To gauge how much he
increased the SEC budget and staff, I look at the annualized growth from FY 1981 (which ran through September 1981) to FY 1989.
However, I also ran the numbers going from FY 1980 through FY 1988 etc., and it doesn't really affect the results. Administration
Annualized SEC Budget Growth (not inflation-adjusted) Annualized SEC Full-Time Staff Growth Jimmy Carter 9.3% -1.2% Ronald Reagan
7.5% 1.4% George H.W. Bush 15.3% 6.7% Bill Clinton 6.8% 1.4% George W. Bush 11.3% 1.0% As the table shows, clearly the person who
hated the free-wheeling market most was the first President Bush, followed up by his son. And especially when we consider the high
inflation rate, it's obvious that Jimmy Carter was a laissez-faire ideologue. Bill Clinton, in contrast, had the same attitude towards
speculators as Ronald Reagan. Naturally we can quibble with these conclusions. Maybe Bill Clinton's numbers would have been a lot higher
had Newt Gingrich remained a history professor. Maybe George W. Bush used the Enron scandal to beef up the SEC's budget, while he gave
orders behind the scenes to use the cash for pizza and beer rather than enforcement. But whatever the excuse, it just proves my point: it
is
foolish to give the task of ensuring financial integrity to DC politicians. The SEC was
supposedly retooled after the Enron fiasco in order to do its job. And it failed
miserably. Some heads may roll and budgets balloon, but if history is any guide, there
will be another huge financial fraud within another decade. Conclusion The SEC clearly
botched its alleged job in the case of the Madoff Ponzi scheme. Taxpayers are certainly entitled to ask,
"What exactly are we getting for our (now) $900 million per year?" It is not simply that the SEC failed to help. On
the contrary, the SEC is actively harmful . For one thing, its implicit blessing of Madoff probably
reassured some investors; surely the SEC would have shut him down if his returns
were bogus! Beyond that, the SEC has been horrible during the financial crisis .
In the summer it engaged in a phony ban on "naked" short selling that was already
illegal, and then a few months later it banned short selling outright on hundreds of
financial stocks, a move that paralyzed [destroyed] that particular sector even more. And lately,
they've decided to launch a witch hunt on Mark Cuban—those 3,000+ employees have to do something. Democrats should not take away
from the Madoff scandal the lesson that Republicans cannot be trusted to regulate financial markets. Even if it were true that Democrats
would run it more honorably and competently, eventually another Republican will win the White House. Rather than pitting each party
against the other, it
is wiser to conclude that Washington politicians and bureaucrats will never
put the average taxpayer or investor's interests above those of billionaire financiers. The
SEC should be abolished, and investors should rely on private-sector watchdog
groups to spot swindlers.
Exts. Self-Regulation Solves
Self regulation is better
Ribstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses
to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER
Modern regulatory theories of corporate governance begin with Adolf Berle and Gardiner
Means, who argued in the wake of the 1929 crash that owners of publicly held corporations could
not effectively control their corporations. 44 This lack of control effectively involves two problems. First, as Adam
Smith observed, corporate managers do not watch over "other people's money" with the "anxious vigilance with which the partners in a
private copartnery frequently watch over their own."'45 In other words, public corporations involve agency costs. Second, agency costs are
high because it is impractical for shareholders with small, dispersed interests to invest much time and money in monitoring managers.
The antiregulatory response to Berle and Means is essentially that shareholders cannot be as
vulnerable to misappropriation as the regulatory model would suggest because no one
can force them to invest in firms that will squander their money. The capital markets
therefore can be expected to develop devices that overcome the problems Berle
and Means discussed. These devices include hostile takeovers and other devices that
aggregate shareholder voting power and facilitate shareholder monitoring, alignment of
managers' and shareholders' interests through incentive compensation, and monitors
such as independent directors and large accounting and law firms. Efficient securities
markets, in turn, provide both an effective valuation device to enable these devices to operate and a
mechanism for pricing and testing the efficacy of the devices. The takeover market
functions because the price of a suboptimally managed firm drops enough to make it
worthwhile for better managers to buy the stock and replace the incumbents. Stock
compensation is an efficient incentive because it aligns managers' interests with
shareholder welfare. A company's stock price can be viewed as measuring the value of its bundle of contracts. Even if the
market cannot know the evil that lies within managers' hearts, it can observe the contracts that tend to keep
them honest. Investment dollars will tend to flow to the firms with the most
efficient governance devices .
AT//PCAOB CP
2AC—PCAOB CP
The PCAOB fails and gets litigated
Myers 6 (Stephanie, finance contributor to the Trusted Professional, a newsletter
published by the New York State Society of CPAs, MA of Business Administration from
York, “Lawsuit Challenges Constitutionality of PCAOB”,
http://web.archive.org/web/20070423131945/http://www.nysscpa.org/trustedprof/30
6a/tp2.htm)
The suit claims that the PCAOB, created by the Sarbanes-Oxley Act (SOX) in 2002, is
unconstitutional and that it hinders competition . The crux of the lawsuit is that the PCAOB is
actually a government entity rather than a private corporation, according to a legal overview document made public by the
FEF. The organization argues that PCAOB board membership should therefore require
Senate approval. Under current guidelines, the appointment of board members is left up to
the Securities and Exchange Commission (SEC). The legal team handling the case for the plaintiffs will include past
Independent Counsel Kenneth Starr, who investigated President Clinton in 1998. The suit is being funded by the Free
Enterprise Institute (www.feinstitute.org), according to a spokesperson from the FEF. Private Corporation Status
Challenged In their lawsuit, the plaintiffs claim that the PCAOB’s powers—including “the power to ‘enforce compliance’
with the [Sarbanes-Oxley] Act and the securities laws, to regulate the conduct of auditors through rulemaking and
adjudication, and to set its own budget and to fund its own operations by fixing and levying a tax on the nation’s public
companies”—effectively render the PCAOB a government entity. “[The PCAOB] is a government entity
subject to the limits of the United States Constitution, including the Constitution’s separation of
powers principles and the requirements of the Appointments Clause. The Board’s structure and
operation, including its freedom from Presidential oversight and control and the method by which its members are
appointed, contravene these principles and requirements . For this reason, the Board and all
power and authority exercised by it violate the Constitution,” the lawsuit states. PCAOB Member Selection Questioned
The lawsuit contends that the PCAOB’s members should be appointed by the White
House with Senate review, as opposed to being appointed by the SEC. “The PCAOB is not accountable
to any person who has ever been elected and therefore [is] unaccountable to the citizenry
they purport to regulate,” the FEF stated in its press release announcing the suit. “As far as board appointments
go, I don’t know if the White House is necessarily the way to go, but I also don’t think the SEC is the way to go,” Joseph
Troche, a member of the Society’s SEC Practice Committee, said.
Anything short of repeal fails – the CP gets circumvented
John and Morano 7 (David, lead analyst on issues relating to pensions, financial
institutions, asset building, and Social Security reform at the Heritage Foundation and
Senior Fellow at the Heritage Foundation. Nonresident Senior Fellow at the Brookings
Institution and as the Deputy Director of the Retirement Security Project, and Nancy,
“The Sarbanes-Oxley Act: Do We Need a Regulatory or Legislative Fix?”,
http://www.heritage.org/research/reports/2007/05/the-sarbanes-oxley-act-do-weneed-a-regulatory-or-legislative-fix)
A growing body of evidence suggests that the unin-tended consequences of Sarbanes-Oxley, especially Section 404, are
harming the U.S. economy and its financial industry. However, the problems with Sec-tion 404 are caused
as much by how regulators have implemented it and how outside auditors have inter-preted it. While
both the Securities and Exchange Commission (SEC) and the Public Company Account-ing Oversight Board
(PCAOB) have recently released proposed changes in how Section 404 is imple-mented, it is not
clear that these changes will be suffi-cient to affect auditors' overzealous behavior in an era in which their
every action may be subjected retroac-tively to a lawsuit. For that reason, auditors may need some level of protection
against legal liability before they feel comfortable with reducing the scope-and cost-of Section 404 audits. Furthermore,
legislative action short of outright repeal of Section 404 is not certain to reduce the
com-pliance burdens and costs. The wording of Section 404 is so simple and broad that
corrective legislation would likely lengthen it and make it even more
complex.
AT//FBI Advantage Counterplan
2AC—FBI Counterplan
DHS is bad—giving them more coordinating power just politicizes
counterterror operations
Lind 15 - Dara Lind covers immigration and criminal justice for Vox. (“The Department of Homeland Security is a total disaster. It's
time to abolish it.” http://www.vox.com/2015/2/17/8047461/dhs-problems 2/17/2015) STRYKER
DHS has managed to distinguish itself from the other government agencies doing similar
work — by becoming extremely politicized, both in its dealings with Congress and
internally. It's become part of DHS' structure — again, in ways that have threatened
national security . The department has had to deal with so much congressional
"oversight" that it's become unproductive. As of fall 2014, more than 90 congressional committees and
subcommittees had some sort of oversight responsibility over some portion of DHS. For comparison, the Department of Defense has about
30 committees or subcommittees with oversight responsibility. DHS
officials need to spend enormous amounts
of time preparing for congressional hearings and delivering research reports to
members; that's time that can't go into directing DHS strategy, or managing the
department. As former DHS Secretary Michael Chertoff said in a 2013 Annenberg Public Policy Center report, this can actually defeat
the purpose of congressional oversight: "either the department has no guidance or, more likely, the department ignores both because
they’re in conflict. And so the department does what it wants to do." But
what does the department "want to do"?
That often depends on whether "the department" means officials in Washington, or
agents in the field. At DHS, the two groups are often in open conflict. Throughout President Obama's
presidency, for example, Immigration and Customs Enforcement agents have been vocally opposed to any effort from DHS leadership to
reduce the risk of deportation for some unauthorized immigrants. So when DHS leadership tried to target immigration enforcement by
issuing memos to ICE field offices about who they should and shouldn't "prioritize" for deportation, the offices often resisted or ignored
those instructions — preventing the administration from actually being able to implement its policies. (As I've written before, this is
arguably the biggest reason that the administration's shifted to granting "deferred action" to unauthorized immigrants, in 2012 and again in
2014.) This
intra-agency tension is likely a big reason that DHS agencies routinely rank
near or at the bottom of the federal government in employee morale. (In the latest survey in
December 2014, DHS ranked lowest among "large agencies," and ICE and two other DHS agencies shared the bottom three slots among all
314 agencies.) But
it's also a security problem. After repeated security breaches in fall 2014,
former Secret Service agent Dan Emmett wrote for Vox about the problems with the agency's culture.
The culprit he identified: the move from the Department of the Treasury to DHS. After that
move, he said, the agency got politicized — and Secret Service leadership stopped telling White House staff when letting the
president do something (like participate in a landing on an aircraft carrier) was a bad or unsafe idea. DHS' "essential" employees aren't at
department headquarters At least one member of Congress, Rep. John Mica (R-FL), is talking openly about dismantling DHS. That's partly
a smokescreen for a fight about the labor rights of DHS employees — which has been ongoing since Congress passed the Homeland Security
Act in 2002, and decided the creation of a new department justified stripping a bunch of rights from the workers who'd be staffing it. (Many
of DHS' labor regulations were later struck down in court.) But Congress shouldn't let a partisan battle over labor relations distract them
from taking a hard look at whether they still believe DHS is necessary. After all, the attitude of many members of Congress suggests that,
while they're
committed to many of DHS' functions, they're not as committed to the
bureaucracy that oversees them . Sure, when it's time to blame the other party, members of Congress are playing
up DHS' importance: Sen. Barbara Mikulski (D-MD) called the shutdown fight "parliamentary ping-pong with national security," while Sen.
Mark Kirk (R-IL) suggested building coffins outside the offices of Democratic Senators if a terrorist attack happened during the shutdown.
But when they're talking about the actual consequences, Republicans, in particular, emphasize that over 85 percent of DHS employees
would keep coming to work as "essential" government workers even if the department were shut down. "It’s not the end of the world if we
get to that time," Rep. Mario Diaz-Balart (R-FL) told Politico, "because the national security functions will not stop." Those 85 percent are
mostly front-line government workers: border agents, TSA screeners, etc. They're employees of the agencies who existed before DHS, and
would continue to exist if DHS were dissolved. The employees at DHS headquarters, providing the centralized bureaucratic glue that's
supposedly so important to coordinating our national security strategy? They'd be staying home in the event of a shutdown. The
department's plan for the 2013 government shutdown had only 10 percent of the staff of the Office of the Secretary and the Office of the
Undersecretary for Management "exempted" from the shutdown; 50 percent of the office of Analysis and Operations; and 57 percent of the
National Protection and Programs Directorate (which didn't exist pre-DHS but encompasses a few pre-DHS offices). Either those offices are
fundamental to "national security functions," or they're not. Given the department's track record since its formation, Diaz-Balart is probably
accidentally correct: it's
not actually essential to national security that DHS, as a department, be
running on a daily basis. But if he and other members of Congress are really so convinced that that's the case, they need
to seriously consider disbanding DHS for good.
The counterplan fails—the DHS is extremely ineffective and fusion centers
don’t work—this doesn’t take out the advantage because the FBI can avoid
their problems now
Lind 15 - Dara Lind covers immigration and criminal justice for Vox. (“The Department of Homeland Security is a total disaster. It's
time to abolish it.” http://www.vox.com/2015/2/17/8047461/dhs-problems 2/17/2015) STRYKER
But the
nonchalance with which both parties are treating the prospect of a Department of
Homeland Security shutdown raises a big policy question: why does the department even
exist? The answer is that it shouldn't, and it never should have. DHS was a mistake to begin with.
Instead of solving the coordination problems it was supposed to solve, it simply
duplicated efforts already happening in other federal departments. And attempts to
control and distinguish the department have politicized it to the point where it can't
function smoothly — and might be threatening national security . This isn't to say
that DHS should be fully liquidated. The argument is there's no reason for it to exist as its own
department when it can be reabsorbed into the various departments (from Justice to Treasury) from which it was assembled. Since
neither side is fighting to make the case for DHS, it's as good a time as any to look back over the agency's decade-plus-long history, and
assess how the department's actually worked. The answer appears to be that the problems built deep in the department haven't aided
national security — and might have damaged it. DHS was doomed from the start "I don't think (George W.) Bush was
ever excited about the department," former Democratic member of Congress Jane Harman told The New Republic in 2009. But because it
was "politically expedient," his White House went ahead with building a proposal for the new department in spring 2002 — and rushed the
process, possibly to distract from revelations that the intelligence community could have prevented 9/11 if it had coordinated the
information it already had. If
the point of DHS was to consolidate disaster prevention (whether
natural or terroristic) and response under one roof, it failed miserably . The process for
deciding which existing agencies would be moved to DHS, and which ones would stay in other departments, was haphazard at best.
According to a 2005 Washington Post article, the agency that supplies prosecutors in immigration court cases was moved to DHS; the
agency that supplies immigration court judges, on the other hand, stayed in the Department of Justice. (The reason: the person in charge, a
Harvard security expert working for Secretary-to-be Tom Ridge, simply hadn't known immigration courts were a thing, so hadn't looked for
them.) When the White House team wanted a research lab for the new department, one of them phoned a friend to ask which of the
Department of Energy's labs they should take — according to the Post, the team "did not realize that he had just decided to give the new
department a thermonuclear weapon simulator." The
department's biggest problem, however, was that it
completely failed to address the single biggest pre-9/11 counterterrorism failure. In fact,
it made it worse. The 9/11 Commission Report (which came out after the creation of
DHS) cited failure to share counter-terrorism intelligence and strategy as one reason the
attacks succeeded. According to a 2011 Cato Institute report, the two primary agencies it singled out were the FBI and the CIA —
neither of which was moved to DHS. (The FBI is still part of the Department of Justice; the CIA is still an independent agency.) So now,
counterterrorism work is being done by agencies in three different departments. A
department of copycat programs
This hasn't stopped DHS from trying to develop its own security capacity. It just means that
whatever DHS does is already being done elsewhere in the government. And that duplication
and fragmentation has made the national-security apparatus even harder to manage. Take
the example of equipment grants to state and local law enforcement. There were already two different federal programs to help police
departments get equipment: the Department of Defense's 1033 program, which sends out surplus military gear to law enforcement (and
requires they use it within a year), and the Department of Justice's Byrne grant program. But DHS now has its own set of grants to allow
police departments to purchase military and other equipment. It's supposed to be used for counterterrorism, but (just as with the other
grant programs) police often end up using the equipment for routine drug enforcement. And as a recent White House report pointed out,
having three different departments giving resources to local police has made it harder to track how those resources get used. If the
Department of Justice, for example, finds out that a police department has been misusing funds or violating the constitution, it can cut off
DOJ grant money — but the police department can turn around and apply for help from the Department of Defense and DHS. Or
think
of "fusion centers," regional hubs supported by DHS to share information among
multiple federal agencies and between state, local and federal law enforcement. The fusion
centers aren't limited to sharing information about terrorism (they're also supposed to monitor other types of crime), but it's definitely a big
component of their mission. The
problem is that the FBI already has Joint Terrorism Task
Forces to investigate terrorism , and Field Intelligence Groups to share information about it. In a 2013
study, the Government Accountability Office looked at eight cities, and found that the
fusion centers in all eight cities overlapped at least partially with the FBI's
counterterrorism work — and in four of them, there was nothing the fusion centers did
that the FBI wasn't already doing. (There are also other things within DHS that overlap with fusion centers' other
purposes.) That means that at best, DHS' coordination work is redundant : a 2012 report
from Republican Senator Tom Coburn (R-OK) found that over a quarter of terrorism-related fusion center
reports "appeared to duplicate a faster intelligence-sharing process administered by the
FBI." (That's in addition to the reports that were based on publicly available information.) Because of that redundancy, dismantling DHS
wouldn't necessarily help civil liberties — anything DHS is doing that infringes on them is also being done by other departments. But, just
like with police grants, consolidating the agencies that might be infringing on civil liberties will at least focus efforts to hold them
accountable. At
worst, DHS' work with fusion centers is actually hampering
information sharing . A 2007 ACLU report on fusion centers explained how this would work: Most likely what is
taking place is a power struggle in which federal agencies seek to turn fusion centers into
"information farms"—feeding their own centralized programs with data from the states
and localities, without providing much in return. The localities, meanwhile, want federal data that the agencies
do not want to give up. For federal security agencies, information is often the key currency in turf
wars and other bureaucratic battles, and from the days of J. Edgar Hoover they have long been loathe to share it freely.
Other Plan Option
1AC—Repeal SOX
Text: The United States federal government should repeal the SarbanesOxley Act of 2002.
Repeal solves—state and self regulation is better
Romano 4 - Roberta Romano is Sterling Professor of Law at the Yale Law School. She is the first woman at Yale Law School to be
named a Sterling Professor. (“The Sarbanes-Oxley Act and the Making of Quack Corporate Governance,”
http://lsr.nellco.org/cgi/viewcontent.cgi?article=1005&context=nyu_lewp 9/26/2004) STRYKER
The absence of state codes or corporate charters tracking the SOX mandates further suggests that board composition, the services
corporations purchase from their auditors, and their credit arrangements with executives, the
substance of the SOX
mandates, are not proper subjects for federal government action, let alone
mandates, and that rendering them optional is not the optimal solution
compared to their outright repeal .409 The states and the stock exchanges are a far
more appropriate locus of regulatory authority for those governance matters than
Congress and its delegated federal regulatory agents.410
GO TO FOOTNOTE 410
410 For a more detailed explanation of why state competition for corporate charters is preferable to exclusive federal regulation, see, e.g.,
Roberta Romano, The Genius of American Corporate Law (1993). The
SEC’s exercise of authority over
exchange rules would need to be eliminated or severely restricted , however, for the
stock exchanges to become an effective source of corporate governance standards. This is
because the SEC now uses its authority to force the exchanges to adopt uniform
standards that it considers desirable, which undermines the benefit of exchange-based
governance, which stems from the market-based incentives of competing exchanges to
offer the rules that enhance the value of listed firms. See generally Mahoney, supra note 193. A more
preferable approach to exchange standards regarding corporate governance than that of the U.S. exchanges is that taken by the London
Stock Exchange, which follows a form of a “disclose and explain” rule: listed firms are required to disclose whether they comply with a code
of best practices (and if they do not conform, to explain why they do not). SOX’s audit committee expert provision (section 407) is of a
similar form. The reason for the difference in approach is not obvious given that there are differences in both the regulatory and domestic
market environments. Namely, the difference could be due to the SEC’s preferences (that is, the agency imposes the listing mandates
through its oversight authority), or because the competition among U.S. exchanges fosters a product differentiation strategy in which an
exchange can benefit from adopting mandatory standards through which listed firms signal quality to investors. It should be noted,
however, that Jonathan Macey and Maureen O’Hara contend that stock exchanges such as the NYSE no longer provide a reputational
function (at least for domestic firms). See Jonathan R. Macey and Maureen O’Hara, The Economics of Stock Exchange Listing Fees and
Listing Requirements, 11 J. Fin. Intermediation 297 (2002).
BACK TO TEXT
They are closer to the affected constituents (corporations) and they are less likely to make
regulatory mistakes. This is because they operate in a competitive environment:
corporations choose in which state to incorporate and can change their domicile if they
are dissatisfied with a legal regime, just as corporations choose, and can change, their trading venue.411 Moreover,
any regulatory mistakes made will be less costly, as not all firms will be affected.
Regulatory competition offers an advantage over a monopolist regulator because it
provides regulators with incentives, and the necessary information, to be accountable
and responsive to the demands of the regulated, an important regulatory characteristic
in the corporate context because firms operate in a changing business environment, and
their regulatory needs concomitantly change over time. Namely, there is a feedback
mechanism in a competitive system that indicates to decisionmakers when a regime
needs to be adapted and penalizes them when they fail to respond: the flows of firms out of regimes
that are antiquated and into regimes that are not. In other words, decisionmakers who fail to update their
regimes to accommodate new business circumstances will lose corporations to more
innovative regimes that have adapted.412
GO TO FOOTNOTE 412
412 E.g., Romano, supra note 18, at 239 n.140. It should be noted, in this regard, that states are able to act more
quickly than Congress . For instance, the Delaware legislature responded to what was
considered an undesirable corporate law decision on director liability 1.5 years after the
holding, whereas Congress has averaged 2.4 years when reversing judicial opinions
invalidating federal statutes, Romano, supra note 409, at 49, and, although the wisdom of the overruling is questionable,
the Supreme Court decision on the statute of limitations overturned by SOX was decided in 1991, over a decade earlier.
BACK TO TEXT
There are incentives for states to prefer having more locally-incorporated corporations to
less and therefore to respond to a net outflow of firms: they receive annual franchise fee payments, and an
important political constituency, the local corporate bar, profits from local incorporations.413 Exchanges, similarly, prefer more listings to
less, since listing fees are a major source of revenue.414 While
even a monopoly regulator is interested in
increasing the number of firms subject to its regulatory authority,415 the SEC has done so
not by principally trying to induce a voluntary increase in registrants by improving its
regulatory product, but rather, by either aggressively interpreting the scope of its
authority to include previously unregulated entities, or by lobbying Congress for a statutory expansion of
jurisdiction.416 Competing regulators, by contrast, can increase the number of firms under their
jurisdiction solely by providing a product of higher value to firms. Thus, states can be
expected to do a better job in setting the appropriate corporate governance
default rules than Congress, or the SEC; they have a greater incentive to get things right.
Topicality
The provisions of SOX all increased enforcement surveillance
Thomsen and Norman 8 - Linda Chatman Thomsen is the Director of the Division of Enforcement, Securities and
Exchange Commission. Donna Norman is the Counsel to the Director of Enforcement, Securities and Exchange Commission. (“SarbanesOxley Turns Six: An Enforcement Perspective,” Journal of Business & Technology Law, Volume 3, Issue 2, Article 9,
http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1078&context=jbtl 2008) STRYKER
NEARLY SIX YEARS AGO CONGRESS PASSED THE
SARBANES-OXLEY ACT (the "Act" or "SOX"), 1 which has
been widely touted as the most sweeping federal securities law reform in nearly seventy
years. The Senate and the House both were anxious to pursue corporate fraud reform after the collapse and late 2001 bankruptcy of the
Enron Corporation, followed shortly by the accounting fraud at WorldCom, as well as multi-billion dollar financial frauds at Global
Crossing, Adelphia, Xerox and Tyco, among others.' SOX amends both the civil and the criminal securities laws. The Act makes sweeping
SOX
significantly adds to the wide array of tools that the Securities and Exchange
Commission (the "Commission" or SEC) has to enforce the securities laws and
regulations . This Article briefly will set forth the circumstances under which the Act was passed. It then will outline the substance
changes to the regulation of the accounting industry and the reporting requirements of public companies. In addition,
of SOX. Finally, it will discuss key new enforcement tools that the Act gives the Commission and how these tools have impacted the
Commission's enforcement program.