The trustees of the Los Angeles County Employees Retirement Association voted unanimously to endorse Proposition 211. It was the right thing to do. It was the right vote for fiduciaries charged with the responsibility to preserve and protect the retirement assets of hard-working people.
Proposition 211, a referendum initiative on the Nov. 5 ballot in California, is a simple proposal: prevent frivolous lawsuits and make all securities fraud wrongdoers liable for their misdeeds. It puts an end to the concern over frivolous lawsuits by setting the highest preventive standard of any court in America. The proposition mandates that California courts require the filer of a meritless lawsuit pay the full costs of the other side's expenses.
Pensions & Investments believes there are frivolous securities class-action lawsuits. The facts say it is not true. Rand Institute for Civil Justice studies prove that the notion of a litigation explosion is a myth. Does P&I know that for the past 20 years, securities class actions have averaged 300 per year? Why has there been no increase?
P&I believes investors sue for securities fraud when a company's share price drops suddenly. The facts show this is not true.
In a three-year study of all listed share prices that declined 20% or more over five days (589 cases) how many companies were sued?
Answer: 20, or 3.4% of the cases.
P&I believes Proposition 211 will stop the flow of information between corporate management and security analysts. The trustees of LACERA do not. Proposition 211 would require forward-looking statements be made on a reasonable basis of fact and in good faith. Does anyone condone statements made on an unreasonable basis and in bad faith?
P&I believes that corporations will leave California if Proposition 211 passes. Proposition 211 only affects the investors in a company and has nothing to do with where the physical plant or the workers are located. If California investors are the victims of securities fraud in a Delaware corporation, they could use Proposition 211 to recover their losses in the California state court system.
P&I believes that directors and officers will resign and outside directors will decline to serve if Proposition 211 passes. The trustees of LACERA do not. The proposition allows corporations to purchase insurance for any liability under Proposition 211. All directors-and-officers insurance policies already have a side that covers directors and officers for exposure if their corporation does not indemnify them.
P&I believes Proposition 211 would reduce the number of high-tech companies going public to avoid Proposition 211 liability. If any company has reservations about going public because it takes away their ability to get away with wrongdoing, it is better they stay private.
The trustees of LACERA believe anyone charged with the responsibility of protecting and preserving retirement assets has a fiduciary obligation to endorse the principles of Proposition 211. Securities fraud costs Americans $40 billion per year, according to the Department of Justice. No one is immune from its attack - institution or individual, large or small, sophisticated or unsophisticated.
A few years ago, one of Wall Street's most powerful firms rigged the Treasury bond market and agreed to a $100 million class-action settlement for investors, which included six California pension funds, 12 California cities and six California counties. Wrongdoers stole $424 million from mostly Californians in just two securities frauds - First Pension and Keating's Lincoln Savings and Loan scandals. Fraud infects even the professional gatekeepers of our financial enterprises. The big six accounting firms alone agreed to $1.75 billion in settlements for wrongdoing during 1991-1995.
Proposition 211 is a disagreement between investors who need strong protections and corporate interests who want lower standards of liability for wrongdoing. LACERA trustees believe securities class actions are an essential fraud deterrent and compensate victims of wrongdoing. Do not confuse securities class actions with tort reform. Unlike tort actions, securities fraud statutes allow victims only to recover defrauded losses; they do not allow any compensation more than the proven loss.
Federal and state securities enforcement officials call them a "necessary supplement" to ensure the integrity of our financial markets. A former commissioner of the Securities and Exchange Commission stated that the SEC takes action only on approximately 10% of securities fraud.
Pension assets will become even more vulnerable if Howard Kaloogian, a Republican California state assemblyman from Carlsbad, has his way. Assemblyman Kaloogian is promoting legislation that will move pension plans from a defined benefit plan managed by skilled professionals to a defined contribution plan managed by the individual beneficiaries themselves. The unsophisticated individual investors is far more vulnerable to securities fraud than the investment professional. If Mr. Kaloogian is successful with his legislative effort, having strong remedies like Proposition 211 will be more important than ever to ensure defrauded investors can recover their losses.
In closing, we recommend you consider one of the most alarming facts of business life published this year. Let us suppose you are a senior executive returning from two weeks of successful business travel meetings. You plow through your 12-inch stack of paper in your in-basket. It is your lucky day, because you read a memo indicating you are on the short list for the retiring president's position. The final decision will be based on each candidate's ability to improve the company's bottom line. From there, things get a little more difficult - but tough decision-making is your job as a senior executive. You read another memo requesting your decision about a procedure that will overstate company assets in the soon-to-be-reported disappointing third-quarter results.
What would you do?
What do you think most corporate executives would do? Forty-seven percent of the top executives, 41% of the controllers, 76% graduate-level business students were willing to commit fraud by understating writeoffs that cut into their companies' profits. These statistics were reported in a study, constructed from actual SEC cases, published this year in the Journal of Business Ethics.
After considering all these facts, it is easy to see why LACERA trustees, joined by four other California county retirement systems, acted with the right stuff and endorsed Proposition 211. Rather than calling for trustees who support Proposition 211 to resign, your readers would be better served if P&I actually reviewed and properly reported on the facts concerning Proposition 211. P&I has relied on a bogus economic study commissioned by the opponents without undertaking any review or analysis of this fallacious study. Even the Legislative Analyst, an independent, objective body that works for the California State Legislature - controlled by both Republicans and Democrats - has stated that there is no empirical evidence to support either the study or the claims made by the opponents of Proposition 211.
Cody Ferguson, a captain in the Los Angeles County Fire Department, is a trustee of the Los Angeles County Employees Retirement Association. He also is a member of the executive board of the National Conference of Public Employee Retirement Systems.
