Since Enron's implosion, an astounding string of accounting scandals have stunned the securities markets. Global Crossing, WorldCom, Adelphia, and a host of other companies have seen plummeting share prices and SEC and criminal investigations. Congress's reaction has been equally stunning and surprisingly swift. It passed with near unanimity the Sarbanes-Oxley Act of 2002 (the "SOA" or the "Act"), and President Bush quickly signed it into law. The President billed the Act as one of the "the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt." While the SOA is certainly lengthy, with eleven titles and nearly 150 pages of text, its importance and impact are far from certain. This Article is not intended as a complete overview of the Act; instead, it focuses primarily on those provisions designed to deter securities fraud. Before analyzing whether Congress is likely to achieve its deterrence goals with these reforms, three more general comments about the Act are in order.
The first is simply that haste makes waste. The SOA moved with lightening speed through the legislature and only seemed to pick up momentum with the revelation of each new accounting restatement. Unfortunately, the Act reflects that speed. The result was, at a minimum, a disorganized law. More significantly, other aspects of the Act, especially the changes to the statute of limitations for private securities claims, are inconsistent with current law. Other aspects of the Act, like the new certification requirements, are internally inconsistent, although at least not totally contradictory. Second, an election year is a poor time to overhaul a complicated area like securities regulation. Much of the Act simply follows headlines from Enron and other corporate scandals, with little appreciation for whether those headlines highlight systemic problems that need legislative attention. Many other provisions, particularly the vaunted criminal provisions, represent little more than political grandstanding and are unlikely to have any real deterrent effect. There was little appreciation that markets still work and can right themselves. Third, as always, the devil is in the details. Many provisions of the Act are simply delegations of authority to the SEC to adopt rules. Often these involve areas in which the SEC or the self-regulatory organizations had already undertaken rulemaking initiatives, again raising the question of whether legislation was truly necessary. While the Act contains quite specific rulemaking directives, in many areas the true effect of the Act will not be known until regulations are drafted and in place.
To be sure, these criticisms do not apply to the entire Act. Some of its provisions may well have a substantial and lasting impact on our securities markets, although it is reasonable to expect, as with other recent securities legislation, that significant unintended consequences will arise. In short, it is far too early to proclaim the Act as the second coming of the New Deal.
This Article proceeds as follows. Part I briefly sketches the economic theory of deterrence. Part II discusses the Act's new criminal sanctions and penalties. Part III focuses on private civil liability for securities fraud, primarily the new longer statute of limitations for certain securities claims. Part IV discusses the SOA provisions that increase SEC resources and enforcement authority. Brief concluding remarks follow.