Cox testifies before Senate Judiciary Committee on corporate behavior

January 31, 2012Duke Law News

Professor James D. Cox testified before the Senate Judiciary Committee on June 29, addressing how recent Supreme Court rulings are likely to affect corporate behavior. Cox, the Brainerd Currie Professor of Law and an expert on corporate and securities law, was highly critical of the Court’s June ruling in Janus Capital Groups, Inc. v. First Derivative Traders, in which the Court found that a financial adviser who prepared a prospectus containing misstatements was not responsible for them, and was merely performing a role akin to that of a speechwriter.

“…[T]he analogy fails,” Cox stated in his written testimony. He argued that unlike a human being delivering a speech, a corporation “can only act through individuals and then can act only through the symbiosis of the entity structure or structures by which the entity operates. Thus, financial reports pass through multiple individuals, each of which provides the voice to the inanimate corporate entity.” The Janus decision and others, such as Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (2008), would likely have “perverse” consequences, Cox said. An excerpt of his testimony follows.

Cox testifies before Senate Judiciary Committee on corporate behavior

“In the wake of Stoneridge and Janus, executives and their counselors who cook the books and defraud investors avoid personal responsibility so long as the product of their chicanery does not bear their name (even though it bears their footprints). Vendors, such as those in Stoneridge, who cooperate in their client’s fraud so as to retain the client’s business escape responsibility for the losses their complicity caused investors. If they seek the advice of their counsel or others whether to participate in a fraudulent roundtrip scheme, such as occurred in Stoneridge, their advisers can correctly advise that the consequences of liability under the securities laws are nonexistent so long as their names are not directly linked to the falsely inflated revenues. This hardly adds to the deterrent effects of the antifraud provision. Similarly, the CEO or CFO who needs to ‘meet the street’s expectations’ or wishes to pump up her bonus or option’s value has much less concern for retribution via private suits if the means to this end is cooking the books. Stated simply, but correctly, Stoneridge and Janus severely reduce the deterrent effects of the antifraud provision.”

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