There’s an old joke that no doubt circulates through the Trial Lawyers Association, and it goes something like this:

“Knock, knock.”

“Who’s there?”


“Sue who?"

“Sue everybody!”

Mildly amusing, except of course if you find yourself a defendant embroiled in a frivolous lawsuit.

In two-plus decades covering the business world, I’ve covered some suits that defy rational analysis as to their merit. One such legal circus included the owner of a pre-war building (FYI: World War I) who was sued by a cadre of slip-and-fall barristers for having a doorway that was two inches smaller than the measurements mandated by the Americans With Disabilities Act -- which, incidentally, passed a scant 77 years after the building’s construction.

But I digress.

I’m a bit surprised at not being more elated over recent actions by the Securities and Exchange Commission, which quite stealthily has been moving toward making it more difficult to win judgments from companies and audit firms in investor lawsuits.

Recently, the SEC filed a brief in Supreme Court petitioning the justices to adopt a legal standard to make it more difficult for shareholders to be awarded judgments. In legalese, that would entail the High Court interpreting a proviso in 1995’s Private Securities Litigation Reform Act  that establishes what investors must contend in a fraud lawsuit to prevent the case from being dismissed.

Meanwhile, Conrad Hewitt, the regulator’s chief accountant,  revealed during a speech to a group of securities lawyers that the agency was  mulling strategies to protect accounting firms from massive damage awards -- particularly ones that have the potential to cripple, and possibly, shutter a firm.

Not surprisingly, investor advocates view the SEC’s move to cap auditor liability as a further example of its heavy pro-business skew and its ongoing mission of reform rollbacks such as Sarbanes-Oxley’s Section 404. Pro-investor groups also point to the declining number of shareholder suits as a counterpoint to the commission’s strategy.

But SEC Chairman Christopher Cox contends that the measures are designed to insulate auditing firms from what he termed “professional plaintiffs” and from massive awards that may further consolidate the profession.

In truth, both camps have a point.

Yes, I’ve seen myriad suits that were thisclose to a Marx Brothers outtake in terms of merit.

Conversely, I’ve also seen examples of outright investor fraud and deception in the corporate and auditing circles that not only were worthy of a court date, but in most cases, of having the defendants outfitted for prison denim.

Capping auditor liability would likely prevent the Big Four from becoming a smaller integer. But it may also make it harder for harmed investors to receive recompense in the event of actual fraud.

Either way, it’s a tough call, and what the High Court does will certainly bear watching.

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