With Vigour and Zeal

Benn Steil, Senior Fellow and Director of International Economics with the Council of Foreign Relations, argues in an opinion piece in the Financial Times that “it was the earlier efforts of another congressman [and not of Paul S. Sarbanes and Michael G. Oxley] which in fact sparked the exodus [of foreign equity listings from New York], by deliberately mixing domestic market regulation with foreign policy.” The congressman in question is Rep. Christopher Cox (R-CA) as he then was, the current Chairman of the SEC. (See also Steil’s previous article on the same topic, here.)

Steil traces the current state of competitiveness back to two Commissions’ reports on US national security issues, in particular in relation to China and ‘weapons of mass destruction’, respectively. Both reports were presented to Congress in 1999; one of the Commissions was chaired by Cox, the other by former CIA Director Dr. John M. Deutch. The Deutch Commission, following findings of the Cox Commission, referred to the waging of ‘economic warfare’ in relation to US capital markets as being essential:

[J]ust as good intelligence is essential to successful military action, so too is good intelligence on key points of leverage in the government of a proliferating country essential for tailoring economic tools to achieve maximum influence. In addition, we should ensure that we have in place the legal mechanisms required to exercise this leverage. For example, the Commission is concerned that known proliferators [of weapons of mass destruction] may be raising funds in U.S. capital markets.

Subsequently, the SEC established the Office of Global Security Risk, under then-SEC Chairman William H. Donaldson. The Securities Industry Association, in a letter to Donaldson, had warned against ‘politicising US capital markets’:

America’s capital markets play a crucial role in fueling U.S. economic growth, creating new jobs, and providing the financing for innovative and new technologies that transform the U.S. economy. We believe that the prinicipal effect of politicizing the U.S. capital markets — however worthy the foreign policy goal — in order to try to influence the behavior of foreign countries would be to damage the U.S. capital markets.

After discussing a few examples of affected companies - including AOA Lukoil (RTS: LKOH; LSE: LKOD; OTC: LUKOY) and PetroChina Company Limited (HKEX: 0857; NYSE: PTR) - Steil concludes:

[I]t was the relentless capital markets sanctions campaigns of the late 1990s that first signalled to the world that the US would use its regulatory power over foreigners for political purposes. Christopher Cox thus became the most important founding father of the capital markets sanctions movement, a movement earning pride of place in the pantheon of diplomatic dopiness.

For your convenience, a selected list of the sources and entities he cites:

• Cox Commission Report
• Deutch Commission Report (via FAS)
• SEC’s Office of Global Security Risk
• SIA’s Letter to Donaldson
• William J. Casey Institute of The Center for Security Policy

Heidi Crebo-Rediker and Douglas Rediker of International Capital Strategies, in their article on foreign policy and capital markets in the Wall Street Journal (entitled ‘Capital Warfare’, via YaleGlobal Online) just a few days earlier, come to the following conclusion:

[A]s long as politicians think the U.S. can afford to play protectionist politics with the CNOOC’s and Dubai Ports World’s of the world, then these proposed solutions [of reforms to Sarbanes-Oxley, shareholder litigation and regulatory fixes] are unlikely to stem the tide.

For more on reports on capital markets competition, see these two previous posts: on the Paulson Committee Report and on the Bloomberg/Schumer and Daley/Culvahouse Reports. (Subscribe to WV&Z here.)

Before Royal Ahold and Parmalat (both of 2003) and the likes, there was Lernout & Hauspie Speech Products NV (NASDAQ: LHSP, as it then was) of Belgium, which at one point was worth $10 billion. (Follow the assets: Dragon Systems Inc. merged with L&H in 2000; ScanSoft Inc. bought certain L&H assets from the post-merger entity in 2001, then took over Nuance Communications Inc. (NASDAQ: NUAN), which is the name of the company as it is today.) The company’s ‘allegedly fraudulent acts’ and subsequent bankruptcy in 2001 has caused, as the Court calls it, a “never ending series of lawsuits” (source), some of which have led to settlements.

See the Lernout & Hauspie Securities Litigation Website for the KPMG, Directors and FLV Settlements of 2004 and 2005; Lead Counsel: Berman DeValerio Pease Tabacco Burt & Pucillo, Cauley Bowman Carney & Williams PLLC and Shalov Stone & Bonner LLP.

The latest opinion and order are of 12 February 2007; the Court (D. Mass.) dismissed the proposed class action on behalf of those who purchased L&H securities on EASDAQ (later known as ‘Nasdaq Europe SA/NV’, as it then was) during the period 28 April 1998 through 8 November 2000. Plaintiffs have since filed a motion for reconsideration and a memorandum in support of that motion. Lead Counsel: Cohen Milstein Hausfeld & Toll LLP and Spector Roseman Kodroff PC, with Hagens Berman Sobol Shapiro LLP acting as Liaison Counsel. (With thanks to Eric J. Belfi of Labaton Sucharow & Rudoff LLP for his notification of the case and to Mark S. Willis and Matthew K. Handley of Cohen Milstein for their submission of the motion for reconsideration and other documents.)

The Court granted the defendants’ motion to dismiss on the ground of the forum non conveniens doctrine, holding that Belgium is an adequate alternative forum for the proposed class to pursue their claims. The previous action on behalf of the NASDAQ class was denied a motion to dismiss on the same ground:

Unlike the NASDAQ case, this Court finds that the balance of private factors strongly supports dismissal of the case. Although this case involves an alleged fraud that spans three continents, the bulk of the harm and activity rests in Europe. […] The fact that these securities were purchased in Europe and that most class members reside there suggests that Belgium would be a more proper forum. […] In addition, it is not clear that Europe [Belgium, your Honor] would enforce a class action judgment from this District.

It then states the factors on the other side of dismissal, namely the lack of the class action mechanism in Belgium and lack of ability to use a “fraud on the market theory” and the long delay in the Belgian government’s conclusion of the criminal investigation which in turn delays the pursuit of civil relief.

The Court has self-admittedly ‘waffled’ on the issue of timeliness and actual and constructive notice in this case, but unfortunately does not reach on it as it ’ships’ the case to the Continent.

The stated aim of the motion for reconsideration is to “request the Court to reconsider and amend its order and stay entry of the judgment therein until the availability of the Belgium forum has been confirmed.” (WV&Z’s emphasis) If, however, Belgium is confirmed to be an available forum, the lead plaintiffs state they will consent to entry of the order.

The main arguments of the motion turn on defendant KPMG LLP of the US: If Belgium lacks jurisdiction over this part of KPMG (as opposed to fellow defendant KPMG of Belgium) and, because in Belgium civil litigation can only commence after the criminal proceedings have been concluded and KPMG US is not a party to these criminal proceedings, it is therefore unlikely all parties to the current action will also be subject to the action once referred (original emphasis), then Belgium is “neither an adequate nor available forum and dismissal for forum non conveniens erroneous” (Mercier v Sheraton Int’l Inc. cited). Another argument for reconsideration relates to human rights under EU law.

The motion is currently pending before the Court.