The conventional wisdom is that it will, because the scandal is unprecedented in scope. Even the most jaded observers find the fallout staggering. "It's a really powerful issue for people. I'm pretty comfortable that this is going to be an exception from the past, that there will be real change," says Michael F. Bachner, a New York securities lawyer who has represented aggrieved investors and criminal defendants alike.
But it's premature to assume that Enron will be an exception to the rule of sound and fury followed by nothing. Public memories are short. Despite the groundswell in sentiment for regulation, the new Investor Class remains amorphous and disorganized. And televised appearances to the contrary, lawmakers are certainly going to listen when the Wall Street and accounting lobbies speak--and fill their campaign coffers. Former Securities & Exchange Commission Chairman Arthur Levitt Jr. recently told reporters that few lawmakers are friends of investors. "The political class is anti-regulatory," Levitt said, adding that he expects "blocking legislation to stem Draconian steps."
History abounds with examples that support Levitt's thesis. Consider the collapse of Long-Term Capital Management in 1998. Attention focused on LTCM's leverage and use of derivatives and on the secretive world of hedge funds. Study commissions were appointed, legislation proposed. But four years later, what was the result? Nothing. Likewise, the penny-stock scams of the 1980s resulted in regulations, such as sales-practice rules, that were easily circumvented in the 1990s by a new generation of stock scamsters.
True, the savings-and-loan scandals produced prosecutions and a regulatory overhaul. But the S&L crisis was as much an accounting debacle as Enron is--and the accountants got off scot-free. Accountants allowed thrifts to keep junk bonds on the books at cost, rather than marking them to market when they lost value. Shrugging off their profession's dismal performance, accountants successfully dodged reforms--despite a hue and cry that included televised congressional testimony by former S&L exec Charles Keating. At the end of the day, "the S&L scandal did not result in any reforms--it resulted in just the opposite, a so-called reform act that made accountability less important," notes Melvyn I. Weiss, a prominent securities lawyer representing plaintiffs.
Indeed, Congress must share the blame for Enron because it chipped away at investor protections. The Private Securities Litigation Reform Act of 1995 "set the stage for all that went wrong at Enron. They removed the `aider and abettor' rules, so the accountants and lawyers and consultants could give advice without any liability," says John Lawrence Allen, a New York securities lawyer.
True, Congress was ostensibly aiming at curbing frivolous lawsuits. But plaintiffs' lawyers have a point, in the wake of Enron, when they maintain that Congress went too far. Lawmakers now are weighing a host of proposals, and some of them are likely to be enacted (table). The days of accountants consulting for auditing clients are no doubt gone. Pension rules will probably be strengthened. Criminal prosecutions are likely and would help deter further wrongdoing.
But Congress needs to show some leadership and tackle issues the securities and accounting industries will find distasteful. Auditors must have an affirmative duty to look for fraud. Analyst independence--and freedom from investment-banker influence--must be guaranteed. And the SEC, working with federal prosecutors, should act forcefully against corporate officers who tell lies.
Taking such steps is going to require substantial political will. It will mean facing down powerful lobbyists. Grandstanding before the TV cameras is so much easier. Senior Writer Weiss has covered Wall Street scandals since 1986.