Harvey Pitt on Individual Investors: Let Them Eat Cake

Former SEC chairman Harvey Pitt was no champion of individual investors. Pitt was in charge of the agency when the former New York Attorney General put the SEC to shame and took the lead in exposing Wall Street's conflicted research. Pitt was also among the regulators who signed off on Spitzer's wrist-slapping $1.4 billion global settlement.

So I guessed I should not have been surprised to hear Mr. Pitt tell CNBC viewers today that the Supreme Court's recent Stoneridge decision, which prevents investors from suing all parties involved in a fraudulent transaction and not just those who directly initiated it, would have no bearing on investors seeking legal recourse relating to the subprime mortgage meltdown. Mr. Pitt said that there were already enough primary violators to sue.

Mr. Pitt is badly mistaken. The Stoneridge decision will adversely affect the legal recourse available to subprime investors, as many potential avenues for discovery – where "smoking guns" are often discovered &ndash are now closed. My guess is that if CNBC had also asked Mr. Pitt about the Supreme Court's Tellabs decision, which requires "a strong inference of fraud" before a class action suit can be certified, he wouldn't have had any issues with that ruling either.

Credit Mr. Pitt at least for one thing: at least the regulatory lightweight's longstanding indifference to the issues and concerns of individual investors remains intact.

Stoneridge Decision is NOT Good for Investors

There’s a lot of propaganda circulating about the Supreme Court’s decision in the Stoneridge vs. Scientific Atlanta case. The court completed its trifecta of anti-investor decisions by deciding that third parties (investment banks, law firms, accountants, etc) are not subject to so-called “scheme liability.” In other words, investors cannot recover losses from third parties that contributed to securities fraud.

The decision is extremely unfortunate for the investors in Enron, many of which were employees whose pensions were mostly invested in the firm’s own stock. Because there’s nothing left of Enron, they will forever be left olding the bag regardless of the fact that investment bankers helped Enron managers create sham transactions that eventually led to the firm’s collapse.

Since the Supreme Courts decision yesterday, many pundits have been echoing the arguments of the business lobby. The argument goes that the Stoneridge decision is actually good for investors because litigation expenses drive down corporate earnings. Another creative argument is that diversified investors will be both victims and beneficiaries of fraud so it evens out.

Maybe, but it is the market’s integrity that is its strength in the long run. Not holding all the market’s participants accountable for fraudulent activities essentially grants a license to steal. Not matter how you slice it, that’s bad for investors. Second of all, allowing for investors to recover losses will not harm competition or corporate earnings. Rather it will even the playing field for those companies operating within the confines of the law.