Colorado mulls corporate fraud crackdown - is it too much?

Posted Apr 1st 2008 4:36PM by Zac Bissonnette
Filed under: Law

While the SEC is off battling delusional fantasies of naked short sellers "destroying companies," Colorado citizens are evaluating a proposed ballot measure that would really crack down corporate fraud. The proposed law would make executives criminally responsible for fraud at the companies they ran. According to the New York Times, "It would also permit any Colorado resident to sue the executives under such circumstances. Proceeds from successful suits would go to the state."

I'm not so sure about this one. I certainly agree that we need to have greater accountability for executives who violate the public trust. But the idea of any Colorado resident being allowed to sue and have the proceeds go to the state sounds a little hokey. Activist organizations might be able to use a law like this to file frivolous and distracting lawsuits against controversial companies like Wal-Mart (NYSE: WMT).

The fact is that no private individual would sue a company with the proceeds going to the state for any purpose other than revenge or some kind of grudge. People who have been defrauded can file civil lawsuits and they do -- it seems like every time a hot stock goes south, four or five class-action firms rush to announce lawsuits. The SEC can file civil charges as well, and the Justice Department can go after criminals, as they did in the case of Enron executives like Jeff Skilling.

If this measure passes and has the effect that critics fear -- a plethora of frivolous lawsuits -- business will flee Colorado. And then Coloradoans won't have to worry about economic fraud -- or economic growth.

The notion that the law would hold executives accountable for fraud even if they didn't participate is a good one though. The ostrich defense that gets trotted out in nearly every corporate malfeasance case is getting old.

Tags: Colorado, Fraud, inthenews, SEC