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Federal
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January 2007
Peter, Meet Paul; President Bush to Propose Cap on Employer-Provided Health Benefits, and to Give New Tax Deduction for Private Health Insurance According to President Bush’s radio address on Saturday, January 20th, he intends to use his State of the Union speech to announce a new approach to how health insurance is dealt with under the Federal tax code. The President wants to “treat health insurance more like home ownership” by giving people tax deductions for their health insurance similar to those for home mortgage interest. The new deductions – up to $15,000 for a family and $7,500 for an individual -- are to be used by people who don’t have employer-provided coverage. The deductions would be paid for by taxing people on that part of their employer-provided health insurance that exceeds these same dollar amounts. The idea is not new and has had little success in the past. However, Bush believes that as healthcare costs are of increasing concern to taxpayers, Democrats will be hard-pressed to oppose a new benefit that expands healthcare coverage and does not increase Federal spending. The President argues that “the tax code unfairly penalizes people who do not get health insurance through their job.” Under current law, the cost of employer-provided health coverage is not treated as taxable income to employees, and is not capped. (The Federal government estimates that 175 million Americans receive their health insurance through employers, while 27 million people are insured on their own through policies bought outside the workplace.) These 27 million are not provided with a comparable tax benefit, which, according to a recent study by the Congressional Research Service, cost the Federal government $90.6 billion in taxes that would otherwise have been collected in FY 2006 if there had been no such exclusion from taxation. This amount is also referred to as a “tax expenditure.” (See NCTR October Federal E-news) At his State of the Union address, to be delivered on January 23rd, Mr. Bush says that he will ask Congress to approve “a tax reform designed to help make basic private health insurance more affordable -- whether you get it through your job or on your own.” The plan, although yet to be formally released, is expected to offer essentially a “standard deduction” for health insurance. That is, even if less than the amount of the deduction is actually spent on health insurance, the entire amount of the deduction can be claimed. Reportedly, the cap would increase based on some index, but would not necessarily match cost increases for medical care and health insurance. Since the average cost of family insurance is now approximately $11,500 a year, the White House argues that even people with employer-based plans (up to 80% of them) will see their tax liability fall because their insurance policies cost less than the deduction. This may also act to serve another goal of the President’s, which is to encourage people to buy more economical healthcare. The current approach, with no limits on employer-provided care, “unwisely encourages workers to choose overly expensive, gold-plated plans,” the President said in his radio address. In addition to increased revenues expected from the proposed cap on employer-provided coverage, other unspecified tax offsets are to be used to make the proposal revenue neutral, thereby satisfying the new Congressional PAYGO rules. (See December NCTR Federal E-news) Furthermore, supporters argue that the proposal will also help increase the number of people with health insurance, thereby reducing the estimated 47 million Americans who are without any coverage at all. However, the initial Democratic response ranges from skeptical to outright opposition. For example, Congressman Charles Rangel (D-NY), the new Chairman of the House Ways and Means Committee, is reported as calling the idea “bad policy,” and “inconsistent” with what the new Democratic majority is seeking. Others point out that the proposal does nothing to address overall reform of the healthcare market. Instead, it simply makes purchasing an overpriced product a little easier. Regardless of the success of the proposal, it is a clear example of the increasing attention being paid to tax expenditures, which the Joint Committee on Taxation (JCT) estimates will amount to $945 billion in 2006 — over three times the projected 2006 federal budget deficit. The largest of these expenditures, by far, is for retirement saving incentives (net exclusion of pension contributions and earnings), estimated at $124.7 billion for FY 2006. If capping such tax expenditures in the healthcare area is being actively discussed to help pay for other programs, can the current retirement savings subsidies be far behind, particularly given that almost half of all Americans have no access to employer-provided pensions? President
Bush Radio Address 1/20/07 In response to requests by NCTR, NASRA and other public sector organizations, the Internal Revenue Service (IRS) has released guidance in the form of questions and answers dealing with certain provisions of the Pension Protection Act of 2006 (PPA). The Q&A covers early distributions to public safety employees and rollovers for non-spouse beneficiaries. It also deals with the new public safety retiree health benefit, but has generated serious concerns for a number of systems whose participants’ health plans are self-insured. The IRS released its eagerly-awaited guidance on several provisions of the PPA affecting public plans on January 10, 2007 in the form of Notice 2007-7. While not all questions that have been raised about public sector issues were addressed, the notice does provide several important answers. For example, with regard to rollovers to non-spouse beneficiaries (section 829 of the PPA), the Notice confirms that offering such rollovers is not mandatory. However, if a plan does offer direct rollovers to non-spouse beneficiaries of some, but not all, participants, such rollovers must be offered on a nondiscriminatory basis. The Notice also addresses how the new, lower age of 50 for the purposes of applying the 10% early distribution penalty will work for public safety employees. Essentially, it will operate in the same way as the age 55 exception has been applied. That is, the penalty will not apply to early distributions so long as the employee’s separation occurs during or after the calendar year in which he or she attains age 50. The biggest surprise came in the Q&A dealing with the public safety retiree health benefit (section 845 of the PPA). Under this new law, an annual exclusion of up to $3,000 from gross income is provided for distributions from an eligible retired public safety officer’s retirement plan that are used to pay “qualified health insurance premiums.” However, according to the IRS, the accident or health plan receiving the payments of qualified health insurance premiums cannot be a self-insured plan. How, you may ask, can the IRS call into question this new benefit for retirees in scores of states where self-insurance at the state and local level is quite common? Surely this was never the intent of the bill’s authors, its supporters, or the Congress when the amendment was drafted and subsequently included as part of the PPA. Well, it would appear that it all boils down to one little word. According to a Treasury Department official involved in the development of the new guidance, that word is “insurance.” According to the statutory language of the new provision of law, “qualified health insurance premiums” are defined to mean premiums for coverage “by an accident or health insurance plan or qualified long-term care insurance contract.” (Emphasis added.) It seems that Treasury and the IRS view health insurance plans as a subset of health plans. The latter term includes both self-insured plans and fully-insured plans; the former does not. They point to IRC section 105’s definition of “health plan” as “the big kahuna” when it comes to such definitional splitting of hairs. Specifically, section 105(h) applies to all employment-based health plans (medical, dental, and vision) in which the risk has not been shifted to an insurance company, including administrative-services-only and cost-plus arrangements, and medical reimbursement plans provided through an IRC Sec. 125 plan. These are collectively referred to as “self-insured health plans.” Section 105(h) creates special rules that apply if these self-insured plans’ eligibility for benefits or benefits payable to highly compensated employees is discriminatory. In creating this section, Congress believed that fully insured plans do not need to be subject to similar rules because they are provided protections from discrimination through state insurance laws. In any case, the point is that section 105 makes a distinction between self-funded plans and fully-insured plans within the overall definition of health plans. Thus, the term “health insurance plans” must therefore refer to fully-insured plans, not self-insured plans. Strike the word “insurance” from the definition in the new health benefit’s language, the Treasury official says, and you solve the problem. NCPERS, which called the new benefit its “number one legislative priority” in 2006, confirms that the issue of self-insurance was not raised in negotiations on the drafting of the provision, and strongly disagrees with the IRS interpretation. It intends to address this and other implementation issues as part of a package of technical amendments to the PPA. However, given that many Democrats, including George Miller (CA), the new Chairman of the House Education and Labor Committee, voted against the PPA, there is some concern that such a vehicle could re-open many of the hard-fought battles that delayed final action on the pension legislation throughout the spring and summer of 2006. A technical corrections bill may be more difficult to advance that might initially appear to be the case. IRS Asks if its Proposed Regs on Phased Retirement Are Needed, Given New PPA Provision on In-Service Benefits The Internal Revenue Service (IRS) has requested comments on the need for guidance on the new provision of the Pension Protection Act of 2006 (PPA) permitting the distribution of in-service benefits at age 62. As part of its request, the IRS has asked whether, in light of this new provision, its proposed regulations governing in-service distributions before normal retirement age should be issued. These draft regulations, first published in 2004, received lukewarm support from NCTR and NASRA, who described them as being of only “limited use” for some plans. The proposed regulations have also been the subject of bipartisan Congressional criticism. A chief concern is that if the IRS does not provide sufficient flexibility and if administrative requirements are overly complex, few employers will be able to take advantage of phased retirement – whether as permitted under the new PPA provision, or as envisioned under the draft regulations. Generally speaking, the Internal Revenue Code (IRC) prohibits a pension plan from paying benefits prior to retirement if the plan wants to retain its qualified (tax exempt) status. This prohibition on so-called “in-service” distributions means that benefits can only be paid to an employee who has reached normal retirement age (or eligibility for an unreduced benefit under the terms of the plan). In 2002, in response to growing interest in phased retirement, the IRS asked for comments on a wide variety of issues related to this topic. Two years later, Treasury issued proposed regulations to permit a pro rata share of an employee’s accrued benefit to be paid prior to normal retirement age under a “bona fide phased retirement program.” Several problems were presented by the proposal. For example, retirement plans would have to monitor the program through annual testing, comparing the number of hours worked with the number of hours on which the phased retirement benefit would be based to ensure that a worker remained eligible for the benefit. Furthermore, the proposed regulations would only apply to workers between age 59½ and normal retirement age. In a joint letter commenting on the regulations in 2005, NCTR and NASRA pointed out that the so-called “hour-counting” rule could mean that any benefits of a program would easily be outweighed by the cost of administration. Also, since normal retirement age is near 59½ for many public plans, participants would have little opportunity to utilize such a limited program. These same concerns were also echoed by Senators Herb Kohl (D-WI) and Gordon Smith (R-OR), when Smith was Chairman and Kohl the Ranking Member of the Senate Special Committee on Aging. (With the switch in Senate control to the Democrats, their roles have now been reversed.) However, with the proposed IRS regulations still pending, a provision was included in the PPA -- Section 905, creating IRC section 401(a)(36) -- that permits in-service distributions beginning at age 62, whether or not the participant has reached normal retirement age. The IRS has now requested comments on the need for guidance dealing with this new section. Specifically, the IRS has asked for input on a number of points, including whether or not such distributions to participants who have yet to reach normal retirement age should be permitted to be subsidized (i.e., not actuarially reduced from what they would otherwise be entitled to receive at normal retirement age), and if so, how should this subsidized benefit be treated. The issue here is whether or not a subsidized benefit should be dealt with as a protected early retirement subsidy (and subject to anti-cutback rules) or viewed instead as a non-protected benefit. This is more a private sector issue, as the IRC non-discrimination sections involved do not apply to governmental plans. The IRS has also asked if it should proceed with its proposed phased-retirement regulations. The answer here is probably “It all depends.” Current law and regulations impose limits on the ability to offer a broad selection of phased retirement programs, and new regulations that address these impediments could be helpful. However, as NCTR has stated in the past, such regulations should allow, but not mandate, retirement systems to have such programs. Any IRS activity in this area must also recognize that retirement systems have different funding methods and varying levels of funding. Accordingly, the IRS should not adopt any policy that would require retirement systems to assume additional funding obligations. Finally, such regulations should recognize that state and local governments have different ways of defining such terms as normal retirement age, early retirement age, and minimum retirement age, and should permit whatever definitions appear in applicable state or local laws and regulations. NCTR and NASRA are considering filing another joint comment letter stressing again our views that any such regulations could be very helpful if they are administratively feasible and reiterating our concerns with the regulations as proposed. If you are interested in filing your own comments, they are due by April 16, 2007.
SEC, PCAOB Act to Ease Impact of SOX 404 Rules on Small Companies
On December 15th, the SEC gave final approval to their previously proposed extension of the date by which smaller public companies will have to provide management's assessment of their internal controls over financial reporting in their annual reports. Such reporting was set to begin for fiscal years ending on or after July 15, 2007. This action moved the date to December 15, 2007. The SEC also voted to extend the date by which small companies (non-accelerated filers) must begin to comply with the auditor attestation requirement of SOX, moving this to fiscal years ending on or after December 15, 2008. The SEC’s deferral of auditor attestation was taken in anticipation of the PCAOB’s expected revisions of their auditing standards, which took place a few days later. The goal was to give smaller public companies and their auditors additional time to accommodate these changes. According to the SEC’s press release, “The extension also should enable management of smaller public companies to focus on the internal assessment process during the first year of compliance with the internal control reporting provisions.” The PCAOB’s plan, which was approved on December 19th, is to replace their existing internal control standard, Auditing Standard No. 2, with one designed to focus attention on the most important matters, eliminating audit requirements that are unnecessary to achieve the intended benefits. The new auditing standard would also provide direction on how to scale the audit for smaller, less complex companies. According to the PCAOB’s chairman, Mark Olson, the new standard reflects their first two years experience with auditors’ implementation of the internal control provisions of Section 404, and should preserve the intended benefits of the law without resulting in unnecessary effort and costs. “We believe the new standard will result in audits that are more efficient, risk-based and scaled to the size and complexity of each company,” Olson explained. The effective date for the new standard, if adopted, will be set at that time. The SEC must also approve the proposal before it can be implemented. The deadline for comments on the PCAOB’s proposal is February 26, 2007. Study Says Biogenerics Can Save Billions if the FDA is Given New Regulatory Authority
Biotech drugs are produced from living cell cultures, instead of being synthesized chemically. The pharmaceutical biotechnology industry traces its beginnings to 1986, and since then has grown fivefold, with annual revenues today estimated to exceed $39 billion; this is expected to more than double in the next two years to $90 billion. In addition to being one of the fastest growing components of the pharmaceutical industry, biotech is also one of the most expensive. In the last year, the cost of biotech drugs grew at a rate of 17.5 percent, compared with 10 percent for traditional drugs. Furthermore, it is not uncommon for these drugs to cost tens or even hundreds of thousands of dollars per patient per year. For example, according to the Generic Pharmaceutical Association (GPhA), the average cost of a one-day supply of biotech drugs is $45, while synthetic drugs cost an average of $1.66 per day. However, unlike with traditional drugs, which had a generic process authorized by the Congress in 1984, there are no similar statutory provisions establishing a similar scheme for biotechs. Thus, there is no generic competition for these drugs. If such biogenerics were available, the new study claims that they could conservatively save Medicare Part B $14 billion over the next 10 years, and Medicare Part D and other government programs would also likely save billions. In addition, biogenerics “would substantially reduce costs for employers and consumers,” and “[m]illions of consumers enrolled in employer health plans would greatly benefit,” the study concludes. The PCMA, which is the national association representing America’s pharmacy benefit managers (PBMs), released the analysis, which was done by Engel & Novitt, a law firm with a global biopharmaceuticals and medical device client base. Legislation (the “Access to Life-Saving Medicine Act”) was introduced in both the House and Senate on September 29, 2006, to authorize such a process, but no action was taken on the bills prior to the adjournment of the 109th Congress. H.R. 6257, introduced by Congressman Henry Waxman (D-CA), and S. 4016, introduced by Senators Charles E. Schumer (D-NY) and Hillary Rodham Clinton (D-NY), would allow the FDA to approve abbreviated applications for generic versions of biotech drugs licensed under the Public Health Services Act, without repeating expensive and duplicative clinical trials. Specifically, the Public Health Service Act would be amended to authorize the Secretary of Health and Human Services (HHS) to approve abbreviated applications for biological products that are “comparable” to previously approved (brand name) biological products. The legislation would also establish user fees to help fund the FDA’s assessment and approval process, which is expected to be more difficult and time-consuming for biogeneric applications. Currently, the generic-drug industry is the only drug-industry segment that does not help pay for the processing of its applications. Now that Democrats control both Houses of Congress, with Mr. Waxman the new Chairman of the Oversight and Government Reform Committee and thought by some to be one of the most powerful men in the 110th Congress, it might appear that this legislation could be reintroduced with a much more successful prognosis. However, as Senator Charles Grassley (R-IA), the former Chairman of the Senate Finance Committee and now its ranking Republican, has been quoted as saying, “You can hardly swing a cat by the tail in Washington without hitting a pharmaceutical lobbyist." The pharmaceutical lobby, led by the Pharmaceutical Research and Manufacturers of America (PhRMA), is one of the most powerful organizations in Washington, as evidenced by its recent ability to restrict the House Democratic proposal regarding the authority of Medicare to negotiate the price of prescription drugs to little more than a toothless directive to do so. And even this proposal, which is much less than what some powerful Democrats had hoped for (see December NCTR Federal E-news), is probably going nowhere in the Senate. So, while biogenerics is likely to be a hot topic in the 110th Congress, don’t count on final action on the issue anytime soon.
Divestment News: New Global Investment Initiative to Examine “Extra-Financial Issues” Announced; Meanwhile, Sudan Divestiture Push Continues at State Level, but NFTC Lawsuit Ruling On Illinois Law, Expected Soon, May Slow Efforts
PRI was officially launched in April of 2006, but had its origins in 2005 when the then-United Nations Secretary-General, Kofi Annan, asked a group representing 20 institutional investors from 12 countries to develop a framework for investors whereby, in fulfilling their fiduciary duty, they could give appropriate consideration to environmental, social and corporate governance issues that can affect the performance of investment portfolios. Six “Principles for Responsible Investment” were developed as a result. Signatories to these principles, where consistent with their fiduciary responsibilities, commit to incorporating environmental, social and corporate governance issues into their investment analysis and decision-making; to being active, responsible owners by promoting good corporate practices; and to reporting on their activities and progress towards implementing the principles. The principles do not call for exclusion or screening out of particular companies or sectors, but instead suggest a policy of engagement. Investors responsible for about 10 per cent of global capital backed the principles when they were announced, and signatories currently include the California Public Employees’ Retirement System, the Connecticut Retirement Plans and Trust Funds, the Illinois State Board of Investment, New York City Employees Retirement System, the New York State and Local Retirement System, and the Teachers’ Retirement System of the City of New York. PRI announced on January 11, 2007, that it was joining with the Enhanced Analytic Initiative (EAI) to encourage the development and use of extra-financial research by a broader group of investors, and the integration of that research into the investment process. EAI is an international collaboration between asset owners and asset managers whose goal is to encourage better investment research; the California State Teachers’ Retirement System (CalSTRS) is an associate member. The new collaboration between PRI and EAI is based on the belief among investment professionals that factors beyond traditional financial analysis are affecting the performance of investment portfolios, and that analysts have failed to adequately address the impact of environmental, social and governance issues on long-term investment. PRI also recently co-hosted a conference at UN Headquarters, along with the UN Global Compact Office and the New York City Comptroller's Office, on January 17th. Entitled "Responsible Investment in Weak or Conflict Prone States," this gathering examined the premise that institutional investors have an important role to play, both individually and collectively, to positively influence the conduct of companies operating in, or with ties to, weak/conflict-prone countries in order to advance sustainable economic and societal development and the protection of human rights – and that a failure to act could hold serious negative implications for the protection and enhancement of their investments over the long-term. A recent paper prepared by the International Organization of Employers (IOE), in collaboration with the International Chamber of Commerce (ICC) and the Business and Industry Advisory Committee (BIAC) to the OECD, was a topic of discussion. It identifies “effective ways for companies to deal with dilemma situations encountered in weak governance zones.” While investors are seeking ways at the international level to appropriately incorporate issues such as human rights in their investment process, divestment efforts continue at the state and local level related to investments in the Sudan. A major proponent of this cause, the Sudan Divestment Task Force, (which is a project of the Genocide Intervention Network), is advocating “targeted divestment,” an approach that focuses on the so-called “worst offenders” in the Sudan –an approach first adopted legislatively in California. Specifically, the Task Force advocates targeting those companies that have a business relationship with the Sudanese government or a government-created project; impart minimal benefit to the country’s underprivileged; and have expressed no significant corporate governance policy regarding the current situation in Darfur. By urging divestiture of only these types of companies, the Task Force believes that such divestment “explicitly excludes the vast majority of companies in Sudan, including those tied to the agriculture sector, distributing general consumer goods, promoting non-oil related infrastructure development in underprivileged regions of the country, or involved in provision of goods and services intended to relieve human suffering or to promote welfare, health, education, and religious and spiritual activities.” Such an approach is intended to have maximum impact on the government of Sudan’s behavior while causing the least harm to innocent Sudanese. The Task Force has developed a legislative model and it expects that at least 19 states will be introducing targeted Sudan divestment legislation in the first few months of 2007 as a result of its efforts. In addition, the Task Force has produced a “State of Sudan Divestment” report that provides details on the progress of numerous states, cities, universities, and companies that have active divestment campaigns, updated as of January 14, 2007. Finally, the Task Force compiles a “Companies for Scrutiny” listing of all companies that it believes deserve “extra scrutiny” by investors on account of their business operations in Sudan. This listing, available upon request, is continuously updated. According to the Task Force, it has reviewed over 400 companies with connections to Sudan, and only those contained in this document appear to warrant further investigation – but not necessarily divestment. As the Task Force points out, some of the companies on their list “are clear candidates for shareholder engagement.” As a result, the Task Force has ranked the companies, with those at the top of its list being the worst offenders or the least willing to engage shareholders, and those towards the bottom of the list being the “least offending” or most likely to work with shareholders. The listing also contains companies whose past actions were causes of concern but whose present activities in the Sudan are unclear. Can states adopt laws requiring divestment from Sudan, or do such efforts constitute an improper invasion of Federal authority over foreign policy? The lawsuit filed last August by the National Foreign Trade Council (NFTC) challenging Illinois’ divestiture law may soon provide that answer. (See October NCTR Federal E-news) Oral arguments in NFTC v. Topinka were heard at the end of 2006, where the state agreed to a stipulation as to the facts of the case, removing potential delays associated with challenges. The judge handling the case, Judge Kenelly, is aware that the Illinois statute’s next divestment deadline is January 27th, and indicated that he would issue his decision within the month on the combined petition for a permanent injunction and on the merits. In the meantime, expect a renewed effort in the new Congress to permit states to order divestment of public pension funds from companies whose business is judged directly or indirectly to support the genocide in Darfur. Furthermore, Congresswoman Barbara Lee (D-CA), a major proponent of such Federal legislation, has been appointed to the House Appropriations Committee, and will serve on its Foreign Operations Subcommittee. The Appropriations Committee controls the Federal purse strings and is widely viewed as one of the most powerful committees in Congress. Her new position should provide added leverage for her efforts in this area.
Round Two? California Governor Establishes
New Commission to Recommend Reforms of Public Retirement, Health Benefits The new Public Employee Post-Employment Benefits Commission was legally established on December 28, 2006. It is designed as a bipartisan group that will identify the extent of unfunded pension and retiree health care liabilities, review and analyze options for addressing them and recommend a plan to the Legislature and the Governor by January 1, 2008. The 12-member group will have half its membership appointed by the Democratically-controlled State Assembly and Senate, and half by the Governor. No members have been named yet, and the new group was neither mentioned in Schwarzenegger’s recent “State-of-the-State” address nor in his 2007-2008 budget. So far, the commission is being greeted with a wait-and-see attitude by most of the Governor’s previous opponents on the issue of pension reform. Assembly Speaker Fabian Núñez, (D-Los Angeles) is quoted in the press as saying that it “makes sense for a bipartisan review of our post-employment benefit system for the long haul." However, Nunez cautioned that “this should not be viewed by any stretch as an attack on a system that has performed well and provides economic security to hundreds of thousands of Californians, or an indication of any interest in turning the system over to interests whose only concern is their profits." California Senate President Pro Tem Don Perata (D-Oakland) is also quoted as encouraging everyone “to let the process move ahead without pre-supposing what conclusions the commission will reach or intervening to politically influence its deliberations." Some supporters of the Governor’s 2005 push to replace California’s public sector DB plans with DC plans for new hires are also luke-warm about the proposal. However, they do view it as a potential opportunity to advance their cause. As Jon Coupal, president of the Howard Jarvis Taxpayers Association -- California's largest taxpayer organization – wrote recently, “Not only will California taxpayers get an eye- and earful of information on the scope of the problem” thanks to the public hearings that the Commission will hold, “but the motivations of the various stakeholders will become glaringly transparent.” Coupal believes that “[o]rdinary taxpayers have a general sense that public employee retirement benefits are far better than their own. Now, they are going to see some real specifics.” While the political outlook may be better this time around in California, it must never be forgotten that ideological proponents of conversion to DC plans have not changed their views. They can be expected to continue to mount vigorous campaigns to achieve their goals. Study commissions may buy time to regroup and rearm, but the assaults will continue.
Securities Litigation Numbers Continue to Decline
The number of securities litigation cases filed in 2006 dropped to the lowest point recorded since the passage of the Public Securities Litigation Reform Act (PSLRA) in 1995. In the year just passed, filings fell to 110 from 178 the year before, according to the Securities Class Action Clearinghouse maintained by Stanford University Law School and Cornerstone Research. This represents a decrease in filings, “making this year’s numbers nearly 43 percent lower than the ten-year historical average of 193,” according to a Clearinghouse press release. Filings have steadily edged downwards since a high of 497 in 2001. Smaller dollar losses accompanied fewer filings, the Clearinghouse also noted in its release. The amount of shareholder value lost from fraud (as proved through securities litigation) went from $362 billion in 2005 to $294 billion in 2006. The dollar losses peaked with the large filings in 2002 at $680 billion in damage, although technology continues to be the most sued sector of the economy, as it was then. The Clearinghouse data includes results from the 20 suits processed in 2006 over the controversial practice of options back-dating, which is a growing area for litigation. The Clearinghouse attributed the sharp declines to more Federal enforcement. “I think we are seeing the effects of a tougher and smarter campaign against white collar fraud by the Securities and Exchange Commission (SEC) and the Department of Justice,” offered Professor Joseph Grundfest, the Clearinghouse’s Director and a former SEC commissioner. Other factors in the filing decline included a strong market with lower volatility and the cycling-out of cases based on the “wilder” days of the early 2000’s. High volatility tends to encourage filings by creating the environment for fraud to occur, or for the perception that fraud has occurred to thrive. While the number of filings has declined, the Clearinghouse also notes that, during the five-year period since adoption of the PSLRA, the dollar magnitude of settlements has increased noticeably, particularly in the settlement of so-called "mega-cases." For example, the Clearinghouse points out that there have been seven post-PSLRA settlements in excess of $500 million: the WorldCom and Enron litigations (still pending) have already reached settlement agreements of $6.128 and $4.760 billion, respectively; the Cendant litigation was settled for $3.525 billion; the IPO Allocation Litigation settled for $1 billion; McKesson is in the process of settling its class actions for $960 million; Lucent Technologies settled for $673 million; and Raytheon Corporation settled for $535 million. Perhaps these settlements, and the fees associated with them, are the real story?
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