Paulson Committee Report Addresses SEC Enforcement and Corporate Criminal Liability

The Committee on Capital Markets Regulation, otherwise known as the Paulson Committee (after Treasury Secretary Henry M. Paulson, Jr. who spoke approvingly of the group), issued its much talked about and anticipated Interim Report today.  While the 135 page tome did not address some of the more controversial issues discussed in recent press releases and commented on earlier, it does cover a number of issues regarding competitiveness in the U.S. capital markets, many of which will be addressed in more detail in future entries.  

Two key issues addressed relate to SEC enforcement actions and the criminal prosecution of corporations.  As to the former, the Report makes three specific recommendations:  1) that the SEC resolve conflicts among the circuits on certain issues regarding private damage liability under Rule 10b-5; 2) that the amount recoverable in class actions be reduced to the extent that investors have been compensated from funds paid under the SOX Fair Funds provision from an SEC enforcement actions; and 3) that a rule should be established to limit “pay-to-play” arrangements involving charitable donations made by class action law firms to solicit institutional investors to be lead plaintiffs.  As to the latter, the Committee recommended that the standards in the Thompson Memo for indicating a corporation be modified so that a corporation can only be charged in “exceptional cases . . . ”  (In all the discussion about the waiver of privilege it is often overlooked that the original idea behind the Holder and Thompson Memos, which at least in part emanated from the private bar, was to delimit the scope of corporate criminal liability which in theory has been extremely broad since the 1909 decision of the Supreme Court in New York Central v. U.S., 212 U.S. 481, which first held that corporations could be held accountable for criminal acts of their agents).  

The full text of the report can be found on the Committee’s web site at