SoxFinal[1] - The Impact of Sarbanes-oxley on Capital...

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The Impact of Sarbanes-oxley on Capital Formation May 29, 2008 David C. Martin 1
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Why was Sarbanes-Oxley Enacted? United States Federal legislation known as the Sarbanes-Oxley Act (SOX), may be described as an offshoot of what Alan Greenspan once called the period of “irrational exuberance”. This is because when the hallucinations of the late 1990’s in the stock markets began to fade in March 2000, when investors recognized that a financial bubble had arisen and then drove stock prices plunging, 1 the ugliness of “irrational exuberance” began to appear. The terrorist attacks on September 11, 2001 only exasperated this hidden reality because it sent the financial markets into frenzy, creating widespread uncertainty within the minds of the investing public, driving down stock prices even more. 2 Looking back, the new war on terrorism took a significant toll on the American economy and pushed it deep into a recession. 3 Between December 2001 and July 2002, four major U.S. companies filed for bankruptcy: Enron, Adelphia, WorldCom, and Global Crossing . 4    Therefore,   when smoke and mirrors accounting business models of the 1990s began to surface in late-2001, the wheels of change began to grind in favor of new legislation that some now simply call SOX. 1 Lawrence A. Cunningham, Professor of Law & Business, Boston College, Speech delivered to the Federation of European Securities Exchanges’ 7th European Financial Markets Convention in London (June 12, 2003). 2 See Business Cycle Dating Committee, National Bureau of Economic Research 8, (Nov. 2001), http://www.nber.com/cycles/november2001/recessions.pdf (discussing and pinpointing the beginning of 2001 recession at the same time discussing the impact Sept 11 had our markets). 3 Id. 4 See Jennifer S. Recine, Examination of the White Collar Crime Penalty Enhancements in the Sarbanes- Oxley Ac t, 39 Am. Crim. L. Rev . 1535, 1537 (2002) 3
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The Sarbanes-Oxley Act (SOX) was passed in the wake of corporate scandals involving spectacular bankruptcies; inappropriate accounting practices; and audit firms that apparently closed their eyes to those practices. Much like a domino effect, the collapse of Enron was a telltale sign that others would only follow during a period of deteriorating valuations. The unraveling of Enron, a direct product of the prior era’s financial fantasia, which began in late 2001 and escalated in 2002, can best be viewed as providing the main thrust and the catalyst for SOX. 5 A. Enron and the domino effect (a short history) Enron operated its energy business for the most part with the help of off-the- books Special Purpose Entities (SPEs) 6 It was thru such vehicles that systematically provided misleading information to the capital markets and its investors, Enron executives were able to cover the company’s massive debt load while gaining private benefits for themselves. 7
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This note was uploaded on 02/13/2010 for the course LAW securities taught by Professor Harrington during the Spring '08 term at St. Johns Duplicate.

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SoxFinal[1] - The Impact of Sarbanes-oxley on Capital...

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