SEC Affirmative

Solvency/Topicality

1AC—Plan/SolvencyText: The United States federal government should curtail enforcement surveillance of markets by the Security and Exchange Commission authorized under the Sarbanes-Oxley Act of 2002.

The SEC is ramping up its enforcement surveillance—the agency is getting out of handWilczek 14 - Yin Wilczek covers the Securities and Exchange Commission, corporate governance and securities litigation for Securities Regulation & Law Report™ and Securities Law Daily™. (“SEC Data Collection to Fuel Cases, Challenge Defendants,” http://www.bna.com/sec-data-collection-n17179895112/ 9/19/2014) STRYKER

Sept. 11 — The Securities and Exchange Commission is ramping up its use of data analytic tools in a fashion that ultimately could pose problems for companies and registrants, attorneys and other commenters said Sept. 11. The massive amounts of data the SEC now is collecting will fuel future enforcement cases, and such cases will be especially difficult to defend against, they said during the American Bar Association's Business Law Section meeting in Chicago. Elizabeth Gray, a partner in Willkie Farr & Gallagher LLP, Washington, noted that in some areas, the defense bar is seeing massive document requests from the SEC. The staff is exercising “a lot less discipline,” Gray said. “The process in that has gotten slightly

out of hand .” Carmen Lawrence, a New York-based partner in King & Spalding LLP and a former director of the SEC's Northeast Regional Office, also said the staff has become less willing to negotiate down the scope of the SEC's data requests in terms of relevancy. With the new tools, the staff now has the ability to very quickly scan through the information to obtain what is necessary. The

remaining data “could be useful for them in the future,” she said. It is now “all about amassing data.” The SEC over the last two years has beefed up its use of data analytics for its enforcement , examination and oversight functions . Earlier this year, SEC Enforcement Director Andrew Ceresney told Bloomberg BNA that his division is using software developed by Palantir Technologies to mine for connections in insider trading and other investigations.

The plan ends the enforcement of Sarbanes OxleyWallison 6 - Peter J. Wallison, a codirector of AEI’s program on financial policy studies, researches banking, insurance, and securities regulation. He was a general counsel of the U.S. Treasury Department. (“The Canary in the Coal Mine: What the Growth of Foreign Securities Markets and Foreign Financing Should Be Telling Congress and the SEC,” http://www.aei.org/publication/the-canary-in-the-coal-mine-what-the-growth-of-foreign-securities-markets-and-foreign-financing-should-be-telling-congress-and-the-sec/ 8/8/2006) STRYKERSEC Enforcement Abuses. Apart from its costly regulations, the SEC imposes significant costs on the U.S. securities market through excessive and abusive enforcement activity . Advancement within the SEC’s enforcement division comes from finding and pursuing dramatic cases, which create incentives on the part of the enforcement staff to be the first to discover and take ownership of such a case. Under existing enforcement division procedures, any attorney in the division may initiate a matter simply by sending a request for information to a person or company that has been charged–in a newspaper article or elsewhere–with a possible violation of the securities laws. This request is known as a matter under inquiry (MUI). If the MUI produces no useful information, it can be terminated easily within sixty days of its inception, but if it is not closed during that period, it automatically becomes an informal investigation. At that point, most U.S. securities counsels will advise their clients to disclose the existence of the proceeding, which usually results in a decline in the price of the company’s stock. Thereafter, the matter might be abandoned by the attorney who initiated it, but no division procedure requires that companies subject to informal investigations be advised that no further action will be taken against them. In fact, these matters often remain open for years because the attorney who initiated the MUI has lost interest in the case. But with a public announcement having been made about an SEC enforcement proceeding, the stock price of the company will continue to reflect this unresolved matter. Apart from MUIs, regulated companies are also subject to sweep requests–demands from

the SEC staff for information about matters they have found to exist in other companies in the same industry. These requests can involve years of e-mail, which must be reviewed by the company’s lawyers for relevance or privileged information before they can be turned over. The costs of these reviews can run into many millions of dollars even though the company has done nothing more than operate in the same industry as another company that is thought to have engaged in wrongdoing. If a matter turns out to be serious enough to be brought to the SEC for a formal order, the defendant is afforded an opportunity to make a written submission–known as a Wells submission–defending its position. However, it is not permitted to argue orally to the commission and is frequently not fully informed of the facts that the enforcement division will use in making its case to the commissioners. Since most defendants know that in these circumstances they will not be able to avoid a formal charge by the commission, they feel compelled to settle cases that

they might otherwise win in court. Few companies can suffer the adverse publicity associated with litigating with the SEC after they have been formally charged, even if in the end they are found not to have violated the securities laws. These settlements often result in very heavy monetary fines as well as injunctive remedies, and although the commission has recently begun to establish reasonable rules about the imposition of fines, the pressure to settle remains. This star chamber-like proceeding creates risks for companies offering their securities in the United States and thus adds to the intangible cost of participating in the U.S. securities markets. Of course, if a company is actually charged with wrongdoing, the tangible costs are considerably higher, even if the company might ultimately be vindicated in a fair proceeding. Under these circumstances, companies are reluctant to subject themselves to the jurisdiction of the SEC by offering securities or having contacts with the U.S. securities markets. This attitude has been reinforced by the Sarbanes-Oxley Act , which attempts in many instances to apply U.S. law extraterritorially, prompting foreign companies to eliminate any jurisdictional basis on which the SEC or private plaintiff might move against them–a fact that explains the striking decline in global offerings in the United States since 2000. Because of the mobility of capital, issuers of securities are able to attract capital–even capital from the United States–in many other markets, without the risks of a U.S. offering.

TopicalityWe meet—the plan ends market surveillance—the eliminates the collection of intelligence informationUS SEC 4 - US Security and Exchange Commission. (“Enforcement Surveillance of Markets ,” https://www.sec.gov/about/oig/audit/246fin.htm 8/18/2004) STRYKER***This document was modified by the SEC on 8/8/2004—it was originally written on 1/7/1997***

The Office of Market Surveillance in the Division of Enforcement is an important source of intelligence information for the Commission's Enforcement program. It obtains information through referrals from Self-Regulatory

Organizations (SROs), which have primary responsibility for surveillance of their markets, and through its own surveillance , including reviews of filings and trading data (for example, from blue sheets and external

data bases). When the Office receives or identifies information on suspicious trading patterns (insider trading or market manipulation), it conducts additional analysis . If warranted , based on materiality and other considerations, the Office refers the matter internally within the Division of Enforcement or to the appropriate region.

SOX is a new form of federal market surveillance analogous to counter-terror surveillance Backer, 10 – Professor of Law at Pennsylvania State University - Dickinson School of Law (Larry Catá, “Surveillance and Control: Privatizing and Nationalizing Corporate Monitoring after Sarbanes-Oxley”, SSRN, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=508802, 8/25/10)//KTCAbstract: This essay explores consequences flowing from the imposition of increasingly significant governmentally directed and enforced surveillance obligations on private actors within the economic sphere. The emerging public-private regime, exemplified by the Sarbanes-Oxley Act, has more clearly revealed its character: surveillance and control of the market and the firm by government in the name, and on behalf, of the private stakeholders traditionally charged with the development and protection of their economic arrangements. Surveillance is privatized -- outside directors, auditors, outside counsel, and corporate employees now increasingly serve as the eyes and ears of the state. Enforcement is nationalized. In lieu of private action by stakeholders, the state offers 'fair funds' reimbursements and state enforcement. The focus will be on the observer (who is required to survey), the observed (who must be monitored), the purpose of the surveillance (what must be monitored), and the persons or entities to whom the monitors must report. The essay then sets out three sets of archetypal factual narratives, the consequences of which are being currently litigated. The first relates to Chancellor Corp., the second to Solucorp Industries, Ltd., and the third to part of the Enron litigation. Using these as archetypal narratives, the essay extracts a series of norms for behavior applicable to both observer and observed. These are the beginnings of a system of standards ultimately governed by and beholden to the state. The essay then turns to an examination of the state, lying at the very center of this web of surveillance. First it analyzes the role of the state as enforcer as evidenced by the state's role in the cases considered. It considers the state as source of redress to stakeholder and market as evidenced by the SEC's campaign to widen its legislative authority to seek damages from wrongdoers and return the recovered funds to investors. Second, it examines the impact of SOX in the context of post-September 11, 2001 policies. In particular, it suggests that the elevation of monitoring as a significant state policy after September 11, 2001, may explain certain

parallels between SOX and the anti-terrorism provisions adopted in 2001 and 2002. The essay ends with a preliminary consideration of the consequences of the construction of this great panoptic system of disclosure, in which individuals, firms and markets form the periphery and government

lies at its center, and suggests that what may be emerging is a system of surveillance mercantilism.

SEC surveillance is intelligence gatheringShapiro 84 - Susan Shapiro is a sociologist who studies the social construction, social organization, and social control of fiduciary, trust, and principal-agency relationships. She got her Ph.D in Sociology from Yale University. (“Detection and Enforcement Process,” Wayward Capitalism, pp. 181, 1984) STRYKERThe examination of the artifacts of securities behaviors and transactions plays a part in SEC surveillance activities . The SEC market surveillance program is well-organized, complex, and sophisticated, probably the most refined of all SEC intelligence activities . Yet even it is criticized as being primitive ("A Computer Watchdog"

1980, 42). Until the recent advent of a policitical climate of deregulation and budgetary cutbacks, SEC officials campaigned hard for congressional appropriations to fund a more sophisticated and comprehensive computerized market surveil- lance oversight system (SEC Annual Report I980, xii, 17- 18). Under new leadership and increasing pressure from Wall Street and self-regulatory agencies, which believed that the system would be costly, intrusive, and duplicative of current stock exchange surveillance programs, the SEC has withdrawn proposals to improve its own market surveillance program (“SEC May Abandon Proposals" 1982. 37). But data from an experimen- tal pilot program suggest that SEC and self-regulatory surveillance efforts are not duplicative: a quarter of the unusual trading activities—especially stock manipulation and insider trading—discovered by SEC surveillance was not detected by the exchanges (ibid.). It therefore appears that decisions to abandon updating SEC surveillance capacities are premature and inappropriate, given current SEC priorities for the control of market- place violations particularly. The agency should further explore the ways in which improvements in its own surveillance technology would continue to expose offenses relatively immune from self-regulatory agency surveil- lance.

Market surveillance collects information to prevent crimeGAO 81 - US Government Accountability Office “Securities and Exchange Commission Should Improve Procurement Practices for Market Surveillance System Development,” http://www.gao.gov/products/AFMD-81-17 Mar 6, 1981) STRYKERAs part of the continuing effort to achieve greator economy in contracting for Government goods and services, GAO reviewed the procurement practices used by the Securities and Exchange Commission

(SEC) to obtain an automated market surveillance system. The computerized system will be used

to support SEC market surveillance efforts which detect trading practices that may violate securities laws and regulations .

SEC collection of evidence is surveillanceInvestopedia No Date (“Division Of Enforcement,” http://www.investopedia.com/terms/d/division-of-enforcement.asp No Date) STRYKERDEFINITION OF 'DIVISION OF ENFORCEMENT' The Division of Enforcement is a branch of the U.S. Securities and Exchange Commission which is responsible for collecting evidence of possible securities law violations and recommending prosecution when necessary. Evidence of possible violations is collected through market surveillance activities , investor complaints, other divisions of the SEC and other securities industry sources.

The SEC conducts surveillanceRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER

Finally, increasing SEC surveillance theoretically can reduce corporate fraud. The SEC traditionally has lacked the resources to do intensive review of corporate disclosures. Sarbanes-Oxley addresses this by requiring increased SEC review of public company filings113 and increasing the SEC's funding. 114

Inherency Former legislative review did not solve the unwarranted costs of section 404, repeal is necessary Addington, 11 – Group vice president for research at The Heritage Foundation. Vice President for Domestic and Economic Policy at the Heritage Foundation. Former Republican staff director, chief counsel or counsel for four congressional committees (Senate intelligence committee, House intelligence committee, House foreign affairs committee and House Iran-Contra committee). Former assistant general counsel of the Central Intelligence Agency and as special assistant and then deputy assistant to the president for legislative affairs during the administration of President Ronald Reagan. He went on to serve in the Department of Defense as special assistant to the secretary and deputy secretary of defense and then general counsel during the administration of President George H.W. Bush. Addington served as counsel to the vice president, and then chief of staff to the vice president, during Richard B. Cheney's two terms in that office. Bachelor of Science in Foreign Service from the Georgetown University School of Foreign Service. He received a law degree with distinction in 1981 from the Duke University School of Law. (David S., “Congress Should Repeal or Fix Section 404 of the Sarbanes–Oxley Act to Help Create Jobs”, Heritage Foundation, 9/30/11, http://www.heritage.org/research/reports/2011/09/congress-should-repeal-or-fix-section-404-of-the-sarbanes-oxley-act-to-help-create-jobs)//KTC Congress Started Fixing Section 404 but Has Not Completed the Job Congress waited patiently from 2007 to 2010 for the SEC and the Public Company Accounting Oversight Board (PCAOB), whose rules the SEC approves, to change rules in a way that would solve the problem of unwarranted costs imposed on the private sector by the rules implementing section 404 of the Sarbanes–Oxley Act.[7] While the SEC tinkered with the rules, it did not solve the problem to the satisfaction of Congress.[8] Congress took action in 2010 to address part of the problem, granting by statute to companies whose stock is publicly traded and whose aggregate worldwide value is $75 million or more an exemption from the requirement in section 404(b) for the company to have the registered public accounting firm that does the company’s audit attest to, and report on, management’s assessment of the company’s internal control structure and procedures.[9] While Congress took a laudable first step in exempting the smaller companies from section 404(b), Congress should complete promptly the job of reviewing the full impact of section 404, including on medium-sized and large-sized companies, and repealing section 404 or fixing it to eliminate unwarranted costs. Companies could use freed funds, no longer absorbed by section 404 implementation, to invest in their lines of business, creating much-needed jobs. Congress Should Re-examine Whether Section 404 Is Needed and, If So, How to Cut Its Costly Burden on Businesses Congress should reconsider carefully the requirements in section 404 for company management to assess the effectiveness of its internal control structure and procedures and then for the company’s registered public accounting firm to attest to that management assessment. Given the traditional role of each state in regulating the corporate governance of corporations incorporated in that state,[10] Congress should first examine anew whether federal law should address those subjects, or whether they should be left to state law. In a society based on limited government and free enterprise, and in light of the traditional role of the states in our federal system, Congress should start its examination with a presumption in favor of repealing section 404 and leaving the subjects addressed by section 404 to the states.

Economy Advantage

1AC—Economy (Short) The US economy is stagnating and not self- sustainable Reuters, 4/29/15- News agency (Lucia Mutikani, “US economy stumbles in first quarter as weather, low energy prices weigh in”, Reuters, 4/29/15, http://www.reuters.com/article/2015/04/29/us-usa-economy-idUSKBN0NK08520150429)//KTCU.S. economic growth nearly stalled in the first quarter as harsh weather dampened consumer spending and energy companies struggling with low prices slashed spending. Gross domestic product expanded at an only 0.2 percent annual rate, the Commerce Department said on Wednesday. That was a big step down from the fourth quarter's 2.2 percent pace and marked the weakest reading in a year. A strong dollar and a now-resolved labor dispute at normally busy West Coast ports also slammed growth, the government said. While there are signs the economy is pulling out of the soft patch, the lack of a vigorous growth rebound has convinced investors the U.S. Federal Reserve will wait until late this year to start hiking interest rates. The recovery is the slowest on record and the economy has yet to experience annual growth in excess of 2.5 percent. "The U.S. economy has yet to demonstrate the self-sustaining resilience that the Fed wants to see before raising interest rates," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "A June liftoff is now off the table, our forecast for a September move holds but even that has become tenuous." Fed officials at the end of their two-day policy meeting on Wednesday acknowledged the softer growth, but shrugged it off as "in part reflecting transitory factors." The dollar hit a nine-week low against a basket of currencies. Prices for U.S. Treasury debt fell in line with a global bond sell-off, sparked by a poorly received five-year German bond auction. U.S. stocks were trading lower.

Section 404 prevents effective job creation and discourages company investment in stocksAddington, 11 – Group vice president for research at The Heritage Foundation. Vice President for Domestic and Economic Policy at the Heritage Foundation. Former Republican staff director, chief counsel or counsel for four congressional committees (Senate intelligence committee, House intelligence committee, House foreign affairs committee and House Iran-Contra committee). Former assistant general counsel of the Central Intelligence Agency and as special assistant and then deputy assistant to the president for legislative affairs during the administration of President Ronald Reagan. He went on to serve in the Department of Defense as special assistant to the secretary and deputy secretary of defense and then general counsel during the administration of President George H.W. Bush. Addington served as counsel to the vice president, and then chief of staff to the vice president, during Richard B. Cheney's two terms in that office. Bachelor of Science in Foreign Service from the Georgetown University School of Foreign Service. He received a law degree with distinction in 1981 from the Duke University School of Law. (David S., “Congress Should Repeal or Fix Section 404 of the Sarbanes–Oxley Act to Help Create Jobs”, Heritage Foundation, 9/30/11, http://www.heritage.org/research/reports/2011/09/congress-should-repeal-or-fix-section-404-of-the-sarbanes-oxley-act-to-help-create-jobs)//KTC Americans need jobs. The private sector of the American economy will create jobs when government removes the obstacles it has placed in the way of job creation and when the demand for goods and services rises. The government should promptly review the vast increase in government regulation of the economy that has occurred in recent decades and modify or repeal statutes and override regulations that discourage the private sector from creating jobs. Congress could start by reviewing and fixing section 404 of the Sarbanes–Oxley Act of 2002, as amended in 2010 by the Dodd–Frank Wall Street Reform and Consumer Protection Act.[1] Section 404 Imposes Unwarranted Costs on the Private Sector Section 404 of the Sarbanes–Oxley Act, as amended, requires the Securities and Exchange Commission (SEC) to issue rules to require companies whose stock is publicly traded (for example, on the New York Stock Exchange) and whose aggregate worldwide value is $75 million or more, to: (1)

include in its annual report filed with the SEC a statement of the responsibility of the company management for “establishing and maintaining an adequate internal control structure and procedures for financial reporting” ; (2) include in its annual report filed with the SEC an assessment of the effectiveness of the company’s internal control structure and procedures for financial reporting; and (3) have the registered public accounting firm that does the company’s audit report “attest to, and report on, the assessment made by the management . . . .”[2] To acquire and verify the accuracy of information needed to write an assessment of internal controls in an organization of any significant size and, further, to get an auditing firm to attest to that assessment, costs money—lots of it. As New York City Mayor Michael Bloomberg and U.S. Senator Charles E. Schumer said jointly, referring to the U.S. regulatory framework as “a thicket of complicated rules” in 2007, “[t]he flawed implementation of the 2002 Sarbanes–Oxley Act (SOX), which produced far heavier costs than expected, has only aggravated the situation . . . .”[3] Later that year, in calling for changes in the implementation of section 404 rather than changes in section 404 itself, then-President George W. Bush said that “complying with certain aspects of the law, such as Section 404, has been costly for businesses and may be discouraging companies from listing on our stock exchanges . . . .”[4] The Heritage Foundation conducted a study in 2008 that showed major increases in the audit fees companies paid as a result of section 404.[5] The costs of implementing section 404 were many multiples of what the SEC had estimated.[6]

FDI is necessary for continued competitiveness and economic growth – it’s on a down side in the status squo Ikenson, 13 – director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, MA in Economics from the George Washington University and a BA in Political Science from Susquehanna University (Daniel J., “Policymakers Must Remove the Barriers to Foreign Investment in the United States”, Cato Institute, 10/30/13, http://www.cato.org/publications/commentary/policymakers-must-remove-barriers-foreign-investment-united-states)//KTCNo country has been a stronger magnet for foreign direct investment than the United States. Roughly 17 percent of the world’s $22 trillion stock of FDI is deployed in the U.S. economy — triple the stock in the next largest destination. With the world’s biggest economy, a skilled workforce, an innovative culture, and deep and broad capital markets, the United States has enormous advantages in the intensifying global competition to attract investment from the world’s best companies. But those advantages have been eroding. In 1999, the U .S. share of global FDI stood at 39 percent — a full 22 percentage points higher than today — and has been on a continuous down slide ever since. Economic growth, improved labor skills, greater business transparency, and political stability in emerging economies have made them more alluring investment destinations. Meanwhile, burgeoning regulations, policy incongruity, and lingering uncertainty about the business and political climates have reduced America’s appeal . “The United States has slipped considerably over the past decade in a variety of areas that directly impact investment decisions.” Positioned as it is at the technological frontier, the U.S. economy requires continuous investment to replenish the machinery, software, laboratories, research centers, and high-end manufacturing facilities that harness its human capital, animate new ideas, create wealth, and raise living standards. Over the years, foreign-headquartered companies have satisfied an important part of those investment requirements, bringing capital, know-how, and fresh ideas, while creating synergies by establishing new enterprises and acquiring existing U.S. firms. These U. S. affiliates of foreign-owned companies — call them “insourcing” companies — have punched well above their weight, cont ributing disproportionately to U.S. output, compensation, capital investment, productivity, exports, research and development spending, and other determinants of growth. As reported in a new study published by the Organization for International Investment, insourcing companies

represent less than 0.5 percent of U.S. companies with payrolls, yet they account for 5.9 percent of private-sector value added; 5.4 percent of private-sector employment; 11.7 percent of new private-sector, non-residential capital investment, and; 15.2 percent of private-sector research and development spending. They pay 13.8 percent of all corporate taxes; earn 48.7 percent more revenue from their fixed capital than the U.S. private sector average, and; compensate their employees at a premium of 22.0 percent above the U.S. private-sector average. Competitive jolts to established domestic firms, tech nology spillovers , and the hybridization and evolution of ideas also result from the infusion of foreign direct investment. One can only wonder whether the Detroit automakers would still be producing the likes of the Ford Pinto, the AMC Pacer, and the Chrysler K-Car had foreign nameplate producers not begun investing in the United States in the early 1980s, helping to reinvigorate a domestic industry that had fallen asleep at the wheel. The competition inspired the Big Three to improve quality and selection, and subsequent technology sharing within the industry has benefitted producers and consumers alike. No wonder policymakers are abuzz about attracting more insourcing companies to U.S. shores.

Jobs are the vital internal link to the economyDewan and Benhardt 11/5/12 (Sabina Dewan and Jordan Bernhardt - writers for the America Progress and research analysts, “Creating Just Jobs Must Be Our Top Priority” Center for American Progress, https://www.americanprogress.org/issues/labor/news/2012/11/15/45121/creating-just-jobs-must-be-our-top-priority/) CW“Our top priority has to be jobs and growth . We’ve got to build on the progress that we’ve made because this nation succeeds when we’ve got a growing, thriving middle class.” President Barack Obama started his press conference yesterday—his first since winning a second term—with those words in reference to the United States, but they apply equally to countries around the world. His choice to rhetorically place jobs before growth should not be overlooked. The world needs to focus first and foremost on job creation because jobs are necessary to drive shared and sustainable economic growth . Although job creation and economic growth are related, too often people falsely assume that if you create economic growth, the jobs will follow. But for the past several years, too many nations have seen economic growth without concomitant growth in employment. Creating just jobs—the sort that come with good pay , good benefits , and good working conditions , including the right to freedom of association and collective bargaining— is the key to growing the global middle class and creating the aggregate demand that we need to power the world economy. Without good pay, workers cannot become powerful consumers. And without the rights they deserve, workers lack the economic stability they need before making big investments in themselves, their children, and their societies. But it’s not just a problem facing the United States, which needs to add 9 million new jobs to accommodate those displaced by the Great Recession of 2007–2009 and new entrants into the labor market. The World Bank estimates that more than 200 million people around the world currently do not have a job but would like one. There are also 2 billion people, most of them women, who are of working age but are neither employed nor looking for work. By 2020 the world will need to create 600 million more jobs than there were in 2005 just to hold the employment-to-working-age population ratio constant. Creating jobs—and making sure they are the right jobs—will be how we lift millions of people out of poverty and into the middle class, how we empower billions of women and young people, and how we develop a strong, secure, and robust 21st century global economy . Access to jobs will be what determines whether or not the U nited S tates has a world of flourishing consumers to which to sell its goods and services. U.S. exports already support 7 percent of American jobs and 25 percent of U.S. manufacturing jobs are supported by exports. Creating

good jobs for people in other countries is a fundamental part of creating more jobs for Americans here at home. As the president sets out to create more jobs and revitalize economic growth in the United States, it is important to recognize that achieving our goals depends heavily on the world beyond our borders. The Just Jobs Network has long recognized the magnitude of the world’s employment challenge. We have pushed policymakers to elevate just job creation to a top priority in the United States and abroad, on domestic agendas as well as in arenas like the Group of 20 developed and developing nations. Just jobs are not only a driver of economic growth—they are also the vehicle through which economic growth is broadly shared to raise living standards worldwide . In committing to a domestic job creation agenda, the president must sign on to pushing an international one as well.

Economic decline causes war – studies proveRoyal ‘10 (Jedediah, Director of Cooperative Threat Reduction at the U.S. Department of Defense, 2010, Economic Integration, Economic Signaling and the Problem of Economic Crises, in Economics of War and Peace: Economic, Legal and Political Perspectives, ed. Goldsmith and Brauer, p. 213-215)Less intuitive is how periods of economic decline may increase the likelihood of external conflict . Political science literature has contributed a moderate degree of attention to the impact of economic decline and the security and defence behaviour of interdependent stales. Research in this vein has been considered at systemic, dyadic and national levels. Several notable contributions follow. First, on the systemic level. Pollins (20081 advances Modclski and Thompson's (1996) work on leadership cycle theory, finding that rhythms in the global economy are associated with the rise and fall of a pre-eminent power and the often bloody transition from one pre-eminent leader to the next . As such, exogenous shocks such as economic crises could usher in a redistribution of relative power (see also Gilpin. 19SJ) that leads to uncertainty about power balances , increasing the risk of miscalculation (Fcaron. 1995). Alternatively, even a relatively certain redistribution of power could lead to a permissive environment for conflict as a rising power may seek to challenge a declining power (Werner. 1999). Separately. Pollins (1996) also shows that global economic cycles combined with parallel leadership cycles impact the likelihood of conflict among major, medium and small powers, although he suggests that the causes and connections between global economic conditions and security conditions remain unknown. Second, on a dyadic level. Copeland's (1996. 2000) theory of trade expectations suggests that 'future expectation of trade' is a significant variable in understanding economic conditions and security behaviour of states. He argues that interdependent states arc likely to gain pacific benefits from trade so long as they have an optimistic view of future trade relations. However, if the expectations of future trade decline, particularly for difficult to replace items such as energy resources, the likelihood for conflict increases, as states will be inclined to use force to gain access to those resources . Crises could potentially be the trigger for decreased trade expectations either on its own or because it triggers protectionist moves by interdependent states.4 Third, others have considered the link between economic decline and external armed conflict at a national level. Mom berg and Hess (2002) find a strong correlation between internal conflict and external conflict, particularly during periods of economic downturn. They write. The linkage, between internal and external conflict and prosperity are strong and mutually reinforcing. Economic conflict lends to spawn internal conflict, which in turn returns the favour. Moreover, the presence of a recession tends to amplify the extent to which international and external conflicts self-reinforce each other (Hlomhen? & Hess. 2(102. p. X9> Economic decline has also been linked with an increase in the likelihood of terrorism (Blombcrg. Hess. & Wee ra pan a, 2004). which has the capacity to spill across borders and lead to external tensions. Furthermore, crises generally reduce the popularity of a sitting government. "Diversionary theory" suggests that, when facing unpopularity arising from economic decline, sitting governments have increased incentives to fabricate external military conflicts to create a 'rally around the flag' effect . Wang (1996), DcRoucn (1995), and Blombcrg. Hess, and Thacker (2006) find supporting evidence showing that

economic decline and use of force arc at least indirecti) correlated. Gelpi (1997). Miller (1999). and Kisangani and Pickering (2009) suggest that Ihe tendency towards diversionary tactics arc greater for democratic states than autocratic states, due to the fact that democratic leaders are generally more susceptible to being removed from office due to lack of domestic support. DeRouen (2000) has provided evidence showing that periods of weak economic performance in the United States, and thus weak Presidential popularity, are statistically linked lo an increase in the use of force. In summary, rcccni economic scholarship positively correlates economic integration with an increase in the frequency of economic crises, whereas political science scholarship links economic decline with external conflict al systemic, dyadic and national levels.' This implied connection between integration, crises and armed conflict has not featured prominently in the economic-security debate and deserves more attention.

Competitiveness prevent great power nuclear war Zalmay Khalilzad was the United States ambassador to Afghanistan, Iraq, and the United Nations during the presidency of George W. Bush and the director of policy planning at the Defense Department from 1990 to 1992, “ The Economy and National Security”, 2-8-11, http://www.nationalreview.com/articles/print/259024We face this domestic challenge while other major powers are experiencing rapid economic growth. Even though countries such as China, India, and Brazil have profound political, social, demographic, and economic problems, their economies are growing faster than ours, and this could alter the global distribution of power . These trends could in the long term produce a multi-polar world. If U.S. policymakers fail to act and other powers continue to grow, it is not a question of whether but when a new international order will emerge. The closing of the gap between the United States and its rivals could intensify geopolitical competition among major powers, increase incentives for local powers to play major powers against one another, and undercut our will to preclude or respond to international crises because of the higher risk of escalation. The stakes are high. In modern history, the longest period of peace among the great powers has been the era of U.S. leadership . By contrast, multi-polar systems have been unstable, with their competitive dynamics resulting in frequent crises and major wars among the great powers. Failures of multi- polar international systems produced both world wars . American retrenchment could have devastating consequences. Without an American security blanket, regional powers could rearm in an attempt to balance against emerging threats. Under this scenario, there would be a heightened possibility of arms races , miscalc ulation, or other crises spiraling into all-out conflict. Alternatively, in seeking to accommodate the stronger powers, weaker powers may shift their geopolitical posture away from the United States. Either way, hostile states would be emboldened to make aggressive moves in their regions. As rival powers rise, Asia in particular is likely to emerge as a zone of great-power competition. Beijing’s economic rise has enabled a dramatic military buildup focused on acquisitions of naval, cruise, and ballistic missiles, long-range stealth aircraft, and anti-satellite capabilities. China’s strategic modernization is aimed, ultimately, at denying the United States access to the seas around China. Even as cooperative economic ties in the region have grown, China’s expansive territorial claims — and provocative statements and actions following crises in Korea and incidents at sea — have roiled its relations with South Korea, Japan, India, and Southeast Asian states. Still, the United States is the most significant barrier facing Chinese hegemony and aggression. Given the risks, the United States must focus on restoring its economic and fiscal condition while checking and managing the rise of potential adversarial regional powers such as China. While we face significant challenges, the U.S. economy still accounts for over 20 percent of the world’s GDP. American institutions — particularly those providing enforceable rule of law — set it apart from all the rising powers. Social cohesion underwrites political stability. U.S. demographic trends

are healthier than those of any other developed country. A culture of innovation, excellent institutions of higher education, and a vital sector of small and medium-sized enterprises propel the U.S. economy in ways difficult to quantify. Historically, Americans have responded pragmatically, and sometimes through trial and error, to work our way through the kind of crisis that we face today.

1AC—Economy (Long) The US economy is stagnating and not self- sustainable Reuters, 4/29/15- News agency (Lucia Mutikani, “US economy stumbles in first quarter as weather, low energy prices weigh in”, Reuters, 4/29/15, http://www.reuters.com/article/2015/04/29/us-usa-economy-idUSKBN0NK08520150429)//KTCU.S. economic growth nearly stalled in the first quarter as harsh weather dampened consumer spending and energy companies struggling with low prices slashed spending. Gross domestic product expanded at an only 0.2 percent annual rate, the Commerce Department said on Wednesday. That was a big step down from the fourth quarter's 2.2 percent pace and marked the weakest reading in a year. A strong dollar and a now-resolved labor dispute at normally busy West Coast ports also slammed growth, the government said. While there are signs the economy is pulling out of the soft patch, the lack of a vigorous growth rebound has convinced investors the U.S. Federal Reserve will wait until late this year to start hiking interest rates. The recovery is the slowest on record and the economy has yet to experience annual growth in excess of 2.5 percent. "The U.S. economy has yet to demonstrate the self-sustaining resilience that the Fed wants to see before raising interest rates," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "A June liftoff is now off the table, our forecast for a September move holds but even that has become tenuous." Fed officials at the end of their two-day policy meeting on Wednesday acknowledged the softer growth, but shrugged it off as "in part reflecting transitory factors." The dollar hit a nine-week low against a basket of currencies. Prices for U.S. Treasury debt fell in line with a global bond sell-off, sparked by a poorly received five-year German bond auction. U.S. stocks were trading lower.

SOX destroys the economy (2) internal links

First, is Compliance Costs

Indirect and direct costs of compliance with SOC are higher than anticipated Lowenbrug, 05 –Ph.D. in Economics and Finance and adjunct faculty member in the School of Professional Studies and Business Education at Johns Hopkins University. Manager in the Network Industries Strategies group of the FTI Economic Consulting practice (Paul, “The Impact Of Sarbanes Oxley On Companies, Investors, & Financial Markets”, Sarbanes-Oxley Compliance Journal, 12/6/05, http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=1141)//KTCThe cost of SOX compliance comes with a high price tag. Companies face both direct (quantifiable) and indirect (non-quantifiable) costs such as increased D&O insurance premiums, higher directors fees as a result of greater time commitments and responsibilities, larger expenses related to internal control software and higher costs relating to consulting fees. Both types of costs have proven to be significantly higher than originally estimated by the Securities and Exchange Commission (SEC). Since SOX was passed, much has been written about the costs and benefits of corporate compliance -- specifically Section 404 which mandates an audit of internal accounting controls. Corporate America and the government agree that restoring investor confidence is in the best interest of the economy, publicly traded corporations, and investors; however, they disagree on the actual cost of SOX compliance. Investors know that final solution is to create a moral and ethical environment in which corporate wrongdoing cannot occur. Will SOX create this environment? Doubtful, however it can play a major role. Below is a discussion about the impact the high costs of compliance and potential long-term benefits to companies, investors and the U.S. financial markets. COST OF COMPLIANCE The direct and indirect cost of compliance can grouped into three sections: Costs related to increases in personal liability obligations; costs associated with internal control improvements; and costs to the U.S.

financial markets. Through new substantive requirements, increased penalties, and an increased emphasis on enforcement, SOX regulations have increased the risk that corporate officers and directors will be subject to personal civil and criminal liability. This risk results in increased legal fees; executive, board and officer compensation; insurance premiums and outsourcing costs to help monitor internal audits.

Section 404 high compliance costs generate lower job growth John, 11 – lead analyst on issues relating to pensions, financial institutions, asset building, and Social Security reform at the Heritage Foundation and Senior Fellow at the Heritage Foundation. Nonresident Senior Fellow at the Brookings Institution and as the Deputy Director of the Retirement Security Project. MA in Economics from The University of Georgia and MBA in Finance from the University of Georgia Terry College of Business (David C., “10 Years After Enron, Time to Throw Out Sarbanes–Oxley’s Section 404”, The Daily Signal, 12/02/11, http://dailysignal.com/2011/12/02/ten-years-after-enron-it-is-time-to-throw-out-sarbanes%e2%80%93oxley%e2%80%99s-section-404/?ac=1)//KTCExactly 10 years ago today, the Enron Corporation filed for bankruptcy after it was revealed that it had blatantly falsified its earnings statements for many years. Although most of the accounting irregularities that caused its collapse were already illegal, Congress overreacted and passed Sarbanes–Oxley, a massive and deeply flawed accounting reform law. A decade later, it is time for cooler heads to prevail, and to consider repealing Section 404. This onerous provision is supposed to ensure that the financial reports of publicly traded corporations meet certain standards, but in reality its major role is to greatly increase compliance costs. It continued presence discourages growing companies from going public to raise capital by imposing on them very high compliance costs in the name of protecting their shareholders. The result is lower job growth by these companies and fewer workers hired by new businesses. Congress partially recognized this in 2010 by granting an exemption to publicly traded companies whose stock is worth a total of $75 million or less, but this threshold is far too low, and questions remain if Section 404 is needed at all. Section 404 duplicates part of Section 302 and requires the management of any publicly traded company to produce an internal control report describing the scope and adequacy of its financial reporting procedures and internal financial control structures. The company is required to include this information in its annual report, send it to investors, and file it with the SEC. In addition, the company must produce “an assessment…of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.” In the same report, an outside auditor must both attest to and report on the management’s assessment of the effectiveness of the company’s internal controls and procedures. In short, Section 404 requires both an internal audit and external audit of financial accounting controls, which has turned out to be costly and time-consuming in practice.

Jobs are the vital internal link to the economyDewan and Benhardt 11/5/12 (Sabina Dewan and Jordan Bernhardt - writers for the America Progress and research analysts, “Creating Just Jobs Must Be Our Top Priority” Center for American Progress, https://www.americanprogress.org/issues/labor/news/2012/11/15/45121/creating-just-jobs-must-be-our-top-priority/) CW“Our top priority has to be jobs and growth . We’ve got to build on the progress that we’ve made because this nation succeeds when we’ve got a growing, thriving middle class.” President Barack Obama started his press conference yesterday—his first since winning a second term—with those words in reference to the United States, but they apply equally to countries around the world. His choice to rhetorically place jobs before growth should not be overlooked. The world needs to focus first and foremost on job creation because jobs are necessary to drive shared and sustainable economic growth . Although job creation and economic growth are related, too often people falsely assume that if you create economic growth, the jobs will follow. But for the past

several years, too many nations have seen economic growth without concomitant growth in employment. Creating just jobs—the sort that come with good pay , good benefits , and good working conditions , including the right to freedom of association and collective bargaining— is the key to growing the global middle class and creating the aggregate demand that we need to power the world economy. Without good pay, workers cannot become powerful consumers. And without the rights they deserve, workers lack the economic stability they need before making big investments in themselves, their children, and their societies. But it’s not just a problem facing the United States, which needs to add 9 million new jobs to accommodate those displaced by the Great Recession of 2007–2009 and new entrants into the labor market. The World Bank estimates that more than 200 million people around the world currently do not have a job but would like one. There are also 2 billion people, most of them women, who are of working age but are neither employed nor looking for work. By 2020 the world will need to create 600 million more jobs than there were in 2005 just to hold the employment-to-working-age population ratio constant. Creating jobs—and making sure they are the right jobs—will be how we lift millions of people out of poverty and into the middle class, how we empower billions of women and young people, and how we develop a strong, secure, and robust 21st century global economy . Access to jobs will be what determines whether or not the U nited S tates has a world of flourishing consumers to which to sell its goods and services. U.S. exports already support 7 percent of American jobs and 25 percent of U.S. manufacturing jobs are supported by exports. Creating good jobs for people in other countries is a fundamental part of creating more jobs for Americans here at home. As the president sets out to create more jobs and revitalize economic growth in the United States, it is important to recognize that achieving our goals depends heavily on the world beyond our borders. The Just Jobs Network has long recognized the magnitude of the world’s employment challenge. We have pushed policymakers to elevate just job creation to a top priority in the United States and abroad, on domestic agendas as well as in arenas like the Group of 20 developed and developing nations. Just jobs are not only a driver of economic growth—they are also the vehicle through which economic growth is broadly shared to raise living standards worldwide . In committing to a domestic job creation agenda, the president must sign on to pushing an international one as well.

Second, is FDI

Personal liability discourages market investment – high costs generate risk aversionLowenbrug, 05 –Ph.D. in Economics and Finance and adjunct faculty member in the School of Professional Studies and Business Education at Johns Hopkins University. Manager in the Network Industries Strategies group of the FTI Economic Consulting practice (Paul, “The Impact Of Sarbanes Oxley On Companies, Investors, & Financial Markets”, Sarbanes-Oxley Compliance Journal, 12/6/05, http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=1141)//KTCPersonal Liability Obligations Auditors now face additional costs that are passed on to corporate clients. For example, large accounting firms must undergo annual quality reviews, while smaller firms must undergo a review every three years. SOX’s requirement that audit partners must rotate every five years, and that outside auditors attest to and report on the management’s assessment of the internal controls of each issuer also increases auditor costs. Due to heightened political and legal risks associated with service as a CEO, CFO or board member, companies have been forced to increase compensation to lure executives into running a company under intense scrutiny. Finding suitable individuals has become an expensive undertaking and the fees for an executive search must be shared by companies, investors and customers. Companies additionally

face increased legal fees because boards must hire outside lawyers and consultants for advice on their expanded role and help minimize risk. With increased responsibility and accountability for directors and officers, D&O coverage has become more difficult to obtain and thus more expensive. For many companies, outsourcing the compliance procedure is a better alternative than managing the procedure with internal resources. Retaining a third-party helps ensure independence, achieve broader coverage, and compensate for a lack of internal expertise and staff availability. As a result of the increase in personal liability, companies may become more cautious and risk-adverse in the post-SOX environment and this is where indirect costs come into play. Many corporate officers and directors might be too fearful of personal liability to take business actions with risks. These individuals may decide that it is far better for a company to restrain its growth and produce steady profits than to take the risks associated with reaching for dominance in its market or entering entirely new areas of activity. This approach inevitably stifles innovation, and the economic growth of both the company and the economy. Costs associated with Internal Control Improvement In order to create strong internal controls, many companies must update and refurbish their existing information technology systems to allow standardization and integration throughout all applications company-wide. Time and money are limited resources for companies. Devoting time and money to SOX compliance can limit other activities for which those resources could have been used from research at a biotech plant, to analyst hiring at an asset management firm, to maintenance of an employee benefit program. Additionally, as companies scrutinize their internal controls and become more conscious of the process used to make decisions, they may become more risk-adverse and slower to seize opportunities . Some companies must pass their administrative costs of SOX compliance onto customers by increasing prices, thus making the company less competitive in the marketplace, especially to foreign competition not subject to SOX. Critics argue that although SOX has raised the level of disclosure, the readjustment of costs affects a company’s global competitiveness. Furthermore, the restraints from internal controls reduce the flexibility to respond to customer concerns.

SOX prevents companies from going public – decreases foreign and domestic investment in the market Lowenbrug, 05 –Ph.D. in Economics and Finance and adjunct faculty member in the School of Professional Studies and Business Education at Johns Hopkins University. Manager in the Network Industries Strategies group of the FTI Economic Consulting practice (Paul, “The Impact Of Sarbanes Oxley On Companies, Investors, & Financial Markets”, Sarbanes-Oxley Compliance Journal, 12/6/05, http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=1141)//KTC Conversely, fewer companies are willing to enter the market. SOX requirements make “going public” costly and the maintenance required to “stay public” prohibitively expensive, forcing companies to look elsewhere to raise capital. Foreign companies are also hesitant about the requirements that SOX regulations would impose and are reluctant to commit to the U.S. capital markets. U.S. institutional investors are becoming more willing to invest in foreign markets. For some, the benefits of being on a U.S. exchange may not outweigh the costs of U.S. legal and regulatory compliance (in addition to the typical international challenges of cultural and regulatory differences). For example, Porsche AG elected not to list shares on the NYSE, reportedly due to its objection to the certification of financial statements requirement of the SOX Act. In addition, SOX makes acquisitions of U.S. public companies by foreign entities more expensive. U.S. laws require registration of the foreign company shares with the SEC before the transaction can take place. Registration entails, among other things, full compliance with SOX. Therefore, if the foreign acquirer is not listed in the U.S. it will be difficult to issue its own shares to the selling shareholders of the U.S. firm.

SOX destroys foreign confidence in the US marketLyons et al 8 (Erin, School of IR at Ohio State, along with Dr. Richard Dietrich, Department of Accounting and Management Information Systems

and Dr. Anthony Mughan, Department of International Studies, “The Implications of the Sarbanes-Oxley Act for U.S. Foreign Relations”, Ohio State University Press, 2008)The international outrage toward Sarbanes-Oxley is best summarized by the following statement: “SOX reaches beyond the registration and disclosure requirements first established by the 1933 and 1934 Acts and forces foreign corporations to conform to a model of corporate governance crafted by the U.S. Congress.” 67 Those who object to the Act are wary of the increasing reach of the SEC and newly created PCAOB. International concern primarily stems from Section 106 and there is a call to allow foreign exemptions for those firms that are cross-listed on U.S. exchanges. 68 Many critics emphasize that they believe in the overall purpose of Sarbanes-Oxley , but do not support the tedious requirements now demanded of foreign corporations . Another common reaction to SOX is that many believe it was created to clean up the mess of scandals that occurred in the U.S. during 2002 and that foreign firms should not have to suffer the consequences of cleaning up the U.S. system. One source believes that

“extending this regulation beyond US firms is seen as an arrogant imposition from American regulators.” 69 The negative foreign opinion stems from the fact that U.S. firms gain the upper hand over international accounting firms who now must answer to multiple regulatory systems. Disapproval of SOX is especially prevalent in the European Union , where governments are currently trying to merge several economies, all with differing laws and regulatory bodies, into a single, unified EU economic system. 70 Sarbanes-Oxley essentially deepens this burden for the EU

and the U.S. could possibly face future repercussions from the EU if it were to unify. Answering to more than one accounting regulation system is an extreme disadvantage for foreign firms and representatives of the Big Four Accounting firms abroad have readily voiced their dissatisfaction with the new law. Aidan Walsh, an executive of KPMG International, has said that SOX has made it tricky for the firm to implement abroad and believes that “the Act was put together hastily and with little regard for the consequences to companies based outside of the US.” 71 A European partner at Price Waterhouse Coopers echoes a similar attitude toward SOX and explains international opposition by stating, “No one wants to be a copy of the US. If there is any country where something has gone wrong in the field of corporate governance, and accounting and capital markets, it’s the US .” 72 Consequently,

the international community is now beginning to wonder if the U.S. capital market is really the place to invest if companies are now forced to comply with a law that puts them at an inherent disadvantage in the marketplace. 73 In some ways, it is surprising that there is such

opposition abroad because foreign corporations have traditionally followed U.S. securities laws for years in the past. A careful look into the legal framework of securities regulation provides valuable insight into this apparent anomaly. Although the creation of Regulation S, as mentioned in the preceding section, calmed securities registration worries abroad, fraud regulation, despite the tests developed by the U.S. Courts, still creates unstable conditions in the international marketplace.

FDI is necessary for continued competitiveness and economic growth – it’s on a down side in the status squo Ikenson, 13 – director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, MA in Economics from the George Washington University and a BA in Political Science from Susquehanna University (Daniel J., “Policymakers Must Remove the Barriers to Foreign Investment in the United States”, Cato Institute, 10/30/13, http://www.cato.org/publications/commentary/policymakers-must-remove-barriers-foreign-investment-united-states)//KTCNo country has been a stronger magnet for foreign direct investment than the United States. Roughly 17 percent of the world’s $22 trillion stock of FDI is deployed in the U.S. economy — triple the stock in the next largest destination. With the world’s biggest economy, a skilled workforce, an innovative culture, and deep and broad capital markets, the United States has enormous advantages in the intensifying global competition to attract investment from the world’s best companies. But those advantages have been eroding. In 1999, the U .S. share of global FDI stood at 39 percent — a full 22 percentage points higher than today — and has been on a continuous down slide ever since. Economic growth, improved labor skills, greater business transparency, and political stability in emerging economies have made them more alluring investment destinations. Meanwhile, burgeoning regulations, policy incongruity, and lingering uncertainty about the business and political climates have reduced America’s appeal . “The United States has slipped considerably over the past decade in a variety of areas that directly impact investment decisions.” Positioned as it is at the technological frontier, the U.S. economy requires continuous investment to replenish the machinery, software, laboratories, research centers, and high-end manufacturing facilities that harness its human capital, animate new ideas, create wealth, and raise living standards. Over the years, foreign-headquartered companies have satisfied an important part of those investment requirements, bringing capital, know-how, and fresh ideas, while creating synergies by establishing new enterprises and acquiring existing U.S. firms. These U. S. affiliates of foreign-owned companies — call them “insourcing” companies — have punched well above their weight, cont ributing disproportionately to U.S. output, compensation, capital investment, productivity, exports, research and development spending, and other determinants of growth. As reported in a new study published by the Organization for International Investment, insourcing companies represent less than 0.5 percent of U.S. companies with payrolls, yet they account for 5.9 percent of private-sector value added; 5.4 percent of private-sector employment; 11.7 percent of new private-sector, non-residential capital investment, and; 15.2 percent of private-sector research and development spending. They pay 13.8 percent of all corporate taxes; earn 48.7 percent more revenue from their fixed capital than the U.S. private sector average, and; compensate their employees at a premium of 22.0 percent above the U.S. private-sector average. Competitive jolts to established domestic firms, tech nology spillovers , and the hybridization and evolution of ideas also result from the infusion of foreign direct investment. One can only wonder whether the Detroit automakers would still be producing the likes of the Ford Pinto, the AMC Pacer, and the Chrysler K-Car had foreign nameplate producers not begun investing in the United States in the early 1980s, helping to reinvigorate a domestic industry that had fallen asleep at the wheel. The competition inspired the Big Three to improve quality and selection, and subsequent technology sharing within the industry has benefitted producers and consumers alike. No wonder policymakers are abuzz about attracting more insourcing companies to U.S. shores.

Economic decline causes war – studies proveRoyal ‘10 (Jedediah, Director of Cooperative Threat Reduction at the U.S. Department of Defense, 2010, Economic Integration, Economic Signaling and the Problem of Economic Crises, in Economics of War and Peace: Economic, Legal and Political Perspectives, ed. Goldsmith and Brauer, p. 213-215)Less intuitive is how periods of economic decline may increase the likelihood of external conflict . Political science literature has contributed a moderate degree of attention to

the impact of economic decline and the security and defence behaviour of interdependent stales. Research in this vein has been considered at systemic, dyadic and national levels. Several notable contributions follow. First, on the systemic level. Pollins (20081 advances Modclski and Thompson's (1996) work on leadership cycle theory, finding that rhythms in the global economy are associated with the rise and fall of a pre-eminent power and the often bloody transition from one pre-eminent leader to the next . As such, exogenous shocks such as economic crises could usher in a redistribution of relative power (see also Gilpin. 19SJ) that leads to uncertainty about power balances , increasing the risk of miscalculation (Fcaron. 1995). Alternatively, even a relatively certain redistribution of power could lead to a permissive environment for conflict as a rising power may seek to challenge a declining power (Werner. 1999). Separately. Pollins (1996) also shows that global economic cycles combined with parallel leadership cycles impact the likelihood of conflict among major, medium and small powers, although he suggests that the causes and connections between global economic conditions and security conditions remain unknown. Second, on a dyadic level. Copeland's (1996. 2000) theory of trade expectations suggests that 'future expectation of trade' is a significant variable in understanding economic conditions and security behaviour of states. He argues that interdependent states arc likely to gain pacific benefits from trade so long as they have an optimistic view of future trade relations. However, if the expectations of future trade decline, particularly for difficult to replace items such as energy resources, the likelihood for conflict increases, as states will be inclined to use force to gain access to those resources . Crises could potentially be the trigger for decreased trade expectations either on its own or because it triggers protectionist moves by interdependent states.4 Third, others have considered the link between economic decline and external armed conflict at a national level. Mom berg and Hess (2002) find a strong correlation between internal conflict and external conflict, particularly during periods of economic downturn. They write. The linkage, between internal and external conflict and prosperity are strong and mutually reinforcing. Economic conflict lends to spawn internal conflict, which in turn returns the favour. Moreover, the presence of a recession tends to amplify the extent to which international and external conflicts self-reinforce each other (Hlomhen? & Hess. 2(102. p. X9> Economic decline has also been linked with an increase in the likelihood of terrorism (Blombcrg. Hess. & Wee ra pan a, 2004). which has the capacity to spill across borders and lead to external tensions. Furthermore, crises generally reduce the popularity of a sitting government. "Diversionary theory" suggests that, when facing unpopularity arising from economic decline, sitting governments have increased incentives to fabricate external military conflicts to create a 'rally around the flag' effect . Wang (1996), DcRoucn (1995), and Blombcrg. Hess, and Thacker (2006) find supporting evidence showing that economic decline and use of force arc at least indirecti) correlated. Gelpi (1997). Miller (1999). and Kisangani and Pickering (2009) suggest that Ihe tendency towards diversionary tactics arc greater for democratic states than autocratic states, due to the fact that democratic leaders are generally more susceptible to being removed from office due to lack of domestic support. DeRouen (2000) has provided evidence showing that periods of weak economic performance in the United States, and thus weak Presidential popularity, are statistically linked lo an increase in the use of force. In summary, rcccni economic scholarship positively correlates economic integration with an increase in the frequency of economic crises, whereas political science scholarship links economic decline with external conflict al systemic, dyadic and national levels.' This implied connection between integration, crises and armed conflict has not featured prominently in the economic-security debate and deserves more attention.

Exts. FDI Low FDI declining now, markets are being hamstringed – we assume their 2011 and 2010 studiesJackson, 13 – Specialist in International Trade and Finance (James K., “Foreign Direct Investment in the United States: An Economic Analysis”, Congressional Research Service, 12/11/13, Foreign direct investment in the United States dropped sharply in 2012 after rebounded slowly in 2010 and 2011 after falling from the $310 billion recorded in 2008. According to preliminary data, foreign direct investment in the United States in 2013 could fall by 10% below the amount recorded in 2012. (Note: The United States defines foreign direct investment as the ownership or control, directly or indirectly, by one foreign person [individual, branch, partnership, association, government, etc.] of 10% or more of the voting securities of an incorporated U.S. business enterprise or an equivalent interest in an unincorporated U.S. business enterprise (15 CFR §806.15 [a][1]). In 2012, according to U.S. Department of Commerce data, foreigners invested $166 billion in U.S. businesses and real estate, down 28% from the $230 billion invested in 2011. Foreign direct investments are highly sought after by many state and local governments that are struggling to create additional jobs in their localities. While some in Congress encourage such investment to offset the perceived negative economic effects of U.S. firms investing abroad, others are concerned about foreign acquisitions of U.S. firms that are considered essential to U.S. national and economic security.

AT: Alt Causes FDIAlt causes don’t take out the aff, even if there are multiple other reforms that could be done, focusing on some way to increase FDI is sufficient Ikenson, 14- director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, MA in Economics from the George Washington University and a BA in Political Science from Susquehanna University (Daniel J., “More and Better Foreign Direct Investment”, Cato Institute, November 2014, http://www.cato.org/publications/cato-online-forum/more-better-foreign-direct-investment)//KTCThere is probably no single elixir to reverse the declining long-term U.S. growth rate. Getting significantly more mileage out of our labor and capital likely will require a variety of reforms. Among them should be measures that expand the potential for economies of scale, such as deepening global economic integration through harmonization of regulations and standards, removing tariffs on industrial inputs and final goods, and eliminating barriers to services trade. Two “mega-regional” trade negotiations that could yield that outcome are currently in progress. But the priority developed in this essay is for policymakers to focus on making the United States a more attractive location for foreign direct investment. The United States is competing with the rest of the world for investment in domestic value-added activities, and foreign providers of that capital have demonstrated the capacity to raise averages across a variety of economic metrics, including GDP.

FDI is key to the US economy, regulations are prevent investment, the aff is sufficient to drive an increase Ikenson, 14- director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, MA in Economics from the George Washington University and a BA in Political Science from Susquehanna University (Daniel J., “More and Better Foreign Direct Investment”, Cato Institute, November 2014, http://www.cato.org/publications/cato-online-forum/more-better-foreign-direct-investment)//KTCLast year, the Global Investment in American Jobs Act of 2013 was passed in the House of Representatives. The Senate has not yet considered the bill, but one of its cosponsors, Senator Bob Corker (R-TN), remarked: “If we want the U.S. to be the very best place in the world to do business, we need to take a close look at what we’re doing right, what we’re doing wrong and how we can eliminate barriers that diminish investment in the U.S.” The “Findings” section of the legislation states the importance of foreign direct investment to the U.S. economy , acknowledges that the U .S. share has been declining in the face of growing competition from other countries , and calls for a comprehensive assessment of the policies that both repel and attract foreign investment. The bill’s premise is that U.S. policy and its accumulated residue have contributed to a business climate that might be deterring foreign investment in the United States, and that changes to those policies could serve to attract new investment. Whether through this bill or some other vehicle, the concept of a comprehensive policy audit to identify the most fruitful reforms followed by quick implementation makes good sense. Considering that the United States has the highest corporate tax rate among OECD countries and an extraterritorial system that subjects corporate earnings abroad to punishingly high rates upon repatriation, tax reform would likely make the list. The Peterson Institute’s Gary Hufbauer and Martin Vieiro argue in a recent paper that “[r]educing the U.S. corporate tax rate is certainly the most efficient way to encourage domestic investment and associated gains in production and jobs.” Investment deterrents can be found in the millions of pages of the U.S. Code and the Federal Register. According to the Competitive Enterprise Institute, the cost of compliance with federal regulations reached $1.863 trillion in 2013 . In January 2011, President Obama issued Executive Order 13563 under the heading “Improving Regulation and Regulatory Review.” Section 1 states: “Our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness and job creation. It must be based on the best available science. It must allow for public participation and an open exchange of ideas. It must promote predictability and reduce uncertainly. It must identify and use the best, most innovative, and least burdensome tools for achieving regulatory ends. It must take into account benefits and costs, both quantitative and qualitative. It must ensure that regulations are accessible, consistent, written in plain

language, and easy to understand. It must measure, and seek to improve, the actual results of regulatory requirements.” Certainly, a comprehensive audit would identify regulatory overkill as an important impediment to investment . President Obama (or his successor) should be prepared to reissue Executive Order 13536, but with a much greater sense of urgency and seriousness, including external reviews with goals and firm deadlines included. If incoherent U.S. energy policies — policies that leaves investors guessing about whether and to what extent gas and oil exports will be restricted next year or the year after, and about whether solar energy will be subsidized or taxed in 2015 — are found to be deterring investment, policy remedies must be implemented. If U.S.-based producers are disadvantaged by higher production costs than their foreign competitors on account of the customs duties they must pay for raw materials and components, permanently eliminating all duties on production inputs should be an option on the table. If a dearth of skilled workers is cited as an investment deterrent, the spotlight should be shone on U.S. education and immigration policy failures with the goal of finding the right solutions. If liability risks on account of wayward class-action suits and legal system abuses are keeping investors at bay, major tort reform should be seriously considered. Foreign d irect investment is a verdict about the efficacy of a country’s institutions, policies, and potential . Given the importance of FDI to economic growth , understanding its determinants and crafting policy accordingly is a matter of good governance and common sense.

FBI Advantage This advantage is not great, but it is designed to get you to impacts other than the economy and competitiveness

There is a lot of interaction between this advantage and the fraud DA (this is the link turn)

1AC—FBI Advantage StemSOX regulations are ineffective—they don’t prevent fraud and crush market self-regulationKuschnik 8 - Bernhard Kuschnik is a legal clerk at the Landgericht (Regional Court) in Düsseldorf, Germany; First State Exam in Law (Higher Regional); LL.M. (University of Aberdeen, Scotland, UK), and PhD Candidate at the Eberhard Karls University of Tübingen, Germany. (“THE SARBANES OXLEY ACT: “BIG BROTHER IS WATCHING YOU” OR ADEQUATE MEASURES OF CORPORATE GOVERNANCE REGULATION?” http://businesslaw.newark.rutgers.edu/RBLJ_vol5_no1_kuschnik.pdf 2008) STRYKER***MODIFIED FOR OBJECTIONABLE LANGUAGE***Finally, SOX declares the state as being the overall watchdog of corporate governance. Section 107(a) provides the SEC with oversight and enforcement authority over the Board .89 If a company chooses to introduce a new governance rule, it has to ask the SEC if the new rule is consistent with SOX before the new provision can be deemed effective.90 The Board is required to “promptly file any notice with the Commission of any final sanction on any registered public accounting firm or on any associated person thereof,”91 and has the final word regarding the gravity of disciplinary action against the outside auditor.92 Under certain circumstances the SEC is also able to amend the rules of the Board.93 Furthermore, SOX not only patronizes the decisions of the Board, but of shareholders as well. According to § 107(d) of SOX, the SEC has the authority to “relieve the Board of any responsibility to enforce compliance with any provision of this Act, the securities laws, the rules of the Board, or professional standards,” and to censure and limit the activity of the Board if it has violated SOX without reasonable justification. If it is “in the public interest” or “for the protection of investors” the SEC even has the power to remove directors from office.94 This scope of authority is justified with the assertion that the shareholder is not able to effectively enforce [their] his rights on [their] his own. Since this is seen as a “failure of the market,” there is a need for governmental regulation, which is achieved by a mix of paternalism95 and the call for “shareholder empowerment.” The latter is supposed to be realized by giving shareholders greater rights for the election to the Board of Directors.96 Yet, it is questionable if the SOX and SEC strategies turn out to be effective . Managers would face discipline not only through the dynamics of the market for corporate control, but also internally through shareholder action.97 And small investors, as Pettet illustrates, are very often not interested in participating in the decision making process because the amount of prospective profit compared to the required effort is disproportionate,98 whereas institutional investors who have great influence in the decision making process will probably not like the enhanced decision making power of SEC because it undermines their own virtual rights. Hence, it is questionable if market self-regulatory processes are not more desirable . Small investors , in other words, can rely on “ self help remedies ” such as derivative suits . Also, the market is able to react via hostile takeover mechanisms .99

GO TO FOOTNOTE 9999 Ribstein, supra note 4, at 5, 56 (noting that there is a problem of hostile takeover self regulating approaches due to the extensive federal regulation ). In 1968 the Williams Act was put into force, which imposed disclosure requirements on bidders and required them to structure their bids to give incumbent directors time to defend. Id. The adoption of SEC Rule 14(e)-4 which covered disclosures of information about impending acquisition makes it even harder to go for hostile takeover approaches .

BACK TO TEXTYet, the government chose to rely on governmentally steered countermeasures, which destroys initial market regulation .

Market solutions are key to prevent fraudRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER

The above discussion shows that regulatory responses to corporate fraud are unlikely to do much good and may do harm . At the same time, it seems clear that the frauds have increased the general level of market risk and accordingly reduced market valuations, other things, including corporate earnings, remaining constant. Since

markets seem to have failed, regulation might seem to be worth trying even if it is unlikely to help. But before adopting regulatory solutions it is necessary to consider the feasibility of market-based responses . Part IV shows that market-based approaches have high prospects of success now that the risks of defective accounting have become as obvious to investors as they have become to politicians and regulators. Indeed, it was markets and not regulators that uncovered the problems and adjusted the share prices of offending companies, while years of regulation of securities disclosures and membership of boards of directors failed to prevent the frauds . In other words, dishonest insiders were able to outrun the kinds of monitors that regulators favor, but not, ultimately, the markets . If markets can react, there are significant benefits to allowing them to do so.

Market actors are likely to be better informed and motivated than regulators. Markets also lead to a variety of competing solutions. As long as these

solutions are evaluated in liquid securities markets, the most efficient solutions are likely to dominate, and firms can pick the approaches that best suit their particular circumstances. A political or regulatory approach will pick a particular solution that may not be the most efficient overall for the reasons discussed in Part Ill.D, and may be unsuitable for many firms. Although market responses are likely to be imperfect, it is necessary to compare market with regulatory imperfections, rather than unrealistically assuming that only markets are flawed . Moreover, it is important to keep in mind that markets have been constrained by past regulation, particularly regulation of takeovers and of insider trading. Although repeal of this regulation may be

politically infeasible amid calls for more regulation of the securities markets, it is worth reflecting on the contribution of past regulation to current problems when considering whether additional regulation is appropriate.

High profile fraud diverts resources from FBI counterterrorism divisionsDubner 9 - Stephen J. Dubner is an American journalist who has written four books and numerous articles. Dubner is best known as co-author of Freakonomics. (“Did Anti-Terror Enforcement Help Fuel the Financial Meltdown?” http://freakonomics.com/2009/01/06/did-anti-terror-enforcement-help-fuel-the-financial-meltdown/ 1/6/2009) STRYKERThe Times (of London) recently reported that “The F.B.I. has been forced to transfer agents from its counter-terrorism divisions to work on Bernard

Madoff‘s alleged $50 billion fraud scheme.” This might lead you to ask an obvious counter-question: Has the anti-terror enforcement since 9/11 in the U.S. helped fuel the financial meltdown? That is, has the diversion of resources, personnel, and mindshare toward preventing future terrorist attacks — including, you’d have to say,

the wars in Afghanistan and Iraq — contributed to a sloppy stewardship of the financial industry? The Times (of New York) followed with an article by Eric Lichtblau that at least partially answered the

question: Federal officials are bringing far fewer prosecutions as a result of fraudulent stock schemes than they did eight years ago, according to new data, raising

further questions about whether the Bush administration has been too lax in policing Wall Street. Legal and financial experts say that a loosening of enforcement measures, cutbacks in staffing at the Securities and

Exchange Commission, and a shift in resources toward terrorism at the F.B.I. have combined to make the federal government something of a paper tiger in investigating securities crimes. At a time when the financial news is being dominated by the $50 billion Ponzi scheme that Bernard L. Madoff is accused of running,

federal officials are on pace this year to bring the fewest prosecutions for securities fraud since at least 1991, according to the data, compiled by a Syracuse University research group using Justice Department figures. The degree of cause and effect here is an obviously broad and perhaps unanswerable question. Part of the problem is that we’ll never know how much something like “security theater” may prevent an actual attack. Furthermore, just as it is hard to prove a negative in general, it is hard to prove that, e.g., a terrorist attack didn’t happen because of certain preventive measures. What we do know, however, is that

governments in particular have a hard time focusing on more than a few big problems at once , so I don’t think it’s unreasonable to suspect that the anti-terror focus of the past several years has meant that less attention was paid to far more typical issues like financial fraud, etc.

Exts. Regulations FailOne of the largest fraud schemes occurred after SOX – SEC couldn’t stop it Kennedy, 12 – Writing for Senior Honors Thesis in Accounting (Kristin A., “An Analysis of Fraud: Causes, Prevention, and Notable Cases”, University of New Hampshire Scholar’s Repository, Fall 2012, pdf)//KTC V. Recent Case of Fraud The Sarbanes-Oxley Act has proven to be somewhat successful, but there have still been significant cases of fraud since it was enacted in 2002. Even with the act in place,

audits are still only performed on a sample basis, so there is always the possibility that fraud will not be uncovered. Also, considering the nature of fraud, it is often harder to discover than errors because it is intentional. Someone is actively trying to hide it from the auditors and other employees of the company. a. Bernie Madoff Ponzi Scheme Bernard Madoff, typically referred to as Bernie Madoff, began working as a lifeguard on Long Island in his early years. Following his graduation from Hofstra University and a brief stint at Brooklyn Law School, Madoff started Bernard L. Madoff Securities LLC on Wall Street in 1960 with the money he had saved from lifeguarding (topics.nytimes.com). Over the next four decades, Madoff turned into a trading powerhouse, gaining much notoriety on Wall Street throughout his long career. However, on December 11, 2008, Bernie Madoff was arrested for running the largest Ponzi scheme in history. A Ponzi

scheme is a fraudulent investment operation in which 39 investors are paid returns from either their own money or that of other investors. Although these schemes can go on for a very long time, they will eventually collapse due to the fact that the actual earnings (if there even are any) are less than those being paid to investors. At the time the scandal was uncovered, the investor statements to Madoff’s clients totaled almost $65 billion. However, it has since been revealed that only about $17.3 billion of this had actually been legitimate (topics.nytimes.com). The scheme had been going on for around 20 years by the time it was uncovered. On March 12, 2009, Bernie Madoff pleaded guilty to all 11 federal felony charges against him (topics.nytimes.com). These included charges of securities fraud, money laundering, and perjury. Madoff was eventually sentenced to 150 years in prison, with the judge stating his crimes were “extraordinarily evil”. In the wake of the scandal, over 1,000 lawsuits have been filed in the U.S. Lawsuits totaling around $15.5 billion were settled with various banks outside the U.S. in May of 2010 (topics.nytimes.com). Irving H. Picard is the court-appointed trustee representing Madoff’s victims in the U.S. At first he was seeking $100 billion in damages, but it has since become clear that it will be a feat to even recover the $17.3 billion originally invested. It was ruled by a federal judge that Picard cannot file claims against banks or other third parties on behalf of the victims, so the $20 billion sought from JP Morgan Chase, UBS, and HSBC will not be recovered (topic.nytimes.com). So far, around $9 billion has been recovered, but only around $330 has actually been paid to victims due to pending appeals holding up the other funds. Much of the lawsuits involve recovering funds from “net winners”, investors who came out with more than what they originally invested, and paying it to “net losers”, investors who ended up with less than they originally invested. The largest example of this was when New York Mets owners Fred Wilpon and Saul Katz settled at $162 million (topics.nytimes.com). There had also been a 40 willful blindness claim involved, stating they knew fraud was occurring but they did not act because of the large sums they were receiving. This claim was dropped by Picard upon reaching the settlement.

There was plenty of evidence fraud existed, but investigations failed Kennedy, 12 – Writing for Senior Honors Thesis in Accounting (Kristin A., “An Analysis of Fraud: Causes, Prevention, and Notable Cases”, University of New Hampshire Scholar’s Repository, Fall 2012, pdf)//KTC Eventually, it became clear that there was evidence of the fraud long before it was uncovered. The SEC released a report with the findings that they had received six substantive complaints since 1992, but that each investigation had failed due to lack of due diligence 41 (topics.nytimes.com). It was also revealed that JP Morgan Chase had

suspicions for up to 18 months prior to the discovery, but had continued to do business with Madoff. When analyzing the fraud triangle elements with regards to the Bernie Madoff’s ponzi scheme, it is clear that opportunity existed because he was the head of the company.

Although others had suspicions, no one seriously question him, allowing his scheme to go on for years. The motivation behind the fraud was to continue to making the company look successful in order to gain more clients and allow his vast personal income to continue. However, Madoff was forced to forfeit $170 million in personal assets following his criminal trial. Madoff may have rationalized that the investors were at least getting their returns for now and he would be able to reach the reported assets

eventually, so why destroy the company when it could be resolved in the future. That was very unlikely though, considering was a nearly $50 billion difference between actual and reported assets.

Regulations and monitoring are badRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERIn Enron and other notorious recent fraud cases, many levels of market and monitoring devices simultaneously failed . Proregulatory theorists argue that this demonstrates that securities markets cannot be trusted to work on their own

without strong regulatory support and that new regulation is needed to restore investor confidence.

However, this Article has shown that the case for significantly increased regulation has not been made. While Enron exposed gaps in the existing monitoring structure, the benefits of eliminating those gaps are not as clear as they might seem to be. The substantial existing regulatory framework was breached by aggressive outsiders who seemed determined to ignore the risks of their actions, including their personal exposure to punishment. Promoting more independent monitors with lower-powered incentives to scrutinize the actions of highly informed and motivated insiders cannot solve this problem . Moreover, the costs of increased regulation could be significant. On the one hand, the Act may reduce the incentives of both insiders and monitors to increase

shareholder value. Even if the Act is ineffective, as this Article suggests may be the case, the Act could cause harm simply by misleading the market that regulation can solve its problems . 377 In fact, as history has often shown, from the South Sea Bubble 378

to the Great Crash, 379 market abuses manage to stay one step ahead of the regulators. The endless cycle of boom-bust-regulation accomplishes little in the long run. Finally, even if some highly sophisticated and nuanced regulation theoretically could increase social

welfare, it is not likely that this type of reform will arise out of the present highly charged political environment. Markets are capable of responding more quickly and precisely than regulation to corporate fraud, as long as regulation does not impede or mislead them. Although markets will remain imperfect , the potential for a market response, combined with the likely costs of regulation, make the case for additional regulation dubious.

SEC monitoring is ineffective and badRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERThis Article argues that, despite all the appearances of market failure, the recent corporate frauds do not justify a new era of corporate regulation . Indeed,

the fact that the frauds occurred after seventy years of securities regulation shows that more regulation is not the answer. 10 Rather, with all their imperfections,

contract and market-based approaches are more likely than regulation to reach efficient results. Post-Enron reforms, including Sarbanes-Oxley, rely on increased monitoring by independent directors, auditors, and regulators who have both weak incentives and low-level access to information. This monitoring has not been , and cannot be, an effective way to deal with fraud by highly motivated insiders. Moreover, the laws are likely to have significant costs, including perverse incentives of managers, increasing distrust and bureaucracy in firms, and impeding information flows. The only effective antidotes to fraud are active and vigilant markets

and professionals with strong incentives to investigate corporate managers and dig up corporate information.

Regulations don’t solve—the cause isn’t greed and regulations are ineffectiveRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERIn order to fix the markets, it is necessary to understand why the insiders who

pulled accounting scams at major public corporations thought they could get away with them in efficient and regulated securities markets. A thorough understanding of the perpetrators'

motives would seem to be essential in designing regulation that has a significant chance of preventing future frauds. It is too simplistic to ascribe these frauds to "greed" without accounting for the risk of detection . Notably, in contrast to notorious crooks such as Robert

Vesco, none of the main characters in the recent scandals tried to flee. Moreover,

the alleged perpetrators were not shady criminals but seemingly responsible business people who had earned the trust of their, even more respectable, monitors. For example, Scott Sullivan, who is accused of manipulating WorldCom's books in order to meet

earnings targets, was regarded as "one of the best chief financial officers around" and "the key to WorldCom Inc.'s financial credibility."' 130 How could such a man have engaged in large-scale financial manipulation if this is proved to be the case? Similar questions arise regarding the seemingly more blatant behavior of some Enron

insiders, particularly Andrew Fastow. Indeed, the insiders' conduct seems particularly puzzling, at least at first glance, given agents' usual incentives. Since agents bear severe penalties in firms if they fail, including loss of job and reputation, but normally do not get the full benefit of success, it follows that they would tend to be more cautious than their employers would want them to be, rather than the reverse. To begin with, there is a large literature on judgment biases that lead at least some people to tend to be more optimistic about the future and more confident in their judgment and ability to control future events, than

would an actor who objectively processed the relevant data. 13 1 For example, traders generally overestimate their ability to judge the true value of the company-i.e., the value of their private information. 132 These biases may be bolstered over time by the self-esteem-maximizing device of emphasizing positive returns as an indication of ability and downplaying trading losses as irrelevant.133

Moreover, even rational people arguably would be more likely than a third party observer to attribute their own failures to luck and their own successes to skill given their tendency to select actions they think will be successful. 134 Actors' judgment biases may depend somewhat on their self-esteem, in the sense that those with the highest self-esteem are the most likely to misjudge their control and skill. But managers' attributes in this respect are not randomly distributed. Donald Langevoort argues that successful firms tend to reward and promote a particular type of individual-one who is highly, perhaps unrealistically, optimistic about the firm's prospects, confident in his abilities, 13 5 seemingly loyal to the firm and its senior

management, and distrustful of outsiders. 1 36 These judgment biases and miscalculations might be enhanced by external cues. In particular, legal rules hold that managers are better able to judge the value of their companies than markets . This view emerges most clearly in cases involving takeovers or sale of the company, in which courts have given managers the power to defend against above-market-value takeovers. 137 The courts' acceptance of managers' arguments that market prices are systematically too low is particularly striking given managers' power to release positive information and ability to delay the

release of negative information. The law's disregard of markets may have helped confirmed managers' beliefs that their actions were benefiting the firm, regardless of what markets, or earnings, might be saying at the moment. The above story seems to fit some recent corporate frauds. New methods of doing business such as the provision of alternative markets (Enron), consolidation of long distance telephone service (WorldCom), or the power of downsizing (Sunbeam) produced initial successes and high market valuations based on optimistic estimates of future earnings. Stock prices built on hope were highly susceptible to negative earnings shocks,

providing an incentive to prevent these shocks at all costs. Hypermotivated and superoptimistic insiders might be able to persuade themselves that any setbacks were temporary, so that cover-ups need only work for a little while to be successful. On the one hand, they might conclude that markets that spiked in defiance of modest, or no, earnings confirmed their firms' high inherent value, and therefore the validity of their business plans. On the other hand, stocks that fell on bad earnings did not reflect even publicly available information about the firms' abiding value. Thus, hyperoptimistic insiders might be able to convince themselves that earnings manipulations "corrected" the market's misimpressions of their companies. But even these misjudgments do not seem fully to explain why insiders would risk jail and loss of all of their wealth and future business prospects by engaging in fraud that a rational person would surely realize was likely to be detected, all without apparently having a Vesco-type end game strategy. It has been argued that, once having begun their conduct, insiders managed to deceive themselves that their actions were right. 138 But surely at some point insiders would realize that the probability discounted cost of severe sanctions outweighs the potential benefit. Indeed, it would seem that insiders who disregarded the risk of punishment because they were convinced they were right were behaving altruistically rather than greedily. The solution to the puzzle may lie in the shift of agent incentives that occurs when agents perceive the risk that they may lose everything. This is probably before the agents have committed any wrongdoing, which helps explain why they would engage in wrongdoing in the first place. Insiders face punishment in the form of job and reputation loss even for lawful conduct that fails to meet investor expectations-that is, for their firm's failure to meet investors' earnings expectations. 139 At this point insiders may enter a final period in which they are no longer susceptible to potential discipline by their firms or the employment market because failure to distort earnings also will result in loss of their job and reputation . 140 Since insiders are convinced that they are doing the right thing in defending their company's value from destruction by misguided markets, they are also not subject to a significant moral constraint. As soon as insiders begin engaging in fraud, their incentives change. At this point, insiders risk loss of wealth and even personal freedom unless they continue the cover-up. Indeed, the consequences of discovery may be so severe that even a small chance of success might lead a rational actor to cover up. This calculus may be reinforced by a psychological tendency to prefer risk when choosing between present loss and a chance to avoid loss. 14 1 This brief summary should be enough to indicate that strong measures may be necessary to significantly reduce the risk of future fraud. Insiders who think that they are doing the right thing may be harder to detect and deter than those who are simply greedy. Deterrence that is effective also may be very costly . Moreover,

given the shift in incentives discussed above when the end seems near, increasing punishment may actually increase the risk of a cover-up , even as it has little effect on the fraud itself. All of this suggests significant uncertainty about how best to craft the law to prevent future frauds.

Regulations and independent monitoring failsRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER

As discussed in Part II.A, corporate reformers have emphasized independent directors as a way to curb insider abuse. However, the emphasis on the monitoring board over the last thirty years has demonstrated the inherent limitations on independent directors' effectiveness . Myles Mace, in his famous

1971 study of directors, summarized these limitations as constraints on time, information, and inclination to participate effectively in management. 166 Outside directors lack the time to do more than review, rather than make, business decisions. They also must depend on insiders for critical information. With respect to inclination,

independent directors traditionally are nominated by insiders and, in any event, generally are selected from the business community to ensure that they will have adequate expertise and, therefore, usually will be unwilling to second guess managers. Not surprisingly, board independence has done little to prevent past mismanagement and fraud . For example, thirty years ago the SEC cast much

of the blame for the collapse of the Penn Central Company on the passive nonmanagement directors. 167 No corporate boards could be much more independent than those of Amtrak, which have managed that company into chronic failure and government dependence. Enron had a fully functional audit committee operating under the SEC's expanded rules on audit committee disclosure. 168 The substantial data on boards of directors that has been compiled over the last twenty years offers little basis for relying on regulation of board composition as the solution to corporate fraud. 169 The evidence shows that there is no overall positive relationship between various measures of firm welfare, including earnings, Tobin's q, and stock price, and the degree of independence of corporate boards. 1 70 While there is evidence that independent boards may be better at some tasks, such as removing poorly performing managers, 171 there is also evidence that independent directors are correlated with worse corporate performance . 172 This evidence indicates that insiders may have some value on boards, perhaps in adding important expertise. 1 73 In general, firms seem to be making the right decisions as to how much board independence is appropriate. If anything, evidence of a negative correlation between corporate performance and board independence may indicate that, even prior to the post-Enron regulation, corporations were being forced to err on the side of independence. 1 74 This data does not necessarily mean that board independence is irrelevant to corporate fraud. First, independent directors arguably are better at certain types of decisions, perhaps including supervising their firms' financial disclosures and relationships with auditors. Enron and related scandals arguably make the data cited above obsolete because they uncovered pervasive fraud that increases the need for this type of supervision. Second, although the overall proportion of independent directors may not affect corporate performance, the independence of certain "trustee" committees such as audit, nominating and compensation committees, may be particularly important. 175 Third, post-Enron regulation might usefully tweak the definition of independence so that it precludes at least some directors, particularly those on

sensitive "trustee" board committees, from receiving favors such as donations to pet charities with which insiders can buy director loyalty. 176 For example, Ross Johnson at RJR-Nabisco sought to buy board member Juanita Kreps by endowing two chairs at her school, Duke, one of them named after Kreps.1 77 Nevertheless,

it seems unlikely that a relatively minor donation could influence a director with a strong reputation to protect. Even given these caveats, more independence is not necessarily correlated with better monitoring . In order to avoid suspect relationships and connections, corporations may have to appoint more directors from outside the business community. Board members such as law professors, 178 with little hands-on business experience and no formal connection with a company may not be sophisticated enough to spot problems or be able or willing to stand up to a powerful executive. Moreover,

there are significant limits on what even the best audit committee can do if,

as is typically the case, it meets only a few times a year. 179 These problems of board independence may be exacerbated by other proposals to reform the board, particularly including proposals to have directors represent multiple

constituencies in the company, such as workers, rather than the shareholders exclusively. 180 Encouraging or requiring directors to focus on goals other than financial performance increases the risk that directors will miss signs of misbehavior, if only because of the limitations on directors' time discussed above. Directors who are specifically selected to represent particular constituencies may be useless in protecting against insider fraud because of their lack of business sophistication or their interest only in looking after a particular constituency. 18 1 To be sure, firms might minimize these problems by delegating financial monitoring to a specific audit committee that is focused on this task. But even in this situation, a multiconstituency board might interfere with monitoring by nominating financially unsophisticated directors or by impeding full disclosure to and discussion by the full board.

182 It has been argued that, other things being equal, independent directors would be more attentive to corporate interests if they held stock in their companies. 183 Indeed, there is evidence that firms with independent boards that get incentive compensation are

more likely to fire bad managers. 184 On the other hand, the WorldCom directors were heavy investors in WorldCom, having received both their stock and board memberships in WorldCom's earlier acquisitions of MCI and other companies.185

Government auditing failsRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERFor present purposes, the more serious issue is whether even strong regulation will change auditors' practical ability to find corporate fraud when determined corporate insiders want to hide it. In the wake of the WorldCom disclosure, an accounting expert pointed out that accountants do not do "forensic audits" designed to uncover wrongdoing, but rather only sampling audits that may entirely miss the problem. 20 2 The AICPA draft standard on auditing for fraud observes that "[i]dentifying individuals with the requisite attitude to commit fraud, or recognizing the likelihood that management or other employees will rationalize to justify committing the fraud, is difficult. ' 20 3 The draft notes that "[c]haracteristics of fraud include concealment through (a) collusion by both internal and third parties; (b) withheld, misrepresented, or falsified documentation; and (c) the ability of management to override or instruct others to override what otherwise 20 4 appear to be effective controls." To be sure, there is much auditors can do to spot fraud, including developing cross- check procedures and identifying risky situations, as is made clear by the extensive discussion in the AICPA's Exposure Draft.205 However, requiring auditors to do significantly more than they are doing now may involve more than just changing their incentives and making them more independent, but also may involve changing the basic scope of what they do. The benefits of increased auditing may not exceed the costs . If investors cannot rely on auditors to find fraud, it is even less realistic for them to rely on government regulators . Sarbanes-Oxley establishes a Public Company Accounting Oversight Board to scrutinize auditors. 20 6 However, as indicated by the controversy over picking the chair of the board,20 7 simply designating a new regulatory overseer is unlikely to be a panacea. Sarbanes-Oxley also instructs the SEC to increase its review of financial statements and increases the SEC's budget.20 8 However, the SEC faces formidable problems in monitoring for fraud . 20 9 The SEC is charged with a wide range of tasks in addition to spotting fraud in financial statements, including oversight of securities firms, exchanges, investment advisors, and mutual funds, and of market trading, including insider trading. Its staff is perennially too small for these mammoth 210 tasks. Sarbanes-Oxley hopes to enlist others to help in the fight against fraud. Lawyers will now be required to report "evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent" to executives and possibly to the board.2 11 The Act also includes strong protection for whistleblowers. 2 12 As

discussed below in Part llI.C, these rules may be costly because they inhibit efficient information flows within the firm and perversely affect the relationship

between corporations and their lawyers. The main point for present purposes is that these rules are also ineffective for purposes of uncovering fraud. Those involved in a fraudulent scheme are unlikely to discuss it with nonparticipants. The new rules may inhibit even innocuous conversations that might have helped indirectly in uncovering frauds by making them fodder for federal litigation and investigations.

SEC tactics are retroactive—can’t stop the next area of fraudRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERThe recent corporate frauds were attributable less to firms' silence or misleading than to the falsity of their disclosures. Thus, it is not clear how much difference the Sarbanes-Oxley requirements concerning disclosure of off-balance-sheet transactions, pro forma earnings, and material changes in financial condition 2 15

will make in preventing future fraud. To be sure, burying information in financial statements can make it difficult for individual investors to determine a firm's financial condition. But misleading legions of analysts,

reporters, and others in an active market requires greater opacity. In any event, these provisions deal with yesterday's problem . Recent events have cast so much light on these specific matters that additional wattage is unlikely to make any difference in these particular areas. The next great fraud probably will occur elsewhere .

SEC regulations failMurphy 9 - Robert P. Murphy is an Associated Scholar with the Mises Institute. His other positions include Senior Economist for the Institute for Energy Research, Senior Fellow with the Fraser Institute, and Research Fellow with the Independent Institute. Murphy earned his PhD in economics from New York University. He taught for three years at Hillsdale College before entering the financial sector, working for Laffer Associates on research papers as well as portfolio management. Dr. Murphy is now the president of Consulting By RPM and runs the economics blog Free Advice. (“The SEC Makes Wall Street More Fraudulent,” https://mises.org/library/sec-makes-wall-street-more-fraudulent 1/5/2009) STRYKER***MODIFIED FOR OBJECTIONABLE LANGUAGE***The mainstream reaction to the Bernard Madoff scandal was inevitable. Whenever a government regulatory agency proves itself to be incredibly incompetent or corrupt, the respectable media swoop in to declare that the "free market" has failed and the agency in question obviously needs more money and power. Whether it's the Department of Education's failure to produce kids who can read, the FBI's accusations against innocent people in high-profile cases, or the FDA cracking down on tomatoes, the answer is always the same: proponents of bigger government argue that yes, mistakes were made, but the solution of course is to shovel more taxpayer money into the agencies in question. In the private sector, when a firm fails, it ceases operations. The opposite happens in government. There is literally nothing a government agency could do that would make the talking heads on the Sunday shows ask, "Should we just abolish this agency? Is it doing more harm than good?" It's not just Fannie Mae and Freddie Mac: throughout history, virtually every agency created by the federal government has been deemed too important to fail . (I vaguely remember some Republicans in the mid-1990s holding a press conference and declaring that the Department of Commerce was done, and that voters could "stick a fork in it." I guess they found it was still pink inside.) Madoff's Ponzi Scheme The pattern plays out perfectly with the SEC and the Madoff bombshell. Suppose a few years ago, I told a group of MBAs to imagine the worst screwup that the SEC could possibly perform, something so monumentally incompetent that members of Congress might openly question whether the agency should continue. I think that at least half of the class would have come up with something far less outrageous than what has happened in fact. Everyone who reads the headlines knows that Bernard Madoff is accused of running a massive Ponzi scheme that, for over a decade, has ripped off investors to the tune of $50 billion. But those who dig a bit deeper learn that Harry Markopolos, who used to work for a Madoff rival, has been writing the SEC since at least May 1999, urging them to put a stop to Madoff's Ponzi scheme. (Markopolos examined the options markets that Madoff told investors he used to hedge his positions and yield his steady stream of dividends, and Markopolos concluded that Madoff's results were impossible.) Incredibly, the SEC apparently had evidence in front of its face sixteen years ago (in relation to another case) that Madoff was a crook. Yet it gets worse. As the Wall Street Journal and others dig into the story, they find that Madoff's family had close ties to the SEC. His sons, brother, and niece, for example, worked with or advised financial regulators on certain matters—no doubt telling them the best way to protect investors from fraud. But the pièce de résistance is that Madoff wasn't caught; his own sons turned him in after he came to them and admitted what he'd done. (Let's assume they are telling

the truth and didn't realize what their father was up to all along.) And even Madoff's confession was not because of a visit from the ghost of Christmas future. No, Madoff's scheme simply ran out of gas, because of large redemption claims that his clients filed, due to the collapse of the financial markets. Had it not been for the bursting of the credit bubble, Madoff would likely still be bilking new investors — and advising the SEC. Laissez-Faire Ideology to Blame? Even though George Bush has presided over the most interventionist government since FDR's New Deal, he somehow has a reputation for being a free marketeer. (It's funny that his political opponents take him at his word when it comes to economic rhetoric, yet they don't universally refer to Bush as a lover of world democracy and peace.) Naturally, the Madoff Ponzi scheme is blamed on the Bush administration's failure to adequately fund and staff the beleaguered SEC. "Bush thinks markets are self-regulating, and look what happened!" This is complete balderdash. The SEC under George Bush has the biggest budget and the most personnel in its history. The charts below show the annual budgets and "full-time-equivalent" staff for the SEC by fiscal year. These numbers were obtained from the annual SEC reports archived here. (Note that there might be a slight discontinuity in the budget series in the year 2003, when the report format changed.) It's even more interesting to break down the growth rates in budget and staff by presidential administration. For the following table, I have assumed that an incoming president doesn't really influence the SEC's operations for that (partial) fiscal year. For example, Ronald Reagan won the election in November 1980, and was sworn in the following January 1981. To gauge how much he increased the SEC budget and staff, I look at the annualized growth from FY 1981 (which ran through September 1981) to FY 1989. However, I also ran the numbers going from FY 1980 through FY 1988 etc., and it doesn't really affect the results. Administration Annualized SEC Budget Growth (not inflation-adjusted) Annualized SEC Full-Time Staff Growth Jimmy Carter 9.3% -1.2% Ronald Reagan 7.5% 1.4% George H.W. Bush 15.3% 6.7% Bill Clinton 6.8% 1.4% George W. Bush 11.3% 1.0% As the table shows, clearly the person who hated the free-wheeling market most was the first President Bush, followed up by his son. And especially when we consider the high inflation rate, it's obvious that Jimmy Carter was a laissez-faire ideologue. Bill Clinton, in contrast, had the same attitude towards speculators as Ronald Reagan. Naturally we can quibble with these conclusions. Maybe Bill Clinton's numbers would have been a lot higher had Newt Gingrich remained a history professor. Maybe George W. Bush used the Enron scandal to beef up the SEC's budget, while he gave orders behind the scenes to use the cash for pizza and beer rather

than enforcement. But whatever the excuse, it just proves my point: it is foolish to give the task of ensuring financial integrity to DC politicians. The SEC was supposedly retooled after the Enron fiasco in order to do its job. And it failed miserably . Some heads may roll and budgets balloon, but if history is any guide, there will be another huge financial fraud within another decade.

Conclusion The SEC clearly botched its alleged job in the case of the Madoff Ponzi scheme. Taxpayers are certainly entitled to ask, "What exactly are we getting for our (now) $900 million

per year?" It is not simply that the SEC failed to help. On the contrary, the SEC is actively harmful . For one thing, its implicit blessing of Madoff probably reassured some investors ; surely the SEC would have shut him down if his returns were bogus! Beyond that, the SEC has been horrible during the financial crisis . In the summer it engaged in a phony ban on "naked" short selling that was already illegal, and then a few months later it banned short selling outright on hundreds of financial stocks, a move that paralyzed

[destroyed] that particular sector even more. And lately, they've decided to launch a witch hunt on Mark Cuban—those 3,000+ employees have to do something. Democrats should not take away from the Madoff scandal the lesson that Republicans cannot be trusted to regulate financial markets. Even if it were true that Democrats would run it more honorably and competently, eventually another Republican will win the White House. Rather than pitting each party against the other, it is wiser to conclude that Washington politicians and bureaucrats will never put the average taxpayer or investor's interests above those of billionaire financiers. The SEC should be abolished , and investors should rely on private-sector watchdog groups to spot swindlers.

Exts. Self-Regulation SolvesSelf regulation is betterRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERModern regulatory theories of corporate governance begin with Adolf Berle and Gardiner Means, who argued in the wake of the 1929 crash that owners of publicly held corporations could not effectively control their corporations. 44 This lack of control effectively involves two problems. First, as Adam Smith observed, corporate managers do not watch over "other people's money" with the "anxious vigilance with which the partners in a private copartnery frequently watch over their own."'45 In other words, public corporations involve agency costs. Second, agency costs are high because it is impractical for shareholders with small, dispersed interests to invest much time and money in monitoring managers. The antiregulatory response to Berle and Means is essentially that shareholders cannot be as vulnerable to misappropriation as the regulatory model would suggest because no one can force them to invest in firms that will squander their money. The capital markets therefore can be expected to develop devices that overcome the problems Berle and Means discussed. These devices include hostile takeovers and other devices that aggregate shareholder voting power and facilitate shareholder monitoring, alignment of managers' and shareholders' interests through incentive compensation, and monitors such as independent directors and large accounting and law firms. Efficient securities markets, in turn, provide both an effective valuation device to enable these devices to operate and a mechanism for pricing and testing the efficacy of the devices. The takeover market functions because the price of a suboptimally managed firm drops enough to make it worthwhile for better managers to buy the stock and replace the incumbents. Stock compensation is an efficient incentive because it aligns managers' interests with shareholder welfare. A company's stock price can be viewed as measuring the value of its bundle of

contracts. Even if the market cannot know the evil that lies within managers' hearts, it can observe the contracts that tend to keep them honest. Investment dollars will tend to flow to the firms with the most efficient governance devices .

Exts. Zero SumEmpirics prove the trade offJagger 8 - Suzy Jagger is a reporter for The Times (British). (“FBI diverts anti-terror agents to Bernard Madoff $50 billion swindle,” https://rainbowwarrior2005.wordpress.com/2008/12/22/fbi-diverts-anti-terror-agents-to-bernard-madoff-50-billion-swindle/ 12/22/2008) STRYKER

The FBI has been forced to transfer agents from its counter-terrorism divisions to work on Bernard Madoff’s alleged $50 billion fraud scheme as victims of the biggest scam in the world continue to emerge. Only ten days after Mr

Madoff confessed to his two sons that he had created a giant fraud, the FBI and the Securities and Exchange

Commission (SEC), the Wall Street regulator, have narrowed the focus of their inquiries to ascertain which individuals and funds helped him. They are questioning other employees of Madoff Securities and are also examining the role of feeder funds that provided Mr Madoff with clients and capital. It is understood that the US authorities believe it would have been impossible for the financier to have sustained a fraud of such magnitude over a number of years without significant assistance. While the FBI and SEC trawled through documentation seized from three floors of the Manhattan headquarters of Mr Madoff, 70, more individuals and organisations who had fallen prey to the scheme were discovered. Members of the Fifth Avenue Synagogue, on the wealthy Upper East Side of Manhattan, are estimated to have lost about $2 billion (£1.4 billion) between them. Of these Ira Rennert, the chairman of the synagogue board, had about $200 million invested in the fund. It is believed that J. Ezra Merkin, the president of the synagogue, introduced clients to Mr Madoff and gave him access to prominent Jewish charities and universities. The fund of Mr Merkin, Ascot Partners, had about $1.8 billion invested in the schemes. At the weekend it emerged that Burt Ross, a former banker at LF Rothschild, and once the mayor of Fort Lee, New Jersey, was another victim. Mr Ross estimated that he had lost about $5 million, the bulk of his personal wealth. Two classes of victim are emerging in the Madoff scandal: those who had a direct relationship with him and fund of funds investors, where one hedge fund invests in another. The biggest of the latter – so far – appears to be Walter M. Noel, who founded Fairfield Greenwich Group in 1983. Mr Noel marketed his investment services to the upper crust of the financial elite, introducing his international clients to Madoff funds. Mr Noel ran his business from Connecticut, but about 95 per cent of his business was derived from overseas money. It is estimated that Fairfield Greenwich stands to lose $7.5 billion from the collapse of the Madoff scheme. At the other end of the spectrum the town pension scheme in Fairfield, Connecticut — apparently unconnected to the fund belonging to Mr Noel – suffered a $45 million loss for its firefighters, police officers and teachers. American regulators have sought to compile evidence against Mr Madoff, who is now electronically tagged and this weekend was placed on 24-hour curfew in his East 64th Street New York apartment. The FBI and SEC are under increasing pressure from Washington to explain how they could have allowed a scam of such magnitude to operate and flourish – especially after a preliminary inquiry within the SEC found that it had been tipped off several times in the past decade about Mr Madoff’s schemes.

The trade-off is zero sumShukovsky et al 7 - Paul Shukovsky is a staff correspondent for Bloomberg BNA based in the Pacific Northwest. Tracy Johnson is a Seattle Post-Intelligencer Reporter. Daniel Lathrop is an investigative projects reporter currently at The Dallas Morning News. (“The FBI's Terrorism Trade-Off,” Available online at: http://www.truth-out.org/archive/item/69882:the-fbis-terrorism-tradeoff 4/11/2007) STRYKERThousands of white-collar criminals across the country are no longer being prosecuted in federal court - and, in many cases, not at all - leaving a trail of frustrated victims and

potentially billions of dollars in fraud and theft losses. It is the untold story of the Bush administration's massive restructuring of the FBI after the terrorism attacks of 9/11. Five-and-a-half years later, the White House and the Justice Department have failed to replace at least 2,400

agents transferred to counterterrorism squads, leaving far fewer agents on the trail of identity thieves, con artists, hatemongers and other criminals. Two successive attorneys general have rejected the FBI's pleas for reinforcements behind closed doors. While there hasn't been a terrorism strike on American soil since the realignment, few are aware of the hidden cost: a dramatic plunge in FBI investigations and case referrals in many of the crimes that the bureau has traditionally fought, including sophisticated fraud, embezzlement schemes and civil rights

violations. "Politically, this trade-off has been accepted ," said Charles Mandigo, a former FBI congressional liaison who retired four years ago as special agent in charge in Seattle. "But do the American people know this trade-off has been made?" Among the findings of a six-month Seattle P-I investigation, analyzing more than a quarter-million cases touched by FBI agents and federal prosecutors before and after 9/11: Overall, the

number of criminal cases investigated by the FBI nationally has steadily declined. In 2005, the bureau brought slightly more than 20,000 cases to federal prosecutors, compared with about

31,000 in 2000 - a 34 percent drop. White-collar crime investigations by the bureau have plummeted in recent years. In 2005, the FBI sent prosecutors 3,500 cases - a fraction of the more than 10,000 cases assigned to agents in 2000. In Western Washington, the drop has been even more dramatic. Records show that the FBI sent 28 white-collar cases to prosecutors in 2005, down 90 percent from five years earlier. Civil rights investigations, which include hate crimes and police abuse, have continued a steady decline since the late 1990s. FBI agents pursued 65 percent fewer cases in 2005 than they did in 2000. Already hit hard by the shift of agents to terrorism duties, Washington state's FBI offices suffer from staffing levels that are significantly below the national average. While other federal agencies have stepped in to pick up more of the load in drug enforcement, and the FBI has worked to keep agents on Indian reservations, the gaps created by the Bush administration's war on terrorism are troubling to criminal justice experts, police chiefs - even many current and former FBI officials and agents. "There's a niche of fraudsters that are floating around unprosecuted," said one recently retired top FBI official, who spoke on condition of anonymity. "They are not going to jail. There is no law enforcement solution in sight." In most cases,

local law enforcement agencies haven't been able to take up the slack . Seattle police Chief Gil Kerlikowske said his department isn't as equipped to handle complex white-collar investigations - particularly when officers must also join anti-terrorism efforts and when federal funding for local police departments has shrunk. Whether the

solution is to hire more FBI agents or shift some away from the counterterrorism effort, he said, more resources should be devoted to solving white-collar crime. "This is like the perfect storm," Kerlikowske

said. "It's now five years later. We should be rethinking our priorities." A solution can't come soon enough for a growing number of discouraged fraud victims: A 75-year-old Issaquah woman who was allegedly swindled out of more than $1 million. A cancer patient whose identity was stolen from a Seattle hospital. People who fell victim to a nationwide investment scam worth about $70 million. They all sought the FBI's help. They got little or none. "As far as I'm concerned, the FBI has no interest in protecting people from these kinds of crimes," said Lloyd Martindale Jr., a Bellingham man who put $500,000 into an investment con and is still fighting to get some of it back. "They were not responsive to this at all." If the FBI had continued investigating financial crimes at the same rate as it had before the World Trade Center came down, about 2,000 more white-collar criminals would be behind bars, according to the P-I analysis, which was based on Justice

Department data from 1996 through June 2006. Since 9/11, the number of white-collar convictions in federal courts has dropped about 30 percent . White-collar crimes often affect the people least able to afford it - lower-income and elderly people, according to Peter Henning, a former Justice prosecutor who teaches law at Wayne State University in Detroit. "If you keep it small, and act quickly and get out of the jurisdiction, you can avoid being prosecuted," he said. "Scam artists know that." Large numbers of FBI agents also were transferred out of violent-crime programs because bureau officials knew that local police - who have overlapping jurisdiction in violent crimes - would have to help. The retired FBI official said the Bush administration is forcing the bureau to "cannibalize" its traditional crime-fighting units in the name of fighting terrorism. "The administration is starving the criminal program," the former official said. "Fairly Awful Situation" Margarita MacDonald, a 75-year-old widow who has Parkinson's disease, may never get back more than $1 million from a man who helped her with household tasks and then allegedly betrayed her trust. She was nearly deaf, all alone and living in Canada when he befriended her. He began helping her with chores and errands in exchange for room and board. He won her trust and persuaded her to move to Issaquah with him. The man told her that he had her best interests at heart, but he began manipulating her, persuading her to sign documents and threatening that he wouldn't bring her food or medicine if she didn't do what he wanted, MacDonald stated in court documents. He gradually stole about $1 million from her, buying furniture, electronics, jewelry - even vacations to Banff, Alberta, and Hawaii, she wrote. Larry Gold, a lawyer in Vancouver, B.C., who represented her, called the Seattle office of the FBI in January 2005. The duty officer seemed interested and told him to put the information in writing, he said. Gold did. In several carefully detailed pages, he explained that the man stole most of MacDonald's savings and even got his hands on $400,000 worth of gold she kept in a safe deposit box in Canada. He said the FBI never responded. "It was a fairly awful situation, and I thought they might be interested in it," Gold said. "What can I say? They weren't." Frustrated, Gold sought help from Issaquah police, but Lynnwood attorney John Tollefsen took over the case and made getting MacDonald's money back, not prosecution, his main priority. He is still fighting to help MacDonald get back her savings. A judge ordered the man to pay MacDonald more than $1.4 million last year. The man filed for bankruptcy. He hasn't been charged with a crime. "Dead on Arrival" Tensions were growing inside Robert Mueller's inner circle. In the months after 9/11, when the first waves of agents were funneled into counterterrorism, the FBI director was made aware of the consequences to come. Without a major influx of new agents, there was no way to maintain the bureau's grip on a long list of

traditional crimes, particularly time-consuming fraud investigations . Mueller asked for help from two attorneys general - John Ashcroft and his successor, Alberto Gonzales - only to be rebuffed each time. "We were told to do more with less," said David Szady, a former FBI assistant director who stepped down last year as head of counterintelligence. "There was always discussion on backfilling," Szady said. "Always the push that we need to ask for more bodies." Dale Watson, who left in 2002 as the FBI's executive assistant director over counterterrorism programs, also blames the White House Office of Management and Budget and the Justice Department for failing to heed the warnings. "The budget should be backfilled with additional agents," Watson said. "We've got to do this. But you could request 2,000 agents for white collar, and it would never see the light of day at OMB." By the time the bureau started putting together its fiscal 2007 budget in mid-2005, "we realized we were going to have to pull out of some areas - bank fraud, investment fraud, ID theft - cases that protect the financial infrastructure of the country," the retired top FBI official said.

1AC—Counterterrorism ScenarioFBI counterterrorism works and is improving, but every resource is key to prevent likely terrorist threatsSink and Wilber 15 - Justin Sink is a White House reporter for Bloomberg. Del Quentin Wilber covers the federal courts and federal law enforcement. A graduate of Georgetown Prep and Northwestern University, he worked at the Baltimore Sun before joining the Washington Post in 2004. Wilber is also the author of the New York Times best-seller Rawhide Down: The Near Assassination of Ronald Reagan. (“Lone Wolf Terrorists, Cyber Threats Put New Pressure on FBI,” http://www.bloomberg.com/politics/articles/2015-03-25/fbi-must-evolve-to-tackle-lone-wolf-online-threats-report-says 3/25/2015) STRYKER

(Bloomberg) -- The FBI urgently needs to accelerate intelligence-gathering capabilities at

home and abroad to confront evolving terrorist threats , a panel reviewing the bureau’s

response since the Sept. 11 attacks said. Returning foreign fighters, extremists acting alone, and a new breed of criminals in cyberspace mean the agency needs to build up its domestic intelligence operation, the yearlong review of the Federal Bureau of Investigation found. “The FBI has not yet met its potential -— or its mandate from the president and Congress -— to develop a ‘specialized and integrated national security workforce’ that can serve as the hub of America’s domestic intelligence agency,” according to the report, which was presented to FBI Director James Comey. The review was undertaken at the request of Congress, which sought an update on how the FBI is fulfilling its mission since the 2001 terrorist attacks in New York and Washington. It was led by Edwin Meese, attorney general under President Ronald Reagan, former Representative Tim Roemer, an Indiana Democrat, and Georgetown University counterterrorism expert Bruce Hoffman. The report was released during a press conference with Comey and members of the panel Wednesday at FBI headquarters in Washington. Counterterrorism Priority The panel found that the FBI had largely succeeded at transforming itself after Sept. 11, developing a workforce attuned to the importance of intelligence-gathering and putting a priority on counterterrorism. The FBI needs to do more to support, train and equip agents and analysts with the latest technologies to combat the changing nature of threats from jihadist groups such as

Islamic State, it said. “Some things are necessary, we feel, to keep pace with the accelerating threat we find around the world ,” Meese said. “So there has to be an acceleration, obviously, in the amount of effort and the changes being made to bring the FBI” up to date, he said. Comey said that he generally agrees with the report’s findings, including the recommendation that the agency must change further. Leadership at the agency isn’t “unified or consistent in driving cultural change,” partially because of frequent turnover, according to the report. An office dedicated to countering violent extremism is underfunded and should be moved under the Department of Homeland Security, and the agency’s efforts to counter cyberthreats aren’t integrated well enough with other agencies, according to the report. Intelligence Integration The review said the FBI needs to invest more in collaborative relationships with foreign partners as it seeks to combat terrorist threats. In the U.S., the FBI isn’t “sufficiently integrated” into the intelligence community, to the detriment of its own criminal investigations, according to the report. Regional FBI leaders were found to often give competing interests priority over intelligence-collection and coordination with other agencies. The panel urged Comey to work more closely with Director of National Intelligence James Clapper to help the U.S. national security community. FBI agents and analysts should also participate in interagency collaboration and training assignments, according to the panel. “The FBI must better use its strategic processes to drive the intelligence cycle for its law enforcement and intelligence missions,” according to the review. More Pressure Pressure on the FBI to combat terrorism within the U.S. has intensified since the Islamic State emerged, with top administration officials repeatedly warning that the terror group could target the U.S. homeland. Last month, the White House hosted a summit on countering violent extremism, and President Barack

Obama has pushed efforts at the United Nations to target foreign fighters. The panel recommended that FBI leaders communicate to Congress the value of laws integral to several successful investigations since 2008, such as the USA Patriot Act, the Electronic Communications Privacy Act, and the Foreign Intelligence Surveillance Act. Privacy advocates and some companies are opposed to some provisions of those laws. The FBI showed lax communication, coordination, collaboration and use of human intelligence in five case studies analyzed by the review commission. Those included U.S. Army Major Nidal Hasan and the Fort Hood shooting, Faisal Shahzad and the bungled Times Square car-bomb attack, and Tamerlan and Dzhokhar Tsarnaev and the Boston

Marathon bombing. “The FBI will fulfill its domestic intelligence role when its analysts and collectors, like its special agents, are grounded in criminal investigation; have ready access to state-of-the-art technology; continuously

exploit the systems, tools, and relationships of the national intelligence agencies,” the report concluded.

[Terrorism Impact(s)]

Exts. Counterterrorism InternalThe FBI is effective now, but resources are crucialSteinberg 15 - Scott Steinberg is a bestselling leadership and business keynote speaker and one of the world’s most celebrated futurists and strategic innovation consultants, as seen in 600+ outlets from CNN to The Wall St. Journal, and the author of Make Change Work for You: 10 Ways to Future-Proof Yourself, Fearlessly Innovate and Succeed Despite Uncertainty. (“The FBI: Tomorrow's Leading Innovator,” http://www.huffingtonpost.com/scott-steinberg/the-fbi-tomorrows-leading_b_7284164.html 5/15/2015) STRYKER

Innovators, beware: The FBI is watching you. Happily, it's making major strides towards combating terrorism and driving game-changing breakthroughs in national security as a result of these efforts as well. Credit the agency's recent establishment of a new internal innovation team designed to address the increasingly complex challenges of battling criminal elements in an age of big data, online communications and social media. (And the organization's burning desire to better understand tomorrow's fast-changing business and high-tech environments.) Over FBI 250 employees and contractors are now assigned to better comprehending the role that current and futuristic communications networks will play in tomorrow's world, how to analyze the mountains of raw data they'll generate, and how the use of more innovative concepts can help the agency more successfully navigate these waters, and defuse terrorist threats. We recently sat down with Jane Rhodes-Wolfe to find out more about the FBI's interest in the space, and its singular approach to staying ahead of the curve. Q: How and why is the FBI embracing the concept of innovation -- and what does this mean in practical terms (implementation)? A: The FBI's Counterterrorism Innovation Team is always seeking for better ways to identify and address terrorist threats, often in a fast-paced, dynamic environment . In a world where virtually everyone communicates across the digital spectrum, those challenges are made exponentially more difficult when you factor in the complexity and dynamic nature of current communication tools, changes within the telecommunications industry, the use of social media, etc. To maintain our ability to identify and address threats nimbly, we must always be seeking to leverage the latest technology, and always in a manner that respects privacy and the rule of law. Q: In what ways is the organization itself like a startup, and what lessons in leadership and entrepreneurial thinking are you learning from leaders in fast moving, highly competitive industries that are being applied back to bureau operations? A: Although we have been "in business" for 107 years, we are constantly responding and adapting to new threats and national security concerns, just like successful industries that change over time. Over the years the FBI's priorities have diversified and evolved, from organized crime, drugs, financial fraud and other criminal enterprises, to today's focus on threats to national security. This flexibility stems in large part from our ability to adapt along with a dedicated workforce and sense of public service. Today's counterterrorism threats include activities at home and abroad, so innovation, ingenuity, imagination, and teamwork are the key components needed to be successful, as is the case with most successful corporations. Q: You've mentioned the importance of learning from leaders in private sectors -- why is this important, and what types of

initiatives are underway? A: Defeating terrorism requires incredible focus, efficient use of resources , adaptive and creative thinking, and collaboration . Successful industry leaders also exhibit these traits and are always seeking to improve their business processes. While not a business, the FBI is no different in that we are constantly seeking innovative solutions to challenging problems. Just as industry leaders focus and prioritize resources to respond to the needs of the marketplace, we in the FBI focus and prioritize our resources in the defense of the country. Industry and government also face the common challenge of recruiting and hiring unique skill sets across various demographics. Innovation in recruiting and hiring the "best of the best" is a worthy challenge both industry and government must rise to meet in order to achieve our respective goals. We value our partnerships with members of the private sector for the insight they give us. The FBI, in turn, seeks to educate industry leaders about threats relating to their particular sectors, and through this education process, both government and industry are better able to align resources to achieve their goals. Q: What sectors -- technology, big data, communications, etc -- are of most interest to the bureau as of late, and why? A: Within the Counterterrorism Division, we are focused on quickly identifying and disrupting terrorist threats. This job has become increasingly difficult given the advances in technology, pervasiveness of digital communications and worldwide reach of the internet. To that end, we work closely with all sectors to understand the threats unique to each, and leverage their experience in addressing a common goal. Like many other government agencies and private sector enterprises, it's important to develop and maintain communication and understanding across all sectors in order to address an ever evolving and complicated threat. Q: How has the pursuit of innovation provided benefits to the bureau in the past, and what sorts of advancements has it produced? What sorts of benefits do you see this process providing? A: Our internal innovation

team was formed earlier this year and we are confident this team will allow us to more quickly and efficiently respond to terrorist threats . A collateral benefit includes a better educated workforce empowered to effect change and implement solutions.

Trade-off is empirically proven—its zero-sumGIBSON 9 [KATE, Reporter at MarketWatch, “Madoff and mini-Madoffs a black eye for regulators”, Mar 12, 2009, http://www.marketwatch.com/story/correct-analyst-says-madoff-case-turned] allaNEW YORK (MarketWatch) -- With disgraced financier Bernard Madoff now facing a long prison term, analysts on Thursday assessed the damage to investor confidence in a system that allowed the former Nasdaq Stock Market chairman's crime to go undetected for years. "Everybody knew about the bucket banks, the boiler rooms, everything you saw in the movie 'Wall Street.' But this guy [Madoff] was chairman of Nasdaq. It's like reading history and finding out that George Washington was actually Benedict Arnold's contact in a huge spy ring," said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com. The issue extends beyond Madoff, given other recent cases that while smaller, give the same impression of regulators asleep at the wheel , said Roberts. He pointed to Allen Stanford, the Texas tycoon whose alleged fraud was shut down in late February by the Securities and Exchange Commission, and Arthur Nadel, the Florida fund manager who allegedly lost millions of investors' dollars. " It's a colossal failure for the Securities and Exchange Commission when you can have a scheme of 20-plus years go undetected , even after the agency has investigated several times," said Karl

Buch, a former assistant U.S. attorney now at law firm Chadbourne & Park. Part of the trouble is that after 9-11, "the focus of much of the Department of Justice and FBI resources were shifted to counter-terrorism. You had experienced agents who had worked white-collar prosecutions moved to counter-terrorism, which in my opinion played a big part " in Madoff's crimes going undetected for so long, said Buch, who worked in the securities fraud unit as well as counter-terrorism during his nearly five years as assistant U.S. attorney, starting in 2003.

1AC—Money Laundering ScenarioFBI anti-money laundering is an effective part of our counter-terror strategy, but new threats requires resources—the impact is economic decline, instability, organized crime, and terrorismMorehart 6 - Michael Morehart is a Section Chief of the Terrorist Financing Operations in the Counterterrorism Division at the Federal Bureau of Investigation. (“Dismantling Global Money Laundering Operations,” https://www.fbi.gov/news/testimony/dismantling-global-money-laundering-operations 5/18/2006) STRYKERChief among the investigative responsibilities of the FBI is the mission to proactively neutralize threats to the economic and national security of the United States of America. Whether motivated by criminal greed or a radical ideology, the activity underlying both criminal and counterterrorism investigations is best prevented by access to financial information by law enforcement and the intelligence community. In the “criminal greed” model, the FBI utilizes a two-step approach to deprive the criminal of the proceeds of crime. The first step involves aggressively investigating the underlying criminal activity, which establishes the specified unlawful activity requirement of the federal money laundering statutes, and the second step involves following the money to identify the financial infrastructures used to launder proceeds of criminal activity. In the

counterterrorism model, the keystone of the FBI's strategy against terrorism is countering the manner in which terror networks recruit, train, plan, and effect operations, each of which requires a measure of financial support . The FBI established the Terrorist Financing Operations Section (TFOS) of the Counterterrorism Division on the premise that the required financial support of terrorism inherently includes the generation, movement, and expenditure of resources, which are oftentimes identifiable and traceable through records created and maintained by financial institutions. The analysis of financial records provides law enforcement and the intelligence community real opportunities to proactively identify criminal enterprises and terrorist networks and disrupt their nefarious designs.

Traditional Criminal Money Laundering Investigations Money laundering has a significant impact on the global economy and can contribute to political and social instability , especially in developing countries or those historically associated with the drug trade. The International Monetary Fund estimates that money laundering could account for 2 percent to 5 percent of the world’s gross domestic product. In some countries, people eschew formal banking systems in favor of Informal Value Transfer systems such as hawalas or trade-based money laundering schemes such as the Colombian Black Market Peso Exchange, which the Drug Enforcement Administration estimates is responsible for transferring $5 billion in drug proceeds per year from the United States to Colombia. Hawalas are centuries-old remittance systems located primarily in ethnic communities and based on trust. In countries where modern financial services are unavailable or unreliable, hawalas fill the void for immigrants wanting to remit money home to family members, and unfortunately, for the criminal element to launder the proceeds of illegal activity. There are several more formalized venues that criminals use to launder the proceeds of their crimes, the most common of which is the U.S. banking system, followed by cash intensive businesses like gas stations and convenience stores, offshore banking, shell companies, bulk-cash smuggling operations, and casinos. Money services businesses such as money transmitters and issuers of money orders or stored value cards serve an important and useful role in our society, but are also particularly vulnerable to money laundering activities. A recent review of Suspicious Activity Reports filed with the Financial Crimes Enforcement Network (FinCEN) indicated that approximately 73 percent of money services business filings involved money laundering or structuring. The transfer of funds to foreign bank accounts continues to present a major problem for law enforcement. Statistical analysis indicates that the most common destinations for international fund transfers are Mexico, Switzerland, and Colombia. As electronic banking becomes more common, traditional fraud detection measures become less effective, as customers open accounts, transfer funds, and layer their transactions via the Internet or telephone with little regulatory oversight. The farther removed an individual or business entity is from a traditional bank, the more difficult it is to verify the customer’s identity. With the relatively new problem of “nesting” through correspondent bank accounts, a whole array of unknown individuals suddenly have access to the U.S. banking system through a single correspondent account. Nesting occurs when a foreign bank uses the U.S. correspondent account of another foreign bank to accommodate its customers. A foreign bank can conduct dollar-denominated transactions and move funds into and out of the United States by simply paying a wire processing fee to a U.S. bank. This eliminates the need for the foreign bank to maintain a branch in the United States. For example, a foreign bank could open a correspondent account at a U.S. bank and then invite other foreign banks to use that

correspondent account. The second-tier banks then solicit individual customers, all of whom get signatory authority over

the single U.S. correspondent account. The FBI currently has over 1,200 pending cases involving some aspect of money laundering , with proceeds drawn from criminal activities including organized crime , drug trafficking , fraud against

the government, securities fraud, health care fraud , mortgage fraud , and domestic and international terrorism . By first addressing the underlying criminal activity and then following

the money, the FBI has made significant inroads into the financial infrastructure of domestic and international criminal and terrorist organizations, thereby depriving the criminal element of illegal profits from their schemes.

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Exts. Money Laundering InternalEvery tool is necessary to successful AMLSchroeder 1 - William Schroeder, former chief of the FBI's Legal Forfeiture Unit, now serves as president of a private law enforcement consultant company in Woodbridge,Virginia, and is a technical advisor for the U.S. Department of the Treasury regarding money laundering and asset forfeiture and corruption. (“Money Laundering,” https://www2.fbi.gov/publications/leb/2001/may01leb.pdf May 2001) STRYKER

The global threat of money laundering poses unique challenges to the law enforcement community . To pursue the evidentiary trail of a money launderer, law enforcement agencies must identify and use tools and techniques that can help them when crossing international boundaries. Multilateral agreements that require participants to adopt antilaundering measures and the regional and world organizations that have developed and encouraged a standardized approach to addressing laundering all have contributed to the strides made in addressing the challenges posed.40 Efforts undertaken by nations independent of the international community often result in significant variations from the accepted standard and have the effect of facilitating laundering activity rather than combating it.41 For example, the government of Antigua and Barbuda weakened its laws relating to money laundering, resulting in the U.S. Department of the Treasury issuing an advisory warning banks and other financial institutions to be wary of all financial transactions routed into, or out of, that jurisdiction.42 The changes in the law strengthened bank secrecy, inhibited the scope of laundering investigations, and impeded international cooperation. A common, harmonized approach will prevent launderers from using the different laws and practices among the jurisdictions to their advantage both at the expense and disadvantage of countries interested in pursuing them.43 Only with laws that have been harmonized can law enforcement agencies, working together with financial institution administrators and regulators, combat this ever-increasing problem .

AML is effective now, but it relies on sufficient resourcesEnsign 14 - Rachel Louise Ensign is a banking reporter in New York. She covers regional banks including U.S. Bancorp, SunTrust, PNC and Ally. (“Anti-Money Laundering Reports Don’t Fall Into “Black Hole,” Officials Say,” http://blogs.wsj.com/riskandcompliance/2014/10/02/anti-money-laundering-reports-dont-fall-into-black-hole-officials-say/ 10/2/2014) STRYKER

The anti-money laundering reports filed by banks are consistently being used by law enforcement to make cases , current and former law-enforcement officials said

at an industry conference. People “think their [suspicious activity reports] fall into a black hole. I’m here to tell you that that doesn’t happen ,” said Dennis Lormel, president and chief executive of DML Associates LLC and a former top Federal Bureau of Investigation official. He was speaking at an Association of Certified Anti-Money Laundering Specialists conference in Las Vegas. Angela Byers, section chief of the FBI’s criminal investigative division’s financial crimes section, reiterated this point, saying that anti-money laundering data “applies to almost all investigations conducted by the FBI.”

The agency uses the reports in a variety of ways, including an alert system that searches the reports for names of individuals under investigation monthly, she said. More than 1.6 million suspicious activity reports, or SARs, were filed in 2013, an increase of about 3% from the year prior, the Treasury Department’s Financial Crimes

Enforcement Network has said. The number of SARs filed has steadily grown since 2010. The reports may not even come in handy until years after they are filed, said Bryan Smith, unit chief in the FBI’s criminal investigative division’s financial institution fraud unit. “SARs that you put out there sometimes don’t mean anything until six years later,” said Mr. Smith.

Exts. Terrorism ImpactMoney laundering enables successful terrorismBaradaran et al 14 - Shima Baradaran Associate Professor of Law, University of Utah College of Law. Michael Findley Assistant Professor of Government, University of Texas at Austin. Daniel Nielson Associate Professor of Political Science, Brigham Young University. Jason Sharman Professor of Political Science, Center for Governance and Public Policy, Griffith University, Australia. (“Funding Terror,” University of Pennsylvania Law Review, 162 U. Pa. L. Rev. 477, Lexis Nexis, February, 2014) STRYKER

Though the United States has spent enormous sums to fight terrorism

with its military might, many are concerned that it has not invested sufficient resources in cutting off the true lifeline of terrorism: its clandestine network of global financing . n15 As this Article examines in great detail, one of the most dangerous and accessible financial tools used by terrorists today is the anonymous shell company. n16 These companies allow terrorists to disguise their identities and covertly transfer funds - even within U.S. banks - toward illegal activities. Shell companies pose particularly vexing problems for law enforcement because there is often no way to trace them to individuals. n17 The [*483] only tangible component of a shell company may be a post office box; in other words, shell corporations are often "hollow" companies. n18 Shell corporations can serve some legitimate purposes, such as facilitating mergers, enabling international joint ventures, and serving as asset-holding companies. n19 However, because they are "hollow," they are commonly used as vehicles for corruption, money laundering, and, more recently, terrorism. Although many of these organizations seem harmless when they are created, posing as

charities or legitimate businesses, they often become involved in illicit activities and frequently lead law enforcement investigations to dead ends. n20 In an effort to combat terrorist financing, policymakers have begun identifying vulnerabilities in financial institutions and the ways in which terrorists have exploited them. n21 New legislation has pushed for financial [*484]

transparency as a way to avoid corruption and obstruct terrorist financing both within the United States and globally, n22 but the effectiveness of these efforts is debatable , given terrorist organizations' ability to adapt quickly . n23 While others have commented about how easy it is to form anonymous shell companies, n24 no study thus far has determined how effective domestic and international regulations have been at curbing their proliferation and use. n25

Exts. Economy ImpactCurrent Money Laundering efforts are succeeding, but if they decline money laundering will threaten the global economyMcDowell and Novis, 2001 (John McDowell, Senior Policy Adviser of the Bureau of International Narcotics and Law Enforcement Affairs, U.S. Department of State. Gary Novis, Program Analyst of the Bureau of International Narcotics and Law Enforcement Affairs, U.S. Department of State. “THE CONSEQUENCES OF MONEY LAUNDERING AND FINANCIAL CRIME” https://www.hsdl.org/?view&did=3549) // ILMoney laundering is the criminal’s way of trying to ensure that, in the end, crime pays. It is necessitated by the requirement that criminals — be they drug traffickers, organized criminals, terrorists, arms traffickers, blackmailers, or credit card swindlers — disguise the origin of their criminal money so they can avoid detection and the risk of prosecution when they use it. Money laundering is critical to the effective operation of virtually every form of transnational and organized crime. Anti-money-laundering efforts, which are designed to prevent or limit the ability of criminals to use their ill- gotten gains, are both a critical and effective component of anti-crime programs. Money laundering generally involves a series of multiple transactions used to disguise the source of financial assets so that those assets may be used without compromising the criminals who are seeking to use them. These transactions typically fall into three stages: (1) placement — the process of placing unlawful proceeds into financial institutions through deposits, wire transfers, or other means; (2) layering — the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions; and (3) integration — the process of using an apparently legitimate transaction to disguise illicit proceeds. Through these processes, a criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source. Money laundering has potentially devastating economic, security,

and social consequences. It provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials, and others to operate and expand their criminal enterprises. Crime has become increasingly international in scope, and the financial aspects of crime have become more complex due to rapid advances in technology and the globalization of the financial services industry. Modern financial systems, in addition to facilitating legitimate commerce, also allow criminals to order the transfer of millions of dollars instantly using personal computers and satellite dishes. Because money laundering relies to some extent on existing financial systems and operations, the criminal’s choice of money laundering vehicles is limited only by his or her creativity. Money is laundered through currency exchange houses, stock brokerage houses, gold dealers, casinos, automobile dealerships, insurance companies, and trading companies. Private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all can mask illegal activities. In doing so, criminals manipulate financial systems in the United States and abroad. Unchecked, money laundering can erode the integrity of a nation’s financial institutions. Due to the high integration of capital markets, money laundering can also adversely affect currencies and interest rates. Ultimately, laundered money flows into global financial systems, where it can undermine national economies and currencies. Money laundering is thus not only a law enforcement problem; it poses a serious national and international security threat as well.

Money laundering destroys the economy, encourages crime and corruption, and distorts the economy’s external sector – effective AML keyBartlett, 2002 (Brent L. Barlett, International Economics Group, Dewey Ballantine LLP. “The negative effects of money laundering on economic development” http://www.afp.gov.au/~/media/afp/pdf/m/money-laundering-02.pdf) // ILThe negative economic effects of money laundering on economic development are difficult to quantify. It is clear that such activity damages the financial-sector institutions that are critical to economic growth, reduces productivity in the economy’s real sector by diverting resources and encouraging crime and corruption, which slow economic growth, and can distort the economy’s external sector – international trade and capital flows – to the detriment of long-term economic development. Developing countries’ strategies to establish off- shore financial centres (OFCs) as vehicles for economic development are also impaired by significant money-laundering activity

through OFC channels. Effective anti-money-laundering policies, on the other hand, reinforce a variety of other good-governance policies that help sustain economic development, particularly through the strengthening of the financial sector. The financial sector A broad range of recent economic analyses points to the conclusion that strong developing-country financial institutions – such as banks, non-bank financial institutions (NBFIs) and equity markets – are critical to economic growth. Such institutions allow for the concentration of capital resources from domestic savings – and perhaps even funds from abroad – and the efficient allocation of such resources to investment projects that generate sustained economic development. Money laundering impairs the development of these important financial institutions for two reasons. First, it erodes financial institutions themselves. Within these institutions, there is often a correlation between money laundering and fraudulent activities undertaken by employees. At higher volumes of money-laundering activity, entire financial institutions in developing countries are vulnerable to corruption by criminal elements seeking to gain further influence over their money-laundering channels. Second, particularly in developing countries, customer trust is fundamental to the growth of sound financial institutions, and the perceived risk to depositors and investors from institutional fraud and corruption is an obstacle to such trust. By contrast, beyond protecting such institutions from the negative effects of money laundering itself, the adoption of anti-money-laundering policies by government financial supervisors and regulators, as well as by banks, NBFIs, and equity markets them- selves, reinforce the other good-governance practices that are important to the development of these economically critical institutions. Indeed, several of the basic anti-money-laundering policies – such as know-your-customer rules and strong internal controls – are also fundamental, long- standing principles of prudential banking operation, supervision, and regulation.

Money Laundering Kills the economy-hampers government revenue, erodes the economy and funds criminalsFIU No Date (Financial Intelligence Unit of the Republic of Mauritius, It is the central Mauritian agency for the request, receipt, analysis and dissemination of financial information regarding suspected proceeds of crime and alleged money laundering offences as well as the financing of any activities or transactions related to terrorism to relevant authorities, Consequences of Money Laundering, Financial Intelligence Unit Mauritius, http://www.fiumauritius.org/index.php?option=com_content&view=article&id=18%3Amoney-laundering&catid=3&lang=en&limitstart=3//ghs-SG)Money laundering impairs the development of the legitimate private sector

through the supply of products priced below production cost, making it therefore difficult for legitimate activities to compete. Criminals may also turn enterprises which were initially productive into sterile ones to launder their funds leading ultimately to a decrease in the overall productivity of the economy.

Furthermore, the laundering of money can also cause unpredictable changes in money demand as well as great volatility in international capital flows and exchange rates. While the financial sector is an essential constituent in the financing of the legitimate economy, it can be a low-

cost vehicle for criminals wishing to launder their funds. Consequently, the flows of large sums of laundered funds poured in or out of financial institutions might undermine the stability of financial markets. In addition, money laundering may damage the reputation of financial institutions involved in the scheming resulting to a loss in trust and goodwill with stakeholders. In worst case

scenarios, money laundering may also result in bank failures and financial crises.

Money laundering also reduces tax revenue as it becomes difficult for the government to collect revenue from related transactions which frequently take place in the underground economy. The socio-economic effects of money laundering are various

because as dirty money generated from criminal activities are laundered into legitimate funds; they are used to expand existing criminal operations and finance new ones. Further to that money laundering may lead to the transfer of economic power from the market, the government and the citizens to criminals, abetting therefore crimes and corruption.

Exts. Instability ImpactThis poses an existential threatLuna 12 (David, October/26/2012, Director for Anticrime Programs, Bureau of International Narcotics and Law Enforcement Affairs, The Destructive Impact of Illicit Trade and the Illegal Economy on Economic Growth, Sustainable Development, and Global Security, US Department of State, http://www.state.gov/j/inl/rls/rm/199808.htm//ghs-SG)The illegal economy poses an existential threat when it begins to create criminalized markets

and captured states, which launches a downward, entropic spiral towards greater insecurity and instability. In economies that have been corrupted by criminal

networks, market- and state-building become more unattainable, economic growth is stunted, efforts towards development and poverty eradication are stifled, and foreign direct investment is deterred.

Money Laundering threatens the stability of government and the economyLuna 12 (David, October/26/2012, Director for Anticrime Programs, Bureau of International Narcotics and Law Enforcement Affairs, The Destructive Impact of Illicit Trade and the Illegal Economy on Economic Growth, Sustainable Development, and Global Security, US Department of State, http://www.state.gov/j/inl/rls/rm/199808.htm//ghs-SG)From an economic perspective, all of these illicit activities divert money from the balance sheets of legitimate businesses and put cash in the hands of criminals, who build larger and larger illicit networks. These networks threaten the stability of governments and the prosperity of our economies.

National revenue and assets intended to finance the future are instead embezzled and stashed away for private gain, impairing the ability of communities and businesses to make the investments

necessary to create resilient pathways for economic growth and give people hope for a brighter tomorrow. Illicit trade and the illegal economy also undermine the social stability and socioeconomic welfare of our communities. Illicit enterprises not only divert opportunities from the legal economy, they also divert revenue threatening economic growth and development

and preventing the equitable distribution of public goods. But this goes beyond just the economic

harm. The illegal economy also incurs a significant negative social cost. Consider how criminals undermine fair labor conditions through exploitation of persons in the illegal economy such as coca and heroin

cultivation and in industries as varied as manufacturing counterfeits, agriculture, tourism, and elder hostels. Equally damaging is the environmental damage resulting from criminals’ penetration into illegal logging, wildlife trafficking, waste hauling, and fishing. Instead of producing wage earners for tomorrow’s markets and investments, the communities most at risk of

exploitation by illicit networks are saddled with the negative externalities of the illicit economy. The grim reality is that revenue that could be used to build roads to facilitate commerce, hospitals to save lives,

homes to raise and protect families, or schools to educate our future leaders are lost to kleptocrats, criminals, and terrorists whose only interest in the future may be to destroy it.

Money laundering poses a serious threat to nation and international security and unchecked will undermine national economies and curriencesMcDowell and Novis, 2001 (John McDowell, Senior Policy Adviser of the Bureau of International Narcotics and Law Enforcement Affairs, U.S. Department of State. Gary Novis, Program Analyst of the Bureau of International Narcotics and Law Enforcement Affairs, U.S. Department of State. “THE CONSEQUENCES OF MONEY LAUNDERING AND FINANCIAL CRIME” https://www.hsdl.org/?view&did=3549) // ILMoney laundering is the criminal’s way of trying to ensure that, in the end, crime pays. It is necessitated by the requirement that criminals — be they drug traffickers, organized criminals, terrorists, arms traffickers, blackmailers, or credit card swindlers — disguise the origin of their criminal money so they can avoid detection and the risk of prosecution when they use it. Money laundering is critical to the effective operation of virtually every form of transnational and

organized crime. Anti-money-laundering efforts, which are designed to prevent or limit the ability of criminals to use their ill- gotten gains, are both a critical and effective component of anti-crime programs. Money laundering generally involves a series of multiple transactions used to disguise the source of financial assets so that those assets may be used without compromising the criminals who are seeking to use them. These transactions typically fall into three stages: (1) placement — the process of placing unlawful proceeds into financial institutions through deposits, wire transfers, or other means; (2) layering — the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions; and (3) integration — the process of using an apparently legitimate transaction to disguise illicit proceeds. Through these processes, a criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source. Money laundering has potentially devastating economic, security, and social consequences. It provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials, and others to operate and expand their criminal enterprises. Crime has become increasingly international in scope, and the financial aspects of crime have become more complex due to rapid advances in technology and the globalization of the financial services industry. Modern financial systems, in addition to facilitating legitimate commerce, also allow criminals to order the transfer of millions of dollars instantly using personal computers and satellite dishes. Because money laundering relies to some extent on existing financial systems and operations, the criminal’s choice of money laundering vehicles is limited only by his or her creativity. Money is laundered through currency exchange houses, stock brokerage houses, gold dealers, casinos, automobile dealerships, insurance companies, and trading companies. Private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all can mask illegal activities. In doing so, criminals manipulate financial systems in the United States and abroad. Unchecked, money laundering can erode the integrity of a nation’s financial institutions. Due to the high integration of capital markets, money laundering can also adversely affect currencies and interest rates. Ultimately, laundered money flows into global financial systems, where it can undermine national economies and currencies. Money laundering is thus not only a law enforcement problem; it poses a serious national and international security threat as well.

Money laundering is a threat to the economic and political stability of international security, affecting all countries regardless of their level of developmentFrance Diplomatie, 2014 (France Diplomatie, French Ministry of Foreign Affairs and International Development. “France and the fight against money-laundering, financing of terrorism and corruption” http://www.diplomatie.gouv.fr/en/french-foreign-policy/defence-security/money-laundering-and-corruption) // ILThe fight against illicit financial flows is a priority for the French authorities. Money laundering is central to criminal activities and is a threat to the economic and political stability of countries and international security. The rise of terrorism has made it necessary to strengthen the surveillance of financial circuits that could fund it. To address these facts, France has adopted a considerable legal arsenal and actively participates in improving standards in this field, both at international level, through its contribution to the work of the Financial Action Task Force (FATF) and at regional level, as a contributor to the legislative work carried out by the European Commission and to the conventions of the Council of Europe. Corruption affects all countries, regardless of their level of development. It is a barrier to sustainable economic development and an obstacle to good governance and strengthening the rule of law, especially when it affects sectors such as policing, justice and prison administration. Corruption also provides fertile ground for the development of criminal and/or terrorist activities in certain vulnerable countries. The poorest people are those most affected by its consequences. According to a World Bank study, the sum of bribes paid each year amounts to $1000 billion, representing 9% of global trade.

Money laundering is identified as a threat to global peace and freedom – it undermines political stability, increases crime, encourages corruption Schroeder, 2001 (William R. Schroeder, Associate Professor of Philosophy at the University of Illinois at Urbana-Champaign. He is the author of Sartre and His Predecessors (1984) and co-editor, with Simon Critchley, of A Companion to Continental Philosophy (Blackwell, 1998). “Money Laundering” https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB4QFjAA&url=http%3A%2F%2Fwww.unl.edu%2Feskridge%2Fcj394laundering.doc&ei=RbmZVZrqGMb6-AGvrYLICw&usg=AFQjCNFZVdsCNkiPQlS2lOGICAb4W3wDNQ&bvm=bv.96952980,d.cWw&cad=rja) // ILMoney laundering has become a global problem as a result of the confluence of several remarkable changes in world markets (i.e., the globalization of markets). The growth in international trade, the expansion of the global financial system, the lowering of barriers to international travel, and the surge in the internalization of organized crime have combined to provide the source, opportunity, and means for converting illegal proceeds into what appears to be legitimate funds. Money laundering can have devastating effects on the soundness of financial institutions and undermine the political stability of democratic nations. Criminals quickly transfer large sums of money to and from countries through financial systems by wire and personal computers.5 Such transfers can distort the demand for money on a macroeconomic level and produce an unhealthy volatility in international capital flows and exchange rates.6 A recent and highly publicized case prosecuted in New York provides an example of the ease with which criminals can launder large amounts of money in a short time period.7 Several individuals and three companies pleaded guilty to federal money laundering charges in that case in connection with a scheme that funneled more than $7 billion from the Russian through a bank in New York over a 2-year period. The laundering scheme involved the transfer of funds by wire from Moscow to the United States and then to offshore financial institutions. Additionally, in 1998, federal authorities in Florida announced arrests in an international fraud and money laundering scheme involving victims from 10 countries, with losses up to $60 million laundered through two banks on the Caribbean island of Antigua.8 Emerging market countries9 are particularly vulnerable to laundering as they begin to open their financial sectors, sell government owned assets, and establish fledgling securities markets.10 The economic changes taking place in the former Soviet States in Eastern Europe create opportunities for unscrupulous individuals where money laundering detection, investigation, and prosecution tools slowly take shape. Indeed, as most emerging markets began the process of privatizing public monopolies, the scope of money laundering increased dramatically. The international community of governments and organizations that have studied money laundering recognize it as a serious international threat.11 The United Nations and the Organization of American States (OAS) have determined that the laundering of money derived from serious crime represents a threat to the integrity, reliability, and stability of financial, as well as government, structures around the world.12 In October 1995, the President of the United States, in an address to the United Nations General Assembly, identified money laundering, along with drug trafficking and terrorism, as a threat to global peace and freedom. Immediately thereafter, he signed Presidential Directive 42, ordering U.S. law enforcement agencies and the intelligence community to increase an integrate their efforts against international crime syndicates in general and against money laundering in particular.13 The U.S. Department of the Treasury Deputy Secretary summed up the seriousness of the domestic and international threat when he testified before the U.S. Congress on March 9, 2000. During his testimony before the House Committee on Banking and Financial Services, he advised that money laundering encouraged corruption in foreign governments, risked undermined the integrity of the U.S. financial system, weakened the effects of U.S. diplomatic efforts, and facilitated the growth of serious crime.14 These assessments make it clear that money laundering presents not only a formidable law enforcement problem, but also a serious national and international security threat as well. Money laundering threatens jurisdictions from three related perspectives. First, on the enforcement level, laundering increases the threat posed by serious crime, such as drug trafficking, racketeering, and smuggling, by facilitating the underlying crime and providing funds for reinvestment that allow the criminal enterprise to continue its operations. Second, laundering poses a threat from an economic perspective by reducing tax revenues and establishing substantial underground economies, which often stifle legitimate businesses and destabilize financial sectors and institutions.15 Finally, money laundering undermines democratic institutions

and threatens good governance by promoting public corruption through kickbacks, bribery, illegal campaign contributions, collection of referral fees, and misappropriation of corporate taxes and license fees.16

Small Business Add-On

2ACSOX hurts small businesses Kamar et al 5 - Ehud Kamar Associate Professor, University of Southern California Gould School of Law; Visiting Professor, New York University School of Law. Pinar Karaca-Mandic is an Economist, RAND Corporation. Eric Talley is a Professor, University of Southern California Gould School of Law and Senior Economist, RAND Corporation; Visiting Professor, University of California at Berkeley (Boalt Hall) School of Law. (“Going Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analysis,” PDF for E-Scholarship Sept, 2005) STRYKERIn this article, we have reported evidence consistent with the hypothesis that the Sarbanes-Oxley Act of 2002 disproportionately burdens small firms . In

particular, using foreign firms as a control group, we have found that the propensity of small public American firms to be acquired by private acquirers rather than public ones increased substantially in the first year after enactment of SOX . By contrast,

we have not found a similar effect for large firms. These results have been robust in a number of alternative specifications. We have offered two complementary interpretations of these findings.

According to the “new sales hypothesis,” the enactment of SOX induced struggling small firms to be sold . The acquirers of these firms , in turn, tended to be financial acquirers for reasons unrelated to SOX. According to the “all sales hypothesis,” SOX reduced the price that public acquirers would pay for target firms without affecting the price that private acquirers would pay because only public acquirers would inherit any firm-specific compliance costs associated with the target firm. These compliance costs are relatively higher for small firms . Our findings bear on the ongoing debate about the desirability

of SOX and the regulatory regime it catalyzed. To the extent that SOX induced small firms to exit the public capital market , it represents a burden on entrepreneurship that transcends the immediate effects we have estimated . Creating an environment in which entrepreneurship can flourish is seen by many as a fundamental virtue of the American economy . In the

words of a recent newspaper report: “How else could a small software company become a Microsoft, or its founder become a famous millionaire?” (Deutsch 2005). While this consideration should not drive all policy decisions, neither should it be ignored.

Small businesses are key to biotechWyse 7 [Roger, Managing Director and General Partner, Burrill & Company, U.S.A., “What the Public Sector Should Know about Venture Capital”, ipHandbook of Best Practices, http://www.iphandbook.org/handbook/ch13/p03/] allaReady access to venture capital investments is vital to the success of start-up companies in the capital intensive high-technology sectors such as biotechnology . But there is a common misconception that an abundance of venture capital will spawn the formation of new companies. In fact, the opposite is true: new companies actually attract venture capital. This chapter provides an overview of the venture capital system, explains its importance, and identifies what qualities of a company make it attractive to venture capital investors. Some of the factors can be influenced by government action, so the chapter offers several ways that governments can encourage venture capital investment. 1. Introduction Commercialization of biotechnology research is a long, expensive process that requires highly trained staff, sophisticated laboratory facilities, and costly regulatory approvals . A growing amount of this work is done by small companies . They are the primary source of innovation in biotechnology and are performing an ever-increasing share of total U.S. R&D. According to data from the National Science Foundation,

the value of small -company R&D rose to US$40 billion, accounting for 20.7% of the value of all private sector R&D. These small start-up companies rely on venture capital investment to fund their R&D activities. As pharmaceutical and agriculture companies merge and become larger, they increasingly focus on development and marketing, and lose their agility and ability to innovate . Thus, large companies increasingly gain access to the innovations of small companies through licensing agreements, R&D partnerships, and acquisitions. Prior to the 1980s, most agricultural innovation in the U.S. originated at land-grant universities; there were very few small start-up companies. Innovation was offered directly to farmers and to large agriculture companies via products and license agreements. Then with the onset of the go-go genomics era in the late 1990’s agriculture went through two major restructuring cycles. The first cycle was based on the premise that understanding of life processes at the molecular level could be leveraged across agriculture and pharmaceuticals. So-called life science companies were formed. Small agriculture biotechnology (agri-biotech) companies were started based on new genetic technologies; these small companies were quickly acquired by larger companies as they raced to converted into life sciences companies through the acquisition of genomics technologies and germplasm. However, these large life science companies soon discovered the complexities inherent in managing business units with very different cost structures, market sizes, margins, and regulatory paths. Within two to three years, therefore, the large companies spun off freestanding pharmaceutical and agriculture companies. These rapid cycles of restructuring negatively affected small companies, because very few partnerships and acquisitions took place between 1998 and 2004. Fortunately, the trend now seems to be reversing and large agri-biotech companies are again acquiring innovation from small companies, particularly in an era when agriculture increasingly includes food production and biomass for fuels and materials. The ongoing challenge now is to create an environment that encourages entrepreneurship, the formation of small innovative companies and venture capital investment.

Biotech solves Extinction Trewavas 2K [Anthony, is a Professor at the University of Edinburgh, best known for his research in the fields of plant physiology and molecular biology, “GM Is the Best Option We Have”, June 5, 2000, http://www.agbioworld.org/biotech-info/articles/biotech-art/best_option.html] In 535A.D. a volcano near the present Krakatoa exploded with the force of 200 million Hiroshima A bombs . The dense cloud of dust so reduced the intensity of the sun that for at least two years thereafter, summer turned to winter and crops here and elsewhere in the Northern hemisphere failed completely . The population survived by hunting a rapidly vanishing population of edible animals. The after-effects continued for a decade and human history was changed irreversibly. But the planet recovered. Such examples of benign nature's wisdom, in full flood as it were, dwarf and make miniscule the tiny modifications we make upon our environment. There are apparently 100 such volcanoes round the world that could at any time unleash forces as great . And even smaller volcanic explosions change our climate and can easily threaten the security of our food supply . Our hold on this planet is tenuous . In the present day an equivalent 535A.D. explosion would destroy much of our civilisation . Only those with agricultural technology sufficiently advanced would have a chance at survival . Colliding asteroids are another problem that requires us to be forward-looking accepting that technological advance may be the only buffer between us and annihilation. When people say to me they do not need GM, I am astonished at their prescience, their ability to read a benign future in a crystal ball that I cannot. Now is the time to experiment; not when a holocaust is upon us and it is too late. GM is a

technology whose time has come and just in the nick of time. With each billion that mankind has added to the planet have come technological advances to increase food supply . In the 18th century, the start of agricultural mechanisation; in the 19th century knowledge of crop mineral requirements, the eventual Haber Bosch process for nitrogen reduction. In the 20th century plant genetics and breeding, and later the green revolution. Each time population growth has been sustained without enormous loss of life through starvation even though crisis often beckoned. For the 21st century, genetic manipulation is our primary hope to maintain developing and complex technological civilisations . When the climate is changing in unpredictable ways, diversity in agricultural technology is a strength and a necessity not a luxury . Diversity helps secure our food supply. We have heard much of the precautionary principle in recent years; my version of it is "be prepared".

AT//Regulations Good Note: Many of these cards are already in the “Long” version of the Economy 1ac Advantage. Other cards may be duplicated with 2AC to the Fraud DA.

2AC—Regulations GoodSOX regulations are ineffective—they don’t prevent fraud and crush market self-regulationKuschnik 8 - Bernhard Kuschnik is a legal clerk at the Landgericht (Regional Court) in Düsseldorf, Germany; First State Exam in Law (Higher Regional); LL.M. (University of Aberdeen, Scotland, UK), and PhD Candidate at the Eberhard Karls University of Tübingen, Germany. (“THE SARBANES OXLEY ACT: “BIG BROTHER IS WATCHING YOU” OR ADEQUATE MEASURES OF CORPORATE GOVERNANCE REGULATION?” http://businesslaw.newark.rutgers.edu/RBLJ_vol5_no1_kuschnik.pdf 2008) STRYKER***MODIFIED FOR OBJECTIONABLE LANGUAGE***Finally, SOX declares the state as being the overall watchdog of corporate governance. Section 107(a) provides the SEC with oversight and enforcement authority over the Board .89 If a company chooses to introduce a new governance rule, it has to ask the SEC if the new rule is consistent with SOX before the new provision can be deemed effective.90 The Board is required to “promptly file any notice with the Commission of any final sanction on any registered public accounting firm or on any associated person thereof,”91 and has the final word regarding the gravity of disciplinary action against the outside auditor.92 Under certain circumstances the SEC is also able to amend the rules of the Board.93 Furthermore, SOX not only patronizes the decisions of the Board, but of shareholders as well. According to § 107(d) of SOX, the SEC has the authority to “relieve the Board of any responsibility to enforce compliance with any provision of this Act, the securities laws, the rules of the Board, or professional standards,” and to censure and limit the activity of the Board if it has violated SOX without reasonable justification. If it is “in the public interest” or “for the protection of investors” the SEC even has the power to remove directors from office.94 This scope of authority is justified with the assertion that the shareholder is not able to effectively enforce [their] his rights on [their] his own. Since this is seen as a “failure of the market,” there is a need for governmental regulation, which is achieved by a mix of paternalism95 and the call for “shareholder empowerment.” The latter is supposed to be realized by giving shareholders greater rights for the election to the Board of Directors.96 Yet, it is questionable if the SOX and SEC strategies turn out to be effective . Managers would face discipline not only through the dynamics of the market for corporate control, but also internally through shareholder action.97 And small investors, as Pettet illustrates, are very often not interested in participating in the decision making process because the amount of prospective profit compared to the required effort is disproportionate,98 whereas institutional investors who have great influence in the decision making process will probably not like the enhanced decision making power of SEC because it undermines their own virtual rights. Hence, it is questionable if market self-regulatory processes are not more desirable . Small investors , in other words, can rely on “ self help remedies ” such as derivative suits . Also, the market is able to react via hostile takeover mechanisms .99

GO TO FOOTNOTE 9999 Ribstein, supra note 4, at 5, 56 (noting that there is a problem of hostile takeover self regulating approaches due to the extensive federal regulation ). In 1968 the Williams Act was put into force, which imposed disclosure requirements on bidders and required them to structure their bids to give incumbent directors time to defend. Id. The adoption of SEC Rule 14(e)-4 which covered disclosures of information about impending acquisition makes it even harder to go for hostile takeover approaches .

BACK TO TEXTYet, the government chose to rely on governmentally steered countermeasures, which destroys initial market regulation .

Section 404 high compliance costs generate lower job growth John, 11 – lead analyst on issues relating to pensions, financial institutions, asset building, and Social Security reform at the Heritage Foundation and Senior Fellow at the Heritage Foundation. Nonresident Senior Fellow at the Brookings Institution and as the Deputy Director of the Retirement Security Project. MA in Economics from The University of Georgia and MBA in Finance from the University of Georgia Terry College of Business (David C., “10 Years After Enron, Time to Throw Out Sarbanes–Oxley’s Section 404”, The Daily Signal, 12/02/11, http://dailysignal.com/2011/12/02/ten-years-after-enron-it-is-time-to-throw-out-sarbanes%e2%80%93oxley%e2%80%99s-section-404/?ac=1)//KTCExactly 10 years ago today, the Enron Corporation filed for bankruptcy after it was revealed that it had blatantly falsified its earnings statements for many years. Although most of the accounting irregularities that caused its collapse were already illegal, Congress overreacted and passed Sarbanes–Oxley, a massive and deeply flawed accounting reform law. A decade later, it is time for cooler heads to prevail, and to consider repealing Section 404. This onerous provision is supposed to ensure that the financial reports of publicly traded corporations meet certain standards, but in reality its major role is to greatly increase compliance costs. It continued presence discourages growing companies from going public to raise capital by imposing on them very high compliance costs in the name of protecting their shareholders. The result is lower job growth by these companies and fewer workers hired by new businesses. Congress partially recognized this in 2010 by granting an exemption to publicly traded companies whose stock is worth a total of $75 million or less, but this threshold is far too low, and questions remain if Section 404 is needed at all. Section 404 duplicates part of Section 302 and requires the management of any publicly traded company to produce an internal control report describing the scope and adequacy of its financial reporting procedures and internal financial control structures. The company is required to include this information in its annual report, send it to investors, and file it with the SEC. In addition, the company must produce “an assessment…of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.” In the same report, an outside auditor must both attest to and report on the management’s assessment of the effectiveness of the company’s internal controls and procedures. In short, Section 404 requires both an internal audit and external audit of financial accounting controls, which has turned out to be costly and time-consuming in practice.

Personal liability discourages market investment – high costs generate risk aversionLowenbrug, 05 –Ph.D. in Economics and Finance and adjunct faculty member in the School of Professional Studies and Business Education at Johns Hopkins University. Manager in the Network Industries Strategies group of the FTI Economic Consulting practice (Paul, “The Impact Of Sarbanes Oxley On Companies, Investors, & Financial Markets”, Sarbanes-Oxley Compliance Journal, 12/6/05, http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=1141)//KTCPersonal Liability Obligations Auditors now face additional costs that are passed on to corporate clients. For example, large accounting firms must undergo annual quality reviews, while smaller firms must undergo a review every three years. SOX’s requirement that audit partners must rotate every five years, and that outside auditors attest to and report on the management’s assessment of the internal controls of each issuer also increases auditor costs. Due to heightened political and legal risks associated with service as a CEO, CFO or board member, companies have been forced to increase compensation to lure executives into running a company under intense scrutiny. Finding suitable individuals has become an expensive undertaking and the fees for an executive search must be shared by companies, investors and customers. Companies additionally face increased legal fees because boards must hire outside lawyers and consultants for advice on their expanded role and help minimize risk. With increased responsibility and accountability for directors and officers, D&O coverage has become more difficult to obtain and thus more expensive. For many companies, outsourcing the compliance procedure is a better alternative than managing the procedure with internal resources. Retaining a third-party helps ensure independence,

achieve broader coverage, and compensate for a lack of internal expertise and staff availability. As a result of the increase in personal liability, companies may become more cautious and risk-adverse in the post-SOX environment and this is where indirect costs come into play. Many corporate officers and directors might be too fearful of personal liability to take business actions with risks. These individuals may decide that it is far better for a company to restrain its growth and produce steady profits than to take the risks associated with reaching for dominance in its market or entering entirely new areas of activity. This approach inevitably stifles innovation, and the economic growth of both the company and the economy. Costs associated with Internal Control Improvement In order to create strong internal controls, many companies must update and refurbish their existing information technology systems to allow standardization and integration throughout all applications company-wide. Time and money are limited resources for companies. Devoting time and money to SOX compliance can limit other activities for which those resources could have been used from research at a biotech plant, to analyst hiring at an asset management firm, to maintenance of an employee benefit program. Additionally, as companies scrutinize their internal controls and become more conscious of the process used to make decisions, they may become more risk-adverse and slower to seize opportunities . Some companies must pass their administrative costs of SOX compliance onto customers by increasing prices, thus making the company less competitive in the marketplace, especially to foreign competition not subject to SOX. Critics argue that although SOX has raised the level of disclosure, the readjustment of costs affects a company’s global competitiveness. Furthermore, the restraints from internal controls reduce the flexibility to respond to customer concerns.

1AR—Over-confidence Independently, SEC regulations create over-confidence in the marketRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERThis view of investor complacency suggests a possible cost of regulation in

addition to those discussed below in Part III.C. The market may have been misled not only by defrauding insiders, but also by years of regulators' and reformers' exaggerated claims about the efficacy of regulation . In other words,

regulation sends a signal to investors that helps shape their behavior and , specifically, that may mislead them into inaction . 16 1 If this hypothesis is correct, then

additional regulation, accompanied by new exaggerated claims for its efficacy, might inhibit markets from self-adjusting to fraud by giving investors a reason for continued complacency. 162 For example, Sarbanes-Oxley provisions calling for increased SEC review of corporate filings and a significantly increased SEC budget 163 may give investors the impression that the SEC is effectively guarding against fraud . This is an additional reason for concern about the effectiveness of these and other proposed regulatory responses to corporate fraud, discussed in more detail in Part III.B.

1AR—Investor Confidence SOX destroys foreign confidence in the US marketLyons et al 8 (Erin, School of IR at Ohio State, along with Dr. Richard Dietrich, Department of Accounting and Management Information Systems and Dr. Anthony Mughan, Department of International Studies, “The Implications of the Sarbanes-Oxley Act for U.S. Foreign Relations”, Ohio State University Press, 2008)The international outrage toward Sarbanes-Oxley is best summarized by the following statement: “SOX reaches beyond the registration and disclosure requirements first established by the 1933 and 1934 Acts and forces foreign corporations to conform to a model of corporate governance crafted by the U.S. Congress.” 67 Those who object to the Act are wary of the increasing reach of the SEC and newly created PCAOB. International concern primarily stems from Section 106 and there is a call to allow foreign exemptions for those firms that are cross-listed on U.S. exchanges. 68 Many critics emphasize that they believe in the overall purpose of Sarbanes-Oxley , but do not support the tedious requirements now demanded of foreign corporations . Another common reaction to SOX is that many believe it was created to clean up the mess of scandals that occurred in the U.S. during 2002 and that foreign firms should not have to suffer the consequences of cleaning up the U.S. system. One source believes that

“extending this regulation beyond US firms is seen as an arrogant imposition from American regulators.” 69 The negative foreign opinion stems from the fact that U.S. firms gain the upper hand over international accounting firms who now must answer to multiple regulatory systems. Disapproval of SOX is especially prevalent in the European Union , where governments are currently trying to merge several economies, all with differing laws and regulatory bodies, into a single, unified EU economic system. 70 Sarbanes-Oxley essentially deepens this burden for the EU

and the U.S. could possibly face future repercussions from the EU if it were to unify. Answering to more than one accounting regulation system is an extreme disadvantage for foreign firms and representatives of the Big Four Accounting firms abroad have readily voiced their dissatisfaction with the new law. Aidan Walsh, an executive of KPMG International, has said that SOX has made it tricky for the firm to implement abroad and believes that “the Act was put together hastily and with little regard for the consequences to companies based outside of the US.” 71 A European partner at Price Waterhouse Coopers echoes a similar attitude toward SOX and explains international opposition by stating, “No one wants to be a copy of the US. If there is any country where something has gone wrong in the field of corporate governance, and accounting and capital markets, it’s the US .” 72 Consequently,

the international community is now beginning to wonder if the U.S. capital market is really the place to invest if companies are now forced to comply with a law that puts them at an inherent disadvantage in the marketplace. 73 In some ways, it is surprising that there is such

opposition abroad because foreign corporations have traditionally followed U.S. securities laws for years in the past. A careful look into the legal framework of securities regulation provides valuable insight into this apparent anomaly. Although the creation of Regulation S, as

mentioned in the preceding section, calmed securities registration worries abroad, fraud regulation, despite the tests developed by the U.S. Courts, still creates unstable conditions in the international marketplace.

1AR—FDI SOX prevents companies from going public – decreases foreign and domestic investment in the market Lowenbrug, 05 –Ph.D. in Economics and Finance and adjunct faculty member in the School of Professional Studies and Business Education at Johns Hopkins University. Manager in the Network Industries Strategies group of the FTI Economic Consulting practice (Paul, “The Impact Of Sarbanes Oxley On Companies, Investors, & Financial Markets”, Sarbanes-Oxley Compliance Journal, 12/6/05, http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=1141)//KTC Conversely, fewer companies are willing to enter the market. SOX requirements make “going public” costly and the maintenance required to “stay public” prohibitively expensive, forcing companies to look elsewhere to raise capital. Foreign companies are also hesitant about the requirements that SOX regulations would impose and are reluctant to commit to the U.S. capital markets. U.S. institutional investors are becoming more willing to invest in foreign markets. For some, the benefits of being on a U.S. exchange may not outweigh the costs of U.S. legal and regulatory compliance (in addition to the typical international challenges of cultural and regulatory differences). For example, Porsche AG elected not to list shares on the NYSE, reportedly due to its objection to the certification of financial statements requirement of the SOX Act. In addition, SOX makes acquisitions of U.S. public companies by foreign entities more expensive. U.S. laws require registration of the foreign company shares with the SEC before the transaction can take place. Registration entails, among other things, full compliance with SOX. Therefore, if the foreign acquirer is not listed in the U.S. it will be difficult to issue its own shares to the selling shareholders of the U.S. firm.

1AR—Compliance CostsGovernment regulations of Section 404 tradeoff with job creation and productAddington, 11 – Group vice president for research at The Heritage Foundation. Vice President for Domestic and Economic Policy at the Heritage Foundation. Former Republican staff director, chief counsel or counsel for four congressional committees (Senate intelligence committee, House intelligence committee, House foreign affairs committee and House Iran-Contra committee). Former assistant general counsel of the Central Intelligence Agency and as special assistant and then deputy assistant to the president for legislative affairs during the administration of President Ronald Reagan. He went on to serve in the Department of Defense as special assistant to the secretary and deputy secretary of defense and then general counsel during the administration of President George H.W. Bush. Addington served as counsel to the vice president, and then chief of staff to the vice president, during Richard B. Cheney's two terms in that office. Bachelor of Science in Foreign Service from the Georgetown University School of Foreign Service. He received a law degree with distinction in 1981 from the Duke University School of Law. (David S., “Congress Should Repeal or Fix Section 404 of the Sarbanes–Oxley Act to Help Create Jobs”, Heritage Foundation, 9/30/11, http://www.heritage.org/research/reports/2011/09/congress-should-repeal-or-fix-section-404-of-the-sarbanes-oxley-act-to-help-create-jobs)//KTC Congress Should Review Section 404 Promptly Congress should take promptly every step it reasonably can to discourage unwarranted regulations and encourage economic growth and job creation. The government should not force businesses to use their funds to meet the costs of compliance with excessive government regulation when companies could invest those funds to create jobs and meet demand for their products or services. Congress should proceed immediately to reexamine section 404 of the Sarbanes–Oxley Act of 2002 and repeal or modify it as necessary, to free businesses to invest more of their funds in creating jobs and economic growth rather than in complying with government overregulation.

AT//Fraud Disadvantage

2AC—Fraud DisadvantageSOX regulations are ineffective—they don’t prevent fraud and crush market self-regulationKuschnik 8 - Bernhard Kuschnik is a legal clerk at the Landgericht (Regional Court) in Düsseldorf, Germany; First State Exam in Law (Higher Regional); LL.M. (University of Aberdeen, Scotland, UK), and PhD Candidate at the Eberhard Karls University of Tübingen, Germany. (“THE SARBANES OXLEY ACT: “BIG BROTHER IS WATCHING YOU” OR ADEQUATE MEASURES OF CORPORATE GOVERNANCE REGULATION?” http://businesslaw.newark.rutgers.edu/RBLJ_vol5_no1_kuschnik.pdf 2008) STRYKER***MODIFIED FOR OBJECTIONABLE LANGUAGE***Finally, SOX declares the state as being the overall watchdog of corporate governance. Section 107(a) provides the SEC with oversight and enforcement authority over the Board .89 If a company chooses to introduce a new governance rule, it has to ask the SEC if the new rule is consistent with SOX before the new provision can be deemed effective.90 The Board is required to “promptly file any notice with the Commission of any final sanction on any registered public accounting firm or on any associated person thereof,”91 and has the final word regarding the gravity of disciplinary action against the outside auditor.92 Under certain circumstances the SEC is also able to amend the rules of the Board.93 Furthermore, SOX not only patronizes the decisions of the Board, but of shareholders as well. According to § 107(d) of SOX, the SEC has the authority to “relieve the Board of any responsibility to enforce compliance with any provision of this Act, the securities laws, the rules of the Board, or professional standards,” and to censure and limit the activity of the Board if it has violated SOX without reasonable justification. If it is “in the public interest” or “for the protection of investors” the SEC even has the power to remove directors from office.94 This scope of authority is justified with the assertion that the shareholder is not able to effectively enforce [their] his rights on [their] his own. Since this is seen as a “failure of the market,” there is a need for governmental regulation, which is achieved by a mix of paternalism95 and the call for “shareholder empowerment.” The latter is supposed to be realized by giving shareholders greater rights for the election to the Board of Directors.96 Yet, it is questionable if the SOX and SEC strategies turn out to be effective . Managers would face discipline not only through the dynamics of the market for corporate control, but also internally through shareholder action.97 And small investors, as Pettet illustrates, are very often not interested in participating in the decision making process because the amount of prospective profit compared to the required effort is disproportionate,98 whereas institutional investors who have great influence in the decision making process will probably not like the enhanced decision making power of SEC because it undermines their own virtual rights. Hence, it is questionable if market self-regulatory processes are not more desirable . Small investors , in other words, can rely on “ self help remedies ” such as derivative suits . Also, the market is able to react via hostile takeover mechanisms .99

GO TO FOOTNOTE 9999 Ribstein, supra note 4, at 5, 56 (noting that there is a problem of hostile takeover self regulating approaches due to the extensive federal regulation ). In 1968 the Williams Act was put into force, which imposed disclosure requirements on bidders and required them to structure their bids to give incumbent directors time to defend. Id. The adoption of SEC Rule 14(e)-4 which covered disclosures of information about impending acquisition makes it even harder to go for hostile takeover approaches .

BACK TO TEXTYet, the government chose to rely on governmentally steered countermeasures, which destroys initial market regulation .

Market solutions are key to solve fraudRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER

The above discussion shows that regulatory responses to corporate fraud are unlikely to do much good and may do harm . At the same time, it seems clear that the frauds have increased the general level of market risk and accordingly reduced market valuations, other things, including corporate earnings, remaining constant. Since

markets seem to have failed, regulation might seem to be worth trying even if it is unlikely to help. But before adopting regulatory solutions it is necessary to consider the feasibility of market-based responses . Part IV shows that market-based approaches have high prospects of success now that the risks of defective accounting have become as obvious to investors as they have become to politicians and regulators. Indeed, it was markets and not regulators that uncovered the problems and adjusted the share prices of offending companies, while years of regulation of securities disclosures and membership of boards of directors failed to prevent the frauds . In other words, dishonest insiders were able to outrun the kinds of monitors that regulators favor, but not, ultimately, the markets . If markets can react, there are significant benefits to allowing them to do so.

Market actors are likely to be better informed and motivated than regulators. Markets also lead to a variety of competing solutions. As long as these

solutions are evaluated in liquid securities markets, the most efficient solutions are likely to dominate, and firms can pick the approaches that best suit their particular circumstances. A political or regulatory approach will pick a particular solution that may not be the most efficient overall for the reasons discussed in Part Ill.D, and may be unsuitable for many firms. Although market responses are likely to be imperfect, it is necessary to compare market with regulatory imperfections, rather than unrealistically assuming that only markets are flawed . Moreover, it is important to keep in mind that markets have been constrained by past regulation, particularly regulation of takeovers and of insider trading. Although repeal of this regulation may be

politically infeasible amid calls for more regulation of the securities markets, it is worth reflecting on the contribution of past regulation to current problems when considering whether additional regulation is appropriate.

Independently, SEC regulations create over-confidence in the marketRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERThis view of investor complacency suggests a possible cost of regulation in

addition to those discussed below in Part III.C. The market may have been misled not only by defrauding insiders, but also by years of regulators' and reformers' exaggerated claims about the efficacy of regulation . In other words,

regulation sends a signal to investors that helps shape their behavior and , specifically, that may mislead them into inaction . 16 1 If this hypothesis is correct, then

additional regulation, accompanied by new exaggerated claims for its efficacy, might inhibit markets from self-adjusting to fraud by giving investors a reason for continued complacency. 162 For example, Sarbanes-Oxley provisions calling for increased SEC review of corporate filings and a significantly increased SEC budget 163 may give investors the impression that the SEC is effectively guarding

against fraud . This is an additional reason for concern about the effectiveness of these and other proposed regulatory responses to corporate fraud, discussed in more detail in Part III.B.

Fraud is only bad because of investor over-confidence—regulations exacerbate the harmRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERWhy did not securities markets reflect skepticism about the companies' numbers and basic business plans even after public signs of problems emerged? 142 For example, no one seems to have considered the implications of WorldCom's meeting earnings projections by small fractions of a penny per share, or why Enron did not owe any taxes. 14 3 These phenomena are at least partly attributable to investor judgment biases that lead them to underestimate the risk that bad things will occur. Investors, like others, may be overly optimistic in the sense of discounting risks, including the risk of fraud. 144 This optimism may have been exacerbated in the present circumstances by a confirmation or

conservatism bias that tended to discount evidence contrary to the long-running bubble market. 145 Assuming these observations are accurate, their implications are ambiguous. On the one

hand, given investor biases, perhaps stock prices do not efficiently reflect inherent value, thereby increasing investors' need for disclosure. 146 On the other

hand, even if factors other than inherent value influence stock prices, this should not matter to investors unless they can consistently outguess the market. 14 7 There is little, if any, evidence that they can. Moreover, even if investors are irrational, it is not clear what disclosure law can or should do about it. Why would investors want more information about inherent value if their more emotional colleagues will ignore this evidence and take the price in a different direction? Indeed, critics of market efficiency argue that even well-financed arbitrageurs would not want to bear the risk of investing contrary to investor momentum and, for this reason, do not move the market toward efficiency. 14 8 More information alone cannot cure investors of the judgment biases that supposedly lead them to misuse the information. Perhaps clear disclosures of risks would provide the sort of salient warnings necessary to break through investors' excessive optimism or conservatism bias. But requiring such disclosures carries the cost of forcing firms to make characterizations that are not necessarily supported by the available facts. This could make stock prices more volatile and expose firms and insiders to liability for excessive pessimism. Moreover, mandatory disclosure designed in light of investors' judgment biases may present different problems in bear and in bull markets. As discussed below in Part IV.A, in a bear market investors may be overly skeptical, suggesting that in this context firms need to be more careful with negative than with positive information. It is not clear how a single set of rules can deal with creating considerable uncertainty. In short, regulation that simply ensures that markets will have more accurate information will not solve the problem of corporate fraud if, as many

commentators suggest, investors do not know what to do with the information when they get it. A more promising approach is encouraging investors to be more skeptical of firms' disclosures and more alert to fraud than they seem to have been in the recent corporate frauds. Yet, as discussed in the next part,

regulation may actually contribute to these problems .

Exts. Regulations FailRegulations and monitoring are badRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERIn Enron and other notorious recent fraud cases, many levels of market and monitoring devices simultaneously failed . Proregulatory theorists argue that this demonstrates that securities markets cannot be trusted to work on their own

without strong regulatory support and that new regulation is needed to restore investor confidence.

However, this Article has shown that the case for significantly increased regulation has not been made. While Enron exposed gaps in the existing monitoring structure, the benefits of eliminating those gaps are not as clear as they might seem to be. The substantial existing regulatory framework was breached by aggressive outsiders who seemed determined to ignore the risks of their actions, including their personal exposure to punishment. Promoting more independent monitors with lower-powered incentives to scrutinize the actions of highly informed and motivated insiders cannot solve this problem . Moreover, the costs of increased regulation could be significant. On the one hand, the Act may reduce the incentives of both insiders and monitors to increase

shareholder value. Even if the Act is ineffective, as this Article suggests may be the case, the Act could cause harm simply by misleading the market that regulation can solve its problems . 377 In fact, as history has often shown, from the South Sea Bubble 378

to the Great Crash, 379 market abuses manage to stay one step ahead of the regulators. The endless cycle of boom-bust-regulation accomplishes little in the long run. Finally, even if some highly sophisticated and nuanced regulation theoretically could increase social

welfare, it is not likely that this type of reform will arise out of the present highly charged political environment. Markets are capable of responding more quickly and precisely than regulation to corporate fraud, as long as regulation does not impede or mislead them. Although markets will remain imperfect , the potential for a market response, combined with the likely costs of regulation, make the case for additional regulation dubious.

SEC monitoring is ineffective and badRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERThis Article argues that, despite all the appearances of market failure, the recent corporate frauds do not justify a new era of corporate regulation . Indeed,

the fact that the frauds occurred after seventy years of securities regulation shows that more regulation is not the answer. 10 Rather, with all their imperfections,

contract and market-based approaches are more likely than regulation to reach efficient results. Post-Enron reforms, including Sarbanes-Oxley, rely on increased monitoring by independent directors, auditors, and regulators who have both weak incentives and low-level access to information. This monitoring has not been , and cannot be, an effective way to deal with fraud by highly motivated insiders. Moreover, the laws are likely to have significant costs, including perverse incentives of managers, increasing distrust and bureaucracy in firms, and impeding information flows. The only effective antidotes to fraud are active and vigilant markets

and professionals with strong incentives to investigate corporate managers and dig up corporate information.

Regulations don’t solve—the cause isn’t greed and regulations are ineffectiveRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERIn order to fix the markets, it is necessary to understand why the insiders who

pulled accounting scams at major public corporations thought they could get away with them in efficient and regulated securities markets. A thorough understanding of the perpetrators'

motives would seem to be essential in designing regulation that has a significant chance of preventing future frauds. It is too simplistic to ascribe these frauds to "greed" without accounting for the risk of detection . Notably, in contrast to notorious crooks such as Robert

Vesco, none of the main characters in the recent scandals tried to flee. Moreover,

the alleged perpetrators were not shady criminals but seemingly responsible business people who had earned the trust of their, even more respectable, monitors. For example, Scott Sullivan, who is accused of manipulating WorldCom's books in order to meet

earnings targets, was regarded as "one of the best chief financial officers around" and "the key to WorldCom Inc.'s financial credibility."' 130 How could such a man have engaged in large-scale financial manipulation if this is proved to be the case? Similar questions arise regarding the seemingly more blatant behavior of some Enron

insiders, particularly Andrew Fastow. Indeed, the insiders' conduct seems particularly puzzling, at least at first glance, given agents' usual incentives. Since agents bear severe penalties in firms if they fail, including loss of job and reputation, but normally do not get the full benefit of success, it follows that they would tend to be more cautious than their employers would want them to be, rather than the reverse. To begin with, there is a large literature on judgment biases that lead at least some people to tend to be more optimistic about the future and more confident in their judgment and ability to control future events, than

would an actor who objectively processed the relevant data. 13 1 For example, traders generally overestimate their ability to judge the true value of the company-i.e., the value of their private information. 132 These biases may be bolstered over time by the self-esteem-maximizing device of emphasizing positive returns as an indication of ability and downplaying trading losses as irrelevant.133

Moreover, even rational people arguably would be more likely than a third party observer to attribute their own failures to luck and their own successes to skill given their tendency to select actions they think will be successful. 134 Actors' judgment biases may depend somewhat on their self-esteem, in the sense that those with the highest self-esteem are the most likely to misjudge their control and skill. But managers' attributes in this respect are not randomly distributed. Donald Langevoort argues that successful firms tend to reward and promote a particular type of individual-one who is highly, perhaps unrealistically, optimistic about the firm's prospects, confident in his abilities, 13 5 seemingly loyal to the firm and its senior

management, and distrustful of outsiders. 1 36 These judgment biases and miscalculations might be enhanced by external cues. In particular, legal rules hold that managers are better able to judge the value of their companies than markets . This view emerges most clearly in cases involving takeovers or sale of the company, in which courts have given managers the power to defend against above-market-value takeovers. 137 The courts' acceptance of managers' arguments that market prices are systematically too low is particularly striking given managers' power to release positive information and ability to delay the

release of negative information. The law's disregard of markets may have helped confirmed managers' beliefs that their actions were benefiting the firm, regardless of what markets, or earnings, might be saying at the moment. The above story seems to fit some recent corporate frauds. New methods of doing business such as the provision of alternative markets (Enron), consolidation of long distance telephone service (WorldCom), or the power of downsizing (Sunbeam) produced initial successes and high market valuations based on optimistic estimates of future earnings. Stock prices built on hope were highly susceptible to negative earnings shocks,

providing an incentive to prevent these shocks at all costs. Hypermotivated and superoptimistic insiders might be able to persuade themselves that any setbacks were temporary, so that cover-ups need only work for a little while to be successful. On the one hand, they might conclude that markets that spiked in defiance of modest, or no, earnings confirmed their firms' high inherent value, and therefore the validity of their business plans. On the other hand, stocks that fell on bad earnings did not reflect even publicly available information about the firms' abiding value. Thus, hyperoptimistic insiders might be able to convince themselves that earnings manipulations "corrected" the market's misimpressions of their companies. But even these misjudgments do not seem fully to explain why insiders would risk jail and loss of all of their wealth and future business prospects by engaging in fraud that a rational person would surely realize was likely to be detected, all without apparently having a Vesco-type end game strategy. It has been argued that, once having begun their conduct, insiders managed to deceive themselves that their actions were right. 138 But surely at some point insiders would realize that the probability discounted cost of severe sanctions outweighs the potential benefit. Indeed, it would seem that insiders who disregarded the risk of punishment because they were convinced they were right were behaving altruistically rather than greedily. The solution to the puzzle may lie in the shift of agent incentives that occurs when agents perceive the risk that they may lose everything. This is probably before the agents have committed any wrongdoing, which helps explain why they would engage in wrongdoing in the first place. Insiders face punishment in the form of job and reputation loss even for lawful conduct that fails to meet investor expectations-that is, for their firm's failure to meet investors' earnings expectations. 139 At this point insiders may enter a final period in which they are no longer susceptible to potential discipline by their firms or the employment market because failure to distort earnings also will result in loss of their job and reputation . 140 Since insiders are convinced that they are doing the right thing in defending their company's value from destruction by misguided markets, they are also not subject to a significant moral constraint. As soon as insiders begin engaging in fraud, their incentives change. At this point, insiders risk loss of wealth and even personal freedom unless they continue the cover-up. Indeed, the consequences of discovery may be so severe that even a small chance of success might lead a rational actor to cover up. This calculus may be reinforced by a psychological tendency to prefer risk when choosing between present loss and a chance to avoid loss. 14 1 This brief summary should be enough to indicate that strong measures may be necessary to significantly reduce the risk of future fraud. Insiders who think that they are doing the right thing may be harder to detect and deter than those who are simply greedy. Deterrence that is effective also may be very costly . Moreover,

given the shift in incentives discussed above when the end seems near, increasing punishment may actually increase the risk of a cover-up , even as it has little effect on the fraud itself. All of this suggests significant uncertainty about how best to craft the law to prevent future frauds.

Regulations and independent monitoring failsRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKER

As discussed in Part II.A, corporate reformers have emphasized independent directors as a way to curb insider abuse. However, the emphasis on the monitoring board over the last thirty years has demonstrated the inherent limitations on independent directors' effectiveness . Myles Mace, in his famous

1971 study of directors, summarized these limitations as constraints on time, information, and inclination to participate effectively in management. 166 Outside directors lack the time to do more than review, rather than make, business decisions. They also must depend on insiders for critical information. With respect to inclination,

independent directors traditionally are nominated by insiders and, in any event, generally are selected from the business community to ensure that they will have adequate expertise and, therefore, usually will be unwilling to second guess managers. Not surprisingly, board independence has done little to prevent past mismanagement and fraud . For example, thirty years ago the SEC cast much

of the blame for the collapse of the Penn Central Company on the passive nonmanagement directors. 167 No corporate boards could be much more independent than those of Amtrak, which have managed that company into chronic failure and government dependence. Enron had a fully functional audit committee operating under the SEC's expanded rules on audit committee disclosure. 168 The substantial data on boards of directors that has been compiled over the last twenty years offers little basis for relying on regulation of board composition as the solution to corporate fraud. 169 The evidence shows that there is no overall positive relationship between various measures of firm welfare, including earnings, Tobin's q, and stock price, and the degree of independence of corporate boards. 1 70 While there is evidence that independent boards may be better at some tasks, such as removing poorly performing managers, 171 there is also evidence that independent directors are correlated with worse corporate performance . 172 This evidence indicates that insiders may have some value on boards, perhaps in adding important expertise. 1 73 In general, firms seem to be making the right decisions as to how much board independence is appropriate. If anything, evidence of a negative correlation between corporate performance and board independence may indicate that, even prior to the post-Enron regulation, corporations were being forced to err on the side of independence. 1 74 This data does not necessarily mean that board independence is irrelevant to corporate fraud. First, independent directors arguably are better at certain types of decisions, perhaps including supervising their firms' financial disclosures and relationships with auditors. Enron and related scandals arguably make the data cited above obsolete because they uncovered pervasive fraud that increases the need for this type of supervision. Second, although the overall proportion of independent directors may not affect corporate performance, the independence of certain "trustee" committees such as audit, nominating and compensation committees, may be particularly important. 175 Third, post-Enron regulation might usefully tweak the definition of independence so that it precludes at least some directors, particularly those on

sensitive "trustee" board committees, from receiving favors such as donations to pet charities with which insiders can buy director loyalty. 176 For example, Ross Johnson at RJR-Nabisco sought to buy board member Juanita Kreps by endowing two chairs at her school, Duke, one of them named after Kreps.1 77 Nevertheless,

it seems unlikely that a relatively minor donation could influence a director with a strong reputation to protect. Even given these caveats, more independence is not necessarily correlated with better monitoring . In order to avoid suspect relationships and connections, corporations may have to appoint more directors from outside the business community. Board members such as law professors, 178 with little hands-on business experience and no formal connection with a company may not be sophisticated enough to spot problems or be able or willing to stand up to a powerful executive. Moreover,

there are significant limits on what even the best audit committee can do if,

as is typically the case, it meets only a few times a year. 179 These problems of board independence may be exacerbated by other proposals to reform the board, particularly including proposals to have directors represent multiple

constituencies in the company, such as workers, rather than the shareholders exclusively. 180 Encouraging or requiring directors to focus on goals other than financial performance increases the risk that directors will miss signs of misbehavior, if only because of the limitations on directors' time discussed above. Directors who are specifically selected to represent particular constituencies may be useless in protecting against insider fraud because of their lack of business sophistication or their interest only in looking after a particular constituency. 18 1 To be sure, firms might minimize these problems by delegating financial monitoring to a specific audit committee that is focused on this task. But even in this situation, a multiconstituency board might interfere with monitoring by nominating financially unsophisticated directors or by impeding full disclosure to and discussion by the full board.

182 It has been argued that, other things being equal, independent directors would be more attentive to corporate interests if they held stock in their companies. 183 Indeed, there is evidence that firms with independent boards that get incentive compensation are

more likely to fire bad managers. 184 On the other hand, the WorldCom directors were heavy investors in WorldCom, having received both their stock and board memberships in WorldCom's earlier acquisitions of MCI and other companies.185

Government auditing failsRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERFor present purposes, the more serious issue is whether even strong regulation will change auditors' practical ability to find corporate fraud when determined corporate insiders want to hide it. In the wake of the WorldCom disclosure, an accounting expert pointed out that accountants do not do "forensic audits" designed to uncover wrongdoing, but rather only sampling audits that may entirely miss the problem. 20 2 The AICPA draft standard on auditing for fraud observes that "[i]dentifying individuals with the requisite attitude to commit fraud, or recognizing the likelihood that management or other employees will rationalize to justify committing the fraud, is difficult. ' 20 3 The draft notes that "[c]haracteristics of fraud include concealment through (a) collusion by both internal and third parties; (b) withheld, misrepresented, or falsified documentation; and (c) the ability of management to override or instruct others to override what otherwise 20 4 appear to be effective controls." To be sure, there is much auditors can do to spot fraud, including developing cross- check procedures and identifying risky situations, as is made clear by the extensive discussion in the AICPA's Exposure Draft.205 However, requiring auditors to do significantly more than they are doing now may involve more than just changing their incentives and making them more independent, but also may involve changing the basic scope of what they do. The benefits of increased auditing may not exceed the costs . If investors cannot rely on auditors to find fraud, it is even less realistic for them to rely on government regulators . Sarbanes-Oxley establishes a Public Company Accounting Oversight Board to scrutinize auditors. 20 6 However, as indicated by the controversy over picking the chair of the board,20 7 simply designating a new regulatory overseer is unlikely to be a panacea. Sarbanes-Oxley also instructs the SEC to increase its review of financial statements and increases the SEC's budget.20 8 However, the SEC faces formidable problems in monitoring for fraud . 20 9 The SEC is charged with a wide range of tasks in addition to spotting fraud in financial statements, including oversight of securities firms, exchanges, investment advisors, and mutual funds, and of market trading, including insider trading. Its staff is perennially too small for these mammoth 210 tasks. Sarbanes-Oxley hopes to enlist others to help in the fight against fraud. Lawyers will now be required to report "evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent" to executives and possibly to the board.2 11 The Act also includes strong protection for whistleblowers. 2 12 As

discussed below in Part llI.C, these rules may be costly because they inhibit efficient information flows within the firm and perversely affect the relationship

between corporations and their lawyers. The main point for present purposes is that these rules are also ineffective for purposes of uncovering fraud. Those involved in a fraudulent scheme are unlikely to discuss it with nonparticipants. The new rules may inhibit even innocuous conversations that might have helped indirectly in uncovering frauds by making them fodder for federal litigation and investigations.

SEC tactics are retroactive—can’t stop the next area of fraudRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERThe recent corporate frauds were attributable less to firms' silence or misleading than to the falsity of their disclosures. Thus, it is not clear how much difference the Sarbanes-Oxley requirements concerning disclosure of off-balance-sheet transactions, pro forma earnings, and material changes in financial condition 2 15

will make in preventing future fraud. To be sure, burying information in financial statements can make it difficult for individual investors to determine a firm's financial condition. But misleading legions of analysts,

reporters, and others in an active market requires greater opacity. In any event, these provisions deal with yesterday's problem . Recent events have cast so much light on these specific matters that additional wattage is unlikely to make any difference in these particular areas. The next great fraud probably will occur elsewhere .

SEC regulations failMurphy 9 - Robert P. Murphy is an Associated Scholar with the Mises Institute. His other positions include Senior Economist for the Institute for Energy Research, Senior Fellow with the Fraser Institute, and Research Fellow with the Independent Institute. Murphy earned his PhD in economics from New York University. He taught for three years at Hillsdale College before entering the financial sector, working for Laffer Associates on research papers as well as portfolio management. Dr. Murphy is now the president of Consulting By RPM and runs the economics blog Free Advice. (“The SEC Makes Wall Street More Fraudulent,” https://mises.org/library/sec-makes-wall-street-more-fraudulent 1/5/2009) STRYKER***MODIFIED FOR OBJECTIONABLE LANGUAGE***The mainstream reaction to the Bernard Madoff scandal was inevitable. Whenever a government regulatory agency proves itself to be incredibly incompetent or corrupt, the respectable media swoop in to declare that the "free market" has failed and the agency in question obviously needs more money and power. Whether it's the Department of Education's failure to produce kids who can read, the FBI's accusations against innocent people in high-profile cases, or the FDA cracking down on tomatoes, the answer is always the same: proponents of bigger government argue that yes, mistakes were made, but the solution of course is to shovel more taxpayer money into the agencies in question. In the private sector, when a firm fails, it ceases operations. The opposite happens in government. There is literally nothing a government agency could do that would make the talking heads on the Sunday shows ask, "Should we just abolish this agency? Is it doing more harm than good?" It's not just Fannie Mae and Freddie Mac: throughout history, virtually every agency created by the federal government has been deemed too important to fail . (I vaguely remember some Republicans in the mid-1990s holding a press conference and declaring that the Department of Commerce was done, and that voters could "stick a fork in it." I guess they found it was still pink inside.) Madoff's Ponzi Scheme The pattern plays out perfectly with the SEC and the Madoff bombshell. Suppose a few years ago, I told a group of MBAs to imagine the worst screwup that the SEC could possibly perform, something so monumentally incompetent that members of Congress might openly question whether the agency should continue. I think that at least half of the class would have come up with something far less outrageous than what has happened in fact. Everyone who reads the headlines knows that Bernard Madoff is accused of running a massive Ponzi scheme that, for over a decade, has ripped off investors to the tune of $50 billion. But those who dig a bit deeper learn that Harry Markopolos, who used to work for a Madoff rival, has been writing the SEC since at least May 1999, urging them to put a stop to Madoff's Ponzi scheme. (Markopolos examined the options markets that Madoff told investors he used to hedge his positions and yield his steady stream of dividends, and Markopolos concluded that Madoff's results were impossible.) Incredibly, the SEC apparently had evidence in front of its face sixteen years ago (in relation to another case) that Madoff was a crook. Yet it gets worse. As the Wall Street Journal and others dig into the story, they find that Madoff's family had close ties to the SEC. His sons, brother, and niece, for example, worked with or advised financial regulators on certain matters—no doubt telling them the best way to protect investors from fraud. But the pièce de résistance is that Madoff wasn't caught; his own sons turned him in after he came to them and admitted what he'd done. (Let's assume they are telling

the truth and didn't realize what their father was up to all along.) And even Madoff's confession was not because of a visit from the ghost of Christmas future. No, Madoff's scheme simply ran out of gas, because of large redemption claims that his clients filed, due to the collapse of the financial markets. Had it not been for the bursting of the credit bubble, Madoff would likely still be bilking new investors — and advising the SEC. Laissez-Faire Ideology to Blame? Even though George Bush has presided over the most interventionist government since FDR's New Deal, he somehow has a reputation for being a free marketeer. (It's funny that his political opponents take him at his word when it comes to economic rhetoric, yet they don't universally refer to Bush as a lover of world democracy and peace.) Naturally, the Madoff Ponzi scheme is blamed on the Bush administration's failure to adequately fund and staff the beleaguered SEC. "Bush thinks markets are self-regulating, and look what happened!" This is complete balderdash. The SEC under George Bush has the biggest budget and the most personnel in its history. The charts below show the annual budgets and "full-time-equivalent" staff for the SEC by fiscal year. These numbers were obtained from the annual SEC reports archived here. (Note that there might be a slight discontinuity in the budget series in the year 2003, when the report format changed.) It's even more interesting to break down the growth rates in budget and staff by presidential administration. For the following table, I have assumed that an incoming president doesn't really influence the SEC's operations for that (partial) fiscal year. For example, Ronald Reagan won the election in November 1980, and was sworn in the following January 1981. To gauge how much he increased the SEC budget and staff, I look at the annualized growth from FY 1981 (which ran through September 1981) to FY 1989. However, I also ran the numbers going from FY 1980 through FY 1988 etc., and it doesn't really affect the results. Administration Annualized SEC Budget Growth (not inflation-adjusted) Annualized SEC Full-Time Staff Growth Jimmy Carter 9.3% -1.2% Ronald Reagan 7.5% 1.4% George H.W. Bush 15.3% 6.7% Bill Clinton 6.8% 1.4% George W. Bush 11.3% 1.0% As the table shows, clearly the person who hated the free-wheeling market most was the first President Bush, followed up by his son. And especially when we consider the high inflation rate, it's obvious that Jimmy Carter was a laissez-faire ideologue. Bill Clinton, in contrast, had the same attitude towards speculators as Ronald Reagan. Naturally we can quibble with these conclusions. Maybe Bill Clinton's numbers would have been a lot higher had Newt Gingrich remained a history professor. Maybe George W. Bush used the Enron scandal to beef up the SEC's budget, while he gave orders behind the scenes to use the cash for pizza and beer rather

than enforcement. But whatever the excuse, it just proves my point: it is foolish to give the task of ensuring financial integrity to DC politicians. The SEC was supposedly retooled after the Enron fiasco in order to do its job. And it failed miserably . Some heads may roll and budgets balloon, but if history is any guide, there will be another huge financial fraud within another decade.

Conclusion The SEC clearly botched its alleged job in the case of the Madoff Ponzi scheme. Taxpayers are certainly entitled to ask, "What exactly are we getting for our (now) $900 million

per year?" It is not simply that the SEC failed to help. On the contrary, the SEC is actively harmful . For one thing, its implicit blessing of Madoff probably reassured some investors ; surely the SEC would have shut him down if his returns were bogus! Beyond that, the SEC has been horrible during the financial crisis . In the summer it engaged in a phony ban on "naked" short selling that was already illegal, and then a few months later it banned short selling outright on hundreds of financial stocks, a move that paralyzed

[destroyed] that particular sector even more. And lately, they've decided to launch a witch hunt on Mark Cuban—those 3,000+ employees have to do something. Democrats should not take away from the Madoff scandal the lesson that Republicans cannot be trusted to regulate financial markets. Even if it were true that Democrats would run it more honorably and competently, eventually another Republican will win the White House. Rather than pitting each party against the other, it is wiser to conclude that Washington politicians and bureaucrats will never put the average taxpayer or investor's interests above those of billionaire financiers. The SEC should be abolished , and investors should rely on private-sector watchdog groups to spot swindlers.

Exts. Self-Regulation SolvesSelf regulation is betterRibstein 2 - Larry E. Ribstein is a Corman Professor at the University of Illinois College of Law. (“Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,” HeinOnline, Fall, 2002) STRYKERModern regulatory theories of corporate governance begin with Adolf Berle and Gardiner Means, who argued in the wake of the 1929 crash that owners of publicly held corporations could not effectively control their corporations. 44 This lack of control effectively involves two problems. First, as Adam Smith observed, corporate managers do not watch over "other people's money" with the "anxious vigilance with which the partners in a private copartnery frequently watch over their own."'45 In other words, public corporations involve agency costs. Second, agency costs are high because it is impractical for shareholders with small, dispersed interests to invest much time and money in monitoring managers. The antiregulatory response to Berle and Means is essentially that shareholders cannot be as vulnerable to misappropriation as the regulatory model would suggest because no one can force them to invest in firms that will squander their money. The capital markets therefore can be expected to develop devices that overcome the problems Berle and Means discussed. These devices include hostile takeovers and other devices that aggregate shareholder voting power and facilitate shareholder monitoring, alignment of managers' and shareholders' interests through incentive compensation, and monitors such as independent directors and large accounting and law firms. Efficient securities markets, in turn, provide both an effective valuation device to enable these devices to operate and a mechanism for pricing and testing the efficacy of the devices. The takeover market functions because the price of a suboptimally managed firm drops enough to make it worthwhile for better managers to buy the stock and replace the incumbents. Stock compensation is an efficient incentive because it aligns managers' interests with shareholder welfare. A company's stock price can be viewed as measuring the value of its bundle of

contracts. Even if the market cannot know the evil that lies within managers' hearts, it can observe the contracts that tend to keep them honest. Investment dollars will tend to flow to the firms with the most efficient governance devices .

AT//PCAOB CP

2AC—PCAOB CPThe PCAOB fails and gets litigatedMyers 6 (Stephanie, finance contributor to the Trusted Professional, a newsletter published by the New York State Society of CPAs, MA of Business Administration from York, “Lawsuit Challenges Constitutionality of PCAOB”, http://web.archive.org/web/20070423131945/http://www.nysscpa.org/trustedprof/306a/tp2.htm)The suit claims that the PCAOB, created by the Sarbanes-Oxley Act (SOX) in 2002, is unconstitutional and that it hinders competition . The crux of the lawsuit is that the PCAOB is actually a government entity rather than a private corporation, according to a legal overview document made public by the FEF. The organization argues that PCAOB board membership should therefore require Senate approval. Under current guidelines, the appointment of board members is left up to the Securities and Exchange Commission (SEC). The legal team handling the case for the plaintiffs will include past Independent Counsel Kenneth Starr, who investigated President Clinton in 1998. The suit is being funded by the Free Enterprise Institute (www.feinstitute.org), according to a spokesperson from the FEF. Private Corporation Status Challenged In their lawsuit, the plaintiffs claim that the PCAOB’s powers—including “the power to ‘enforce compliance’ with the [Sarbanes-Oxley] Act and the securities laws, to regulate the conduct of auditors through rulemaking and adjudication, and to set its own budget and to fund its own operations by fixing and levying a tax on the nation’s public companies”—effectively render the PCAOB a government entity. “[The PCAOB] is a government entity subject to the limits of the United States Constitution, including the Constitution’s separation of powers principles and the requirements of the Appointments Clause. The Board’s structure and operation, including its freedom from Presidential oversight and control and the method by which its members are appointed, contravene these principles and requirements . For this reason, the Board and all power and authority exercised by it violate the Constitution,” the lawsuit states. PCAOB Member Selection Questioned The lawsuit contends that the PCAOB’s members should be appointed by the White House with Senate review, as opposed to being appointed by the SEC. “The PCAOB is not accountable to any person who has ever been elected and therefore [is] unaccountable to the citizenry they purport to regulate,” the FEF stated in its press release announcing the suit. “As far as board appointments go, I don’t know if the White House is necessarily the way to go, but I also don’t think the SEC is the way to go,” Joseph Troche, a member of the Society’s SEC Practice Committee, said.

Anything short of repeal fails – the CP gets circumventedJohn and Morano 7 (David, lead analyst on issues relating to pensions, financial institutions, asset building, and Social Security reform at the Heritage Foundation and Senior Fellow at the Heritage Foundation. Nonresident Senior Fellow at the Brookings Institution and as the Deputy Director of the Retirement Security Project, and Nancy, “The Sarbanes-Oxley Act: Do We Need a Regulatory or Legislative Fix?”, http://www.heritage.org/research/reports/2007/05/the-sarbanes-oxley-act-do-we-need-a-regulatory-or-legislative-fix)A growing body of evidence suggests that the unintended consequences of Sarbanes-Oxley, especially Section 404, are harming the U.S. economy and its financial industry. However, the problems with Sec tion 404 are caused as much by how regulators have implemented it and how outside auditors have interpreted it. While both the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) have recently released proposed changes in how Section 404 is implemented, it is not clear that these changes will be suffi cient to affect auditors' overzealous behavior in an era in which their every action may be subjected retroactively to a lawsuit. For that reason, auditors may need some level of

protection against legal liability before they feel comfortable with reducing the scope-and cost-of Section 404 audits. Furthermore, legislative action short of outright repeal of Section 404 is not certain to reduce the com pliance burdens and costs. The wording of Section 404 is so simple and broad that c orrective legislation would likely lengthen it and make it even more complex.

AT//FBI Advantage Counterplan

2AC—FBI CounterplanDHS is bad—giving them more coordinating power just politicizes counterterror operationsLind 15 - Dara Lind covers immigration and criminal justice for Vox. (“The Department of Homeland Security is a total disaster. It's time to abolish it.” http://www.vox.com/2015/2/17/8047461/dhs-problems 2/17/2015) STRYKERDHS has managed to distinguish itself from the other government agencies doing similar work — by becoming extremely politicized, both in its dealings with Congress and internally. It's become part of DHS' structure — again, in ways that have threatened national security . The department has had to deal with so much congressional "oversight" that it's become unproductive. As of fall 2014, more than 90 congressional committees and subcommittees had some sort of oversight responsibility over some portion of DHS. For comparison, the Department of Defense has about 30 committees or subcommittees with oversight responsibility. DHS officials need to spend enormous amounts of time preparing for congressional hearings and delivering research reports to members; that's time that can't go into directing DHS strategy , or managing the department. As former DHS Secretary Michael Chertoff said in a 2013 Annenberg Public Policy Center report, this can actually defeat the purpose of congressional oversight: "either the department has no guidance or, more likely, the department ignores both because they’re in conflict. And so the department does what it wants to do." But what does the department "want to do"? That often depends on whether "the department" means officials in Washington, or agents in the field. At DHS, the two groups are often in open conflict. Throughout President Obama's presidency, for example, Immigration and Customs Enforcement agents have been vocally opposed to any effort from DHS leadership to reduce the risk of deportation for some unauthorized immigrants. So when DHS leadership tried to target immigration enforcement by issuing memos to ICE field offices about who they should and shouldn't "prioritize" for deportation, the offices often resisted or ignored those instructions — preventing the administration from actually being able to implement its policies. (As I've written before, this is arguably the biggest reason that the administration's shifted to granting "deferred action" to unauthorized immigrants, in 2012 and again in 2014.) This intra-agency tension is likely a big reason that DHS agencies routinely rank near or at the bottom of the federal government in employee morale. (In the latest survey in December 2014, DHS ranked lowest among "large agencies," and ICE and two other DHS agencies shared the bottom three slots among all 314 agencies.) But it's also a security problem. After repeated security breaches in fall 2014, former Secret Service agent Dan Emmett wrote for Vox about the problems with the agency's culture. The culprit he identified: the move from the Department of the Treasury to DHS. After that move, he said, the agency got politicized — and Secret Service leadership stopped telling White House staff when letting the president do something (like participate in a landing on an aircraft carrier) was a bad or unsafe idea. DHS' "essential" employees aren't at department headquarters At least one member of Congress, Rep. John Mica (R-FL), is talking openly about dismantling DHS. That's partly a smokescreen for a fight about the labor rights of DHS employees — which has been ongoing since Congress passed the Homeland Security Act in 2002, and decided the creation of a new department justified stripping a bunch of rights from the workers who'd be staffing it. (Many of DHS' labor regulations were later struck down in court.) But Congress shouldn't let a partisan battle over labor relations distract them from taking a hard look at whether they still believe DHS is necessary. After all, the attitude of many members of Congress suggests that,

while they're committed to many of DHS' functions, they're not as committed to the bureaucracy that oversees them . Sure, when it's time to blame the other party, members of Congress are playing up DHS' importance: Sen. Barbara Mikulski (D-MD) called the shutdown fight "parliamentary ping-pong with national security," while Sen. Mark Kirk (R-IL) suggested building coffins outside the offices of Democratic Senators if a terrorist attack happened during the shutdown. But when they're talking about the actual consequences, Republicans, in particular, emphasize that over 85 percent of DHS employees would keep coming to work as "essential" government workers even if the department were shut down. "It’s not the end of the world if we get to that time," Rep. Mario Diaz-Balart (R-FL) told Politico, "because the national security functions will not stop." Those 85 percent are mostly front-line government workers: border agents, TSA screeners, etc. They're employees of the agencies who existed before DHS, and would continue to exist if DHS were dissolved. The employees at DHS headquarters, providing the centralized bureaucratic glue that's supposedly so important to coordinating our national security strategy? They'd be staying home in the event of a shutdown. The department's plan for the 2013 government shutdown had only 10 percent of the staff of the Office of the Secretary and the Office of the Undersecretary for Management "exempted" from the shutdown; 50 percent of the office of Analysis and Operations; and 57 percent of the National Protection and Programs Directorate (which didn't exist pre-DHS but encompasses a few pre-DHS offices). Either those offices are fundamental to "national security functions," or they're not. Given the department's track record since its formation, Diaz-Balart is probably accidentally correct: it's not actually

essential to national security that DHS, as a department, be running on a daily basis. But if he and other members of Congress are really so convinced that that's the case, they need to seriously consider disbanding DHS for good.

The counterplan fails—the DHS is extremely ineffective and fusion centers don’t work—this doesn’t take out the advantage because the FBI can avoid their problems nowLind 15 - Dara Lind covers immigration and criminal justice for Vox. (“The Department of Homeland Security is a total disaster. It's time to abolish it.” http://www.vox.com/2015/2/17/8047461/dhs-problems 2/17/2015) STRYKERBut the nonchalance with which both parties are treating the prospect of a Department of Homeland Security shutdown raises a big policy question: why does the department even exist? The answer is that it shouldn't, and it never should have. DHS was a mistake to begin with. Instead of solving the coordination problems it was supposed to solve, it simply duplicated efforts already happening in other federal departments. And attempts to control and distinguish the department have politicized it to the point where it can't function smoothly — and might be threatening national security . This isn't to say that DHS should be fully liquidated. The argument is there's no reason for it to exist as its own department when it can be reabsorbed into the various departments (from Justice to Treasury) from which it was assembled. Since neither side is fighting to make the case for DHS, it's as good a time as any to look back over the agency's decade-plus-long history, and assess how the department's actually worked. The answer appears to be that the problems built deep in the department haven't aided national security — and might have damaged it. DHS was doomed from the start "I don't think (George W.) Bush was ever excited about the department," former Democratic member of Congress Jane Harman told The New Republic in 2009. But because it was "politically expedient," his White House went ahead with building a proposal for the new department in spring 2002 — and rushed the process, possibly to distract from revelations that the intelligence community could have prevented 9/11 if it had coordinated the information it already had. If the point of DHS was to consolidate disaster prevention (whether natural or terroristic) and response under one roof, it failed miserably . The process for deciding which existing agencies would be moved to DHS, and which ones would stay in other departments, was haphazard at best. According to a 2005 Washington Post article, the agency that supplies prosecutors in immigration court cases was moved to DHS; the agency that supplies immigration court judges, on the other hand, stayed in the Department of Justice. (The reason: the person in charge, a Harvard security expert working for Secretary-to-be Tom Ridge, simply hadn't known immigration courts were a thing, so hadn't looked for them.) When the White House team wanted a research lab for the new department, one of them phoned a friend to ask which of the Department of Energy's labs they should take — according to the Post, the team "did not realize that he had just decided to give the new department a thermonuclear weapon simulator." The department's biggest problem, however, was that it completely failed to address the single biggest pre-9/11 counterterrorism failure. In fact, it made it worse . The 9/11 Commission Report (which came out after the creation of DHS) cited failure to share counter-terrorism intelligence and strategy as one reason the attacks succeeded. According to a 2011 Cato Institute report, the two primary agencies it singled out were the FBI and the CIA — neither of which was moved to DHS. (The FBI is still part of the Department of Justice; the CIA is still an independent agency.) So now, counterterrorism work is being done by agencies in three different departments. A department of copycat programs This hasn't stopped DHS from trying to develop its own security capacity. It just means that

whatever DHS does is already being done elsewhere in the government. And

that duplication and fragmentation has made the national-security apparatus even harder to manage. Take the example of equipment grants to state and local law enforcement. There were already two different federal programs to help police departments get equipment: the Department of Defense's 1033 program, which sends out surplus military gear to law enforcement (and requires they use it within a year), and the Department of Justice's Byrne grant program. But DHS now has its own set of grants to allow police departments to purchase military and other equipment. It's supposed to be used for counterterrorism, but (just as with the other grant programs) police often end up using the equipment for routine drug enforcement. And as a recent White House report pointed out, having three different departments giving resources to local police has made it harder to track how those resources get used. If the Department of Justice, for example, finds out that a police department has been misusing funds or violating the constitution, it can cut off DOJ grant money — but the police department can turn around and apply for help from the Department of Defense and DHS. Or think of "fusion centers," regional hubs supported by DHS to share information among multiple federal

agencies and between state, local and federal law enforcement. The fusion centers aren't limited to sharing information about terrorism (they're also supposed to monitor other types of crime), but it's

definitely a big component of their mission. The problem is that the FBI already has Joint Terrorism Task Forces to investigate terrorism , and Field Intelligence Groups to

share information about it. In a 2013 study, the Government Accountability Office looked at eight cities, and found that the fusion centers in all eight cities overlapped at least partially with the FBI's counterterrorism work — and in four of them, there was nothing the fusion centers did that the FBI wasn't already doing. (There are also other things within DHS that overlap with fusion centers' other purposes.) That means that at best, DHS' coordination work is redundant : a 2012 report from

Republican Senator Tom Coburn (R-OK) found that over a quarter of terrorism-related fusion center reports "appeared to duplicate a faster intelligence-sharing process administered by the FBI." (That's in addition to the reports that were based on publicly available information.) Because of that redundancy, dismantling DHS wouldn't necessarily help civil liberties — anything DHS is doing that infringes on them is also being done by other departments. But, just like with police grants, consolidating the agencies that might be infringing on civil liberties will at least focus efforts to hold them accountable. At worst, DHS' work with fusion centers is actually hampering information sharing . A 2007 ACLU report on fusion centers explained how this would work: Most likely what is taking place is a power struggle in which federal agencies seek to turn fusion centers into "information farms"—feeding their own centralized programs with data from the states and localities, without providing much in return. The localities, meanwhile, want federal data that the agencies do not want to give up. For federal security agencies, information is often the key currency in turf wars and other bureaucratic battles, and from the days of J. Edgar Hoover they have long been loathe to share it freely.

Other Plan Option

1AC—Repeal SOXText: The United States federal government should repeal the Sarbanes-Oxley Act of 2002.

Repeal solves—state and self regulation is betterRomano 4 - Roberta Romano is Sterling Professor of Law at the Yale Law School. She is the first woman at Yale Law School to be named a Sterling Professor. (“The Sarbanes-Oxley Act and the Making of Quack Corporate Governance,” http://lsr.nellco.org/cgi/viewcontent.cgi?article=1005&context=nyu_lewp 9/26/2004) STRYKERThe absence of state codes or corporate charters tracking the SOX mandates further suggests that board composition, the services corporations purchase from their auditors, and their credit arrangements with executives, the substance of the SOX mandates, are not proper subjects for federal government action , let alone mandates, and that rendering them optional is not the optimal solution compared to their outright repeal .409 The states and the stock exchanges are a far more appropriate locus of regulatory authority for those governance matters than Congress and its delegated federal regulatory agents.410

GO TO FOOTNOTE 410410 For a more detailed explanation of why state competition for corporate charters is preferable to exclusive federal

regulation, see, e.g., Roberta Romano, The Genius of American Corporate Law (1993). The SEC’s exercise of authority over exchange rules would need to be eliminated or severely restricted , however, for the stock exchanges to become an effective source of corporate governance standards. This is because the SEC now uses its authority to force the exchanges to adopt uniform standards that it considers desirable, which undermines the benefit of exchange-based governance, which stems from the market-based incentives of competing exchanges to offer the rules that enhance the value of listed firms. See generally Mahoney, supra note 193. A more preferable approach to exchange standards regarding corporate governance than that of the U.S. exchanges is that taken by the London Stock Exchange, which follows a form of a “disclose and explain” rule: listed firms are required to disclose whether they comply with a code of best practices (and if they do not conform, to explain why they do not). SOX’s audit committee expert provision (section 407) is of a similar form. The reason for the difference in approach is not obvious given that there are differences in both the regulatory and domestic market environments. Namely, the difference could be due to the SEC’s preferences (that is, the agency imposes the listing mandates through its oversight authority), or because the competition among U.S. exchanges fosters a product differentiation strategy in which an exchange can benefit from adopting mandatory standards through which listed firms signal quality to investors. It should be noted, however, that Jonathan Macey and Maureen O’Hara contend that stock exchanges such as the NYSE no longer provide a reputational function (at least for domestic firms). See Jonathan R. Macey and Maureen O’Hara, The Economics of Stock Exchange Listing Fees and Listing Requirements, 11 J. Fin. Intermediation 297 (2002).BACK TO TEXTThey are closer to the affected constituents (corporations) and they are less likely to make regulatory mistakes. This is because they operate in a competitive environment: corporations choose in which state to incorporate and can change their domicile if they are dissatisfied with a legal regime, just as

corporations choose, and can change, their trading venue.411 Moreover, any regulatory mistakes made will be less costly, as not all firms will be affected. Regulatory competition offers an advantage over a monopolist regulator because it provides regulators with incentives, and the necessary information, to be accountable and responsive to the demands of the regulated, an important regulatory characteristic in the corporate context because firms operate in a changing business environment, and their regulatory needs concomitantly change over time. Namely, there is a feedback mechanism in a competitive system that indicates to decisionmakers when a regime needs to be adapted and penalizes them when they fail to respond: the flows of firms out of regimes that are

antiquated and into regimes that are not. In other words, decisionmakers who fail to update their regimes to accommodate new business circumstances will lose corporations to more innovative regimes that have adapted.412

GO TO FOOTNOTE 412412 E.g., Romano, supra note 18, at 239 n.140. It should be noted, in this regard, that states are able to act more quickly than Congress . For instance, the Delaware legislature responded to what was considered an undesirable corporate law decision on director liability 1.5 years after the holding, whereas Congress has averaged 2.4 years when reversing judicial opinions invalidating federal statutes, Romano, supra note 409, at 49, and, although the wisdom of the overruling is questionable, the Supreme Court decision on the statute of limitations overturned by SOX was decided in 1991, over a decade earlier.BACK TO TEXTThere are incentives for states to prefer having more locally-incorporated corporations to less and therefore to respond to a net outflow of firms: they receive annual franchise fee payments, and an important political constituency, the local corporate bar, profits from local incorporations.413 Exchanges, similarly, prefer more listings to less, since listing fees are a major source of revenue.414 While even a monopoly regulator is interested in increasing the number of firms subject to its regulatory authority,415 the SEC has done so not by principally trying to induce a voluntary increase in registrants by improving its regulatory product, but rather, by either aggressively interpreting the scope of its authority to include previously unregulated entities, or by lobbying Congress for a statutory expansion of jurisdiction.416 Competing regulators, by

contrast, can increase the number of firms under their jurisdiction solely by providing a product of higher value to firms. Thus, states can be expected to do a better job in setting the appropriate corporate governance default rules than Congress, or the SEC; they have a greater incentive to get things right.

TopicalityThe provisions of SOX all increased enforcement surveillanceThomsen and Norman 8 - Linda Chatman Thomsen is the Director of the Division of Enforcement, Securities and Exchange Commission. Donna Norman is the Counsel to the Director of Enforcement, Securities and Exchange Commission. (“Sarbanes-Oxley Turns Six: An Enforcement Perspective,” Journal of Business & Technology Law, Volume 3, Issue 2, Article 9, http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1078&context=jbtl 2008) STRYKERNEARLY SIX YEARS AGO CONGRESS PASSED THE SARBANES-OXLEY ACT (the "Act" or "SOX"), 1

which has been widely touted as the most sweeping federal securities law reform in nearly seventy years. The Senate and the House both were anxious to pursue corporate fraud reform after the collapse and late 2001 bankruptcy of the Enron Corporation, followed shortly by the accounting fraud at WorldCom, as well as multi-billion dollar financial frauds at Global Crossing, Adelphia, Xerox and Tyco, among others.' SOX amends both the civil and the criminal securities laws. The Act makes sweeping changes to the regulation of the accounting industry and the reporting requirements of public companies. In addition, SOX significantly adds to the wide array of tools that the Securities and Exchange Commission (the "Commission" or SEC) has to enforce the securities laws and regulations . This Article briefly will set forth the circumstances under which the Act was passed. It then will outline the substance of SOX. Finally, it will discuss key new enforcement tools that the Act gives the Commission and how these tools have impacted the Commission's enforcement program.