Interview with a Juror

The Wall Street Journal Law Blog has an interesting story about an interview with a juror who gave some insight into the process inside the jury room.  From the time of the first vote, only two of the jurors were inclined to acquit.  It is an interesting read.   

Comments

[Anon]

Change the header to Interview with a Juror

[M. Hodak]

The benefits of SOX include "return of investor confidence that has driven the Dow Jones Average to an all time high, a record number of restatements, and a drop in the number of securities fraud actions. Not all of this can be attributed to SOX but it also cannot be ignored in assessing the impact."

Your last sentence comes close to acknowledging an opportunity cost to SOX, but still leaves you guilty of affirming the consequent. To wit:

a) It's perfectly possible that our markets could be as high as they are today, or higher, absent SOX. Developed and developing markets around the world without SOX have handily outperformed the US since 2002.
b) The record number of restatements is certainly a function of closer scrutiny of financials, some of it possibly attributable to SOX, but none of which has necessarily revealed anything of importance to the investment community. (See (a)) One could make the argument that any number of other factors, such as draconian DOJ enforcement guidelines, the destruction of Andersen, or the increase in derivative suits, have had at least as much impact. One could also argue that such minute concern for how the numbers lie on the page (much of which has nothing to do with fraudulent intent) has actually undermined behavior in how earnings are managed "behaviorally." (See Graham, Campbell, Rajgopal)
c) Attributing the drop in securities fraud actions over the last few years to SOX represents a "base rate" fallacy. Securities frauds always go up after a market decline and go down after a market recovery. The relevant question is what do securities fraud actions look like given the market cycle.

With regards to the latter, even when the question is well-posed, i.e., in a falsifiable manner needed to reach a valid conclusion, it's not at all clear that the null hypothesis should be that the relative number of uncovered frauds should be higher or lower post-SOX. It all depends on whether you believe the law's deterrent versus monitoring effect would dominate, since you must assume both effects would be present and would at least somewhat offset each other.

[J. Robert Brown]

The points are well taken. What they tell us is that SOX may or may not have been beneficial, the jury is still out. That is a far cry from the usual commentary that assumes anything negative in the US securities markets is a consequence of SOX. My own view is that this country will benefit more from a race to the top rather than a race to the lowest common denominator. Take a look at the post up today on the article from the LA Times and the quote from the guy at Merrill Lynch.