Regulation FD requires full disclosure of securities issuers’ communications with analysts for the supposed purpose of protecting the hypothetical ordinary investor. It’s one of those regulations that sounds good on the surface, but fails miserably in practice.
The truth is that Reg FD attempts to regulate statements that perpetuate a myth — i.e., that the securities markets are a level-playing field for the ordinary individual investor. In fact, securities markets are hopelessly rigged against the individual investors, who really have no business attempting to compete in those markets against the pros. Rather, study after study has shown that the individual investor would be much better off simply investing in index funds rather than operating under the myth that the securities markets are fairer for the ordinary investor than, say, playing the slots in Las Vegas.

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Martha Stewart — who was unjustly prosecuted and convicted for allegedly misleading the government about an supposed crime that the government could not prove — finishes the home confinement component of her sentence next week. Ellen Podgor (she of “Busted for Yoga” fame) wonders in this post which of the following will be the legacy of the Stewart case:

1. Tell the truth to the government when questioned.

OR

2. Don’t talk to the government when they seek information.

Given recent developments in other cases, the following alternative might also be added:

3. Waive the attorney-client privilege, offer up others as sacrificial lambs for the government to prosecute, and enter into a deferred prosecution agreement with the government to avoid criminal charges.

The anticipated settlement of criminal charges over KPMG, LLP‘s creation and promotion of allegedly illegal tax shelters has been finalized between the accounting firm and the Department of Justice and will be announced on Monday. Here are the previous posts on KPMG and its tax shelter saga.
Under the deal, KPMG will pay $456 million in fines, accept former chairman of the Securities and Exchange Commission Richard C. Breeden as an independent monitor of the firm’s operations through at least 2006. The firm will also agree to limits on the scope of its tax practice and continue to serve up to prosecutors for possible criminal charges former KPMG partners and other professionals who worked on the tax shelters, which the DOJ contends cost the U.S. Treasury at least $1.4 billion in unpaid taxes. KPMG allegedly earned fees of $124 million on creating and promoting the tax shelters to about 350 clients.
As noted in earlier posts, the settlement with the Justice Department does not mean that KPMG is out of the woods yet by any stretch. KPMG still faces potentially enormous civil liability as a result of its admission of wrongdoing in regard to the tax shelters. Even more importantly, KPMG’s serving up of its former partners on a platter to prosecutors has so damaged partner morale at the firm that key partners may leave the mess behind for greener pastures at competitor firms. Thus, even when it tries to do so, the federal government may not be capable of avoiding an Arthur Andersen-type meltdown of one of the few remaining big accounting firms available to handle the increased regulatory requirements that the government has imposed on public companies.
Update: This NY Sunday Times article — purportedly based on inside sources — tells the story on how KPMG’s management came to embrace, and then abandoned the defense of, the tax shelter promotion scheme.