The Panic of 2001 and Corporate Transparency, Accountability, and Trust (a)

Abstract

These cases are part of a module of teaching materials that study the major financial events of the first decade of the 2000s and the dramatic shift in civic attitudes that accompanied them. Cases on the so-called Panic of 2001 address the start of the shift in 2001-02 (the complementary materials address the events of 2008 and beyond). The substance of the A and B cases is the civic reaction to the dot-com crash of 2000 and the wave of corporate fraud cases exposed from 2000 to 2002. The A case reviews the dot-com crash, the collapse of Enron, other cases of corporate fraud, and the actions of the president, Congress, and other entities up to July 15, 2002. At that date, Senator Paul Sarbanes and Representative Michael Oxley agreed to meet in a conference to hash out the final draft of the bill to be named “The Sarbanes-Oxley Act of 2002.” The dominant issue for the legislators (and for the students) is how tough to make the bill. The task for the student is to compare and contrast the respective bills and make a recommendation for a compromise. More broadly, the case affords the opportunity to reflect on the dynamics of financial crises and why it seems to be that frauds emerge during times of financial instability. Excerpt UVA-F-1788 Rev. Jul. 24, 2018 The Panic of 2001 and Corporate Transparency, Accountability, and Trust (A) On July 19, 2002, Senator Paul Sarbanes (D-Maryland) and US Representative Michael Oxley (R-Ohio) met to shape legislation aimed at limiting corporate fraud and manipulation of earnings. This meeting was a “conference committee” of senators and representatives who would seek to produce a “reconciliation” draft that could pass both houses and be presented to President George W. Bush for his signature. The two houses of Congress had approved their own versions of such legislation. It now depended on the conferees to shape a final recommendation to both houses. The laws passed by each house differed in some respects. The House version was passed on April 24 by a majority vote of 334 to 90. The Senate version was passed on July 15 by a majority vote of 97 to zero. Could the differences in the two acts be attributable to timing? In any event, how should the conferees settle their differences? What prompted this outcome? What was the purpose of the act? How successful would it be? The Dot-Com Bubble and Bust From 1992 to March 2000, the US economy and stock market boomed, particularly in the technology sector. Exhibit 1 shows that the NASDAQ Index displayed a 679% increase from January 1, 1995, to March 10, 2000, compared to a 303% increase for the Standard & Poor's 500 Index (S&P 500). During this time, venture financing of early-stage technology companies surged. The price increases reflected buoyant investor expectations about growth of the World Wide Web, growth in transmission speeds owing to high-capacity optical fiber cable, and general growth in telecommunications volume. Growing access to the internet meant that tech-based services could become part of everyday life, rather than luxuries for a few. . . .