By: Lydie Nadia Cabrera Pierre-Louis
In response to the highly publicized scandals at prominent
public corporations such as Enron, WorldCom, and Tyco, Congress
enacted the Sarbanes-Oxley Act of 2002, a broad package of federal
legislation intended to rein in corporate executives run amok and
restore investor confidence. This legislation did a great
deal to tighten the regulatory framework and provide greater
protections for investors. At the same time, however, certain
entities or individuals continue to exploit flaws in the law for
their own self-interest, resulting in fraud on the market or on
small investors. This article explores the loopholes in the
application of the U.S. Bankruptcy Code to the securities market,
and examines the relevant changes that Sarbanes-Oxley has made to
the U.S. Bankruptcy Code.
Specifically, this Article discusses the substantive changes to
§ 523(a)(19), which requires a court to find a debtor’s fraudulent
intent before prohibiting the discharge of a claim in
bankruptcy. In addition, this Article discusses securities
arbitration, and proposes an amendment to National Association of
Securities Dealers Rules & Regulations. This proposal
requires arbitrators to make a finding of fraud in arbitral awards
when the fraud has been pled and proven during the proceeding for
purposes of § 523(a)(19). Finally, this Article observes that
as loopholes within the law continue to be exploited, the
applicable regulatory framework must constantly be refined in order
to remain in step with an ever-changing securities market.