Arbitration and Reform in Private Securities Litigation: Dealing with the Meritorious as Well as the Frivolous

Article excerpt

INTRODUCTION

An important debate is raging regarding the federal regulatory role in the securities markets. On one side of this debate are those arguing that private securities litigation is dominated by greedy attorneys who use protracted litigation to extort large settlements from legitimate business, imposing a pernicious "litigation tax" upon the cost of capital in America and flooding our courts;(1) on the other side are those arguing that private litigation is the only realistic means of enforcing federal regulation, that the American financial markets are widely perceived to be the fairest and most efficient in the world, and that there is little, if any, evidence that the system has been abused.(2) The stakes in this debate are huge.(3) American fortunes ride upon the success of our financial markets as never before because of increased international economic competition and important demographic trends.(4) Unfair financial markets are a breeding ground for panic.(5) Inefficient markets, like those that impose arbitrary costs upon capital, stunt economic growth.(6) Most importantly, the public must have confidence in the integrity of our financial markets in order to insure a stable and inexpensive source of capital for American business growth.(7)

Recently, those arguing in favor of restricting private enforcement of the federal securities laws have scored near-fatal restrictions in the scope of private remedies available under the federal securities laws. In late 1995, Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA),(8) which restricted private claims generally and class actions in particular.(9) Congress enacted this legislation for the purpose of restricting "strike suits."(10) Congress viewed these suits as a threat to the ability of financial markets to finance start-up companies and generate jobs.(11) One notable effect of these "reforms" is that securities litigation has shifted to state courts.(12) Consequently, Congress has recently preempted state law claims when raised in class action suits involving publicly-held companies.(13) Perhaps the most critical effect of the PSLRA, however, is that it leaves private enforcement of the federal securities laws in near terminal condition.(14) This Article proposes an approach to resolving the tension between weeding out frivolous securities claims and permitting meritorious claims to proceed that neither side in this debate is likely to embrace.(15) Specifically, this Article proposes that private securities claims relating to public companies be arbitrated to the maximum extent possible.(16) Arbitration has a long and successful history in the securities broker-dealer industry, in which it is the dominant form of dispute resolution.(17)

Arbitration is capable of achieving rapid adjudications that undermine the possibility of extortionate settlements.(18) Arbitration can reduce defense costs(19) and permit meritorious claims to be resolved quickly by expert panels(20) at little or no net cost to taxpayers.(21) Most importantly, industry-sponsored arbitration in the securities broker-dealer industry under Securities and Exchange Commission (SEC) supervision provides investors with a fair process for the resolution of securities claims.(22) In short, arbitration can enhance the quality of justice available in this vital area as well as protect incipient capital formation from the costs of "strike suits." This Article recognizes that proposing an arbitration regime to resolve these claims raises a host of issues and it attempts to address the most important of these problems as well as to open a dialogue on alternative methods of resolving securities claims. This Article thus endeavors to begin a process. Indeed, one thesis of this Article is that lawmakers should proceed cautiously in addressing the proposal advanced here and implement any arbitration process in a gradual fashion in order to avoid unintended consequences. …

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