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Securities Markets Need Private Class-Action Lawsuits

Feb. 26, 2014

Securities Markets Need Private Class-Action Lawsuits

New Report Shows Securities Lawsuits Deter Fraud and Protect Investors, Contrary to Misleading Arguments Brought to Upcoming Supreme Court Case

WASHINGTON, D.C. – Private securities lawsuits are a necessary tool in preventing fraud and protecting investors, according to a new report released today by Public Citizen’s Chamber Watch program. The report disproves misleading arguments made by the U.S. Chamber of Commerce’s Institute for Legal Reform (ILR) as the U.S. Supreme Court prepares to hear Halliburton Co. v. Erica P. John Fund on March 5.

The report, “What’s Right With Securities Class Action Lawsuits: A Response to the U.S. Chamber’s Institute for Legal Reform,” demonstrates how much institutional investors value the ability to file private securities class-action lawsuits, and, contrary to the Chamber’s claims, how they have no incentive to pursue meritless litigation, which would only harm their own investments. It also reviews academic literature demonstrating how both private and public enforcement activities are important in deterring fraud and maintaining investor confidence.

“The Chamber’s claim that private securities lawsuits are both overly burdensome and ineffective is contradictory,” said Lisa Gilbert, director of Public Citizen’s Congress Watch division, where Chamber Watch is housed, and co-author of the report. “A more rigorous analysis of the evidence demonstrates that private securities lawsuits are effective at deterring fraud and widely supported by institutional investors as a way to maintain the credibility and sustainability of their investments.”

“Deterrents against fraud are good for investors, good for the economy and therefore good for companies in the long run,” said the report’s co-author, Jonathan Massey, of Massey & Gail LLP.

Additionally, the Chamber proposes that the U.S. Securities and Exchange Commission (SEC) be given exclusive responsibility for enforcing federal securities laws, yet even the SEC disagrees with the Chamber’s position, and, as the report explains, does not have the resources to take on such a role.

In February, the ILR published a paper attempting to discredit the Supreme Court’s decision in Basic Inc. v. Levinson (1988), in which the court ratified the “fraud-on-the-market” presumption now being challenged in Halliburton. That rule makes securities class actions possible by establishing that consumers who exchanged stock during the relevant time period can bring fraud claims without having to prove that they knew the details of misrepresentations made by the business when the consumers decided to make their transactions. Instead it acknowledges that information given or omissions made by companies are widely understood to be incorporated into market prices. The defendant can rebut such a presumption if he can show that there was no link between misrepresentations and the amount the plaintiff paid or received.

A recent report by Public Citizen’s Chamber Watch program showed that the ILR was funded in 2012 by just 96 donors giving an average of $454,110 each.

“The small group of huge companies behind the Chamber and the ILR are not genuinely trying to improve the legal system for everyone, but making a blatant attempt to end consumers’ and investors’ rights to hold them accountable for fraud and other misdeeds,” said Sam Jewler, press officer for U.S. Chamber Watch. “Companies that don’t commit fraud can take part in economic growth and stability without having to worry about losing class-action lawsuits.”

Read the report.