Eliminating Securities Fraud Class Actions Under the Radar

Abstract

At least since Basic, Inc. v. Levinson, the business community and many influential scholars have challenged the existence of the securities fraud class action on a variety of grounds. Recently, two proposals have been advanced to “fix” the problem of “abusive” securities fraud class actions. One proposal requires arbitration of all securities fraud actions; the other eliminates the corporate defendant in most actions. Proponents assert that shareholders should have the right to adopt these proposals through amendment of the company’s certificate of incorporation. Both these proposals have attracted more than academic interest. In reality, adoption of either proposal would substantially curtail, if not eliminate, the securities fraud class action. Part II of this paper first reviews the two rationales – compensation and deterrence–for the federal securities class action, sets forth the critics’ principal arguments as to why these goals are not achieved, and argues that the post-PSLRA securities fraud class action is reasonably effective in achieving both compensatory and deterrence goals. Part III then describes the two proposals. Part IV explains why these proposals are impermissible under the anti-waiver clause, Section 29(a) of the Securities Exchange Act of 1934. Part V explains why these proposals are also, under state law, illegal, unfair to shareholders that do not vote in favor of them, and unenforceable as to future stock purchasers. Part VI concludes by calling for a national debate on the future of the securities fraud class action. The arguments for and *803 against the securities fraud class action involve complexities and uncertainties that make “quick and dirty” solutions like these two proposals inappropriate.