Stop frivolous securities litigation

July 06, 1995|By J. Carter Beese

A BILL TO reform the nation's securities litigation system is moving toward a vote in the Senate.

Critics argue that it will allow corporate America to take small investors to the cleaners.

Nothing could be further from the truth.

As a former commissioner of the Securities and Exchange Commission, I believe that strict enforcement of securities laws is vital for investors and the integrity of the market. But today's litigation machine harms the very investors whom opponents of reform profess to help.

A majority of the high-tech firms in the Silicon Valley have been sued at least once by vociferous plaintiffs' attorneys in class-action fraud lawsuits.

One of every eight companies on the New York Stock Exchange is sued for securities fraud every five years. Is fraud really that rampant among our most successful public companies?

Or is the system allowing, even encouraging, the initiation of litigation, even when there is no evidence of wrongdoing?

Under current law, there is little downside to frivolous litigation, while the potential rewards are enormous -- the deep pockets of corporations and their advisers.

The prevailing legal doctrine of joint and several liability, which makes all defendants fully liable for what may or may not have been their wrongdoing, adds to the potential pot.

Meanwhile, the huge costs of litigation give defendants an equally powerful incentive to settle. Though there may be a high probability of winning in court, settling is often a bottom-line business decision made in the best interest of investors.

As a result, most cases are settled on a formulaic basis, with plaintiffs collecting a small fraction of their alleged loss and with legal fees consuming the remainder of the settlement account.

The ultimate costs are passed on to all investors in lower earnings and lower share prices. These costs also weigh heavily on productivity and competitiveness. Every dollar spent on frivolous litigation is a dollar less for research, innovation, capital investment and jobs.

The critics of this bill claim that its main purpose is to protect corporate officials who peddle overly optimistic predictions of profitability.

Under today's rules, any positive forecast that does not materialize can and will be held against you in court. Companies have thus become reluctant to disseminate projections crucial to investment decision-making.

The changes in securities law before the Senate would not prevent defrauded investors from seeking redress. They would simply require any action involving misleading statements to specify each such statement, thereby eliminating the vague, sweeping claims that characterize so many meritless cases.

They would begin to hold plaintiffs' attorneys accountable for the attorneys' actions by requiring the court to rule on whether the suit was frivolous.

Finally, they would establish legal protections for forward-looking information unless that information was misleading or fraudulent.

These measured reforms are surely a better deal for investors and the economy.

By addressing the imbalance in our system, separating the serious from the frivolous, we will have a tort system that provides protection from fraud without subverting fairness and free enterprise.

J. Carter Beese is a former commissioner of the Securities and Exchange Commission.

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