“Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”
– Justice Louis Brandeis”
Investors need to be aware of efforts underway to undermine their ability to redress corporate fraud. The Securities Exchange Commission (SEC) is contemplating a highly controversial change to securities policy which would allow companies to block securities class actions, which are often the only way that defrauded investors can be made whole.
In the years leading to the election of Donald J. Trump, consumer awareness of the dangers of mandatory pre-dispute arbitration contracts seemed to be growing. Notably the New York Times published a series of in-depth exposes regarding how stacked the decks were against consumers in arbitration. Especially unfair are clauses designed to bar consumers from banding together to redress fraud through class actions.
Fast forward to 2018 and the new Administration is actively dismantling consumer protection laws and regulations in order to bolster corporate profitability at the expense of every day consumers.
For decades, the SEC has advocated against mandatory arbitration agreements that would limit or destroy shareholder protections. To date, the SEC has prohibited public corporations from employing arbitration clauses that would prevent shareholders from seeking damages through class actions. However, the SEC appears to be undergoing a change of heart suggesting that mandatory arbitration agreements for shareholders are on the horizon.
In July of 2017, SEC Republican Commissioner Michael Piwowar encouraged companies to discuss the possibility of placing a mandatory arbitration agreement in corporate charters. Similarly, in October 2017, the Trump administration issued a recommendation encouraging the SEC to consider permitting corporations to use arbitration to settle disputes with shareholders. This spring, SEC chair Jay Clayton stated that the SEC is considering approving arbitration clauses or bylaws for companies that have gone public. Simultaneously, on March 8, 2018, Clayton expressed a laissez fair opinion on this issue, stating that SEC protections against mandatory arbitration agreements are a low priority.
The securities acts were first put into effect in the wake of the Wall Street Crash of 1929. Their primary goal was to bring “truth in securities” or implement transparency in the otherwise opaque landscape of securities. In essence, it was the “light” intended to disinfect and police the market spoken of by Justice Brandeis. If the SEC were to permit mandatory arbitration clauses, this light would go dark, changing the face of securities litigation as we know it.
Mark C. Molumphy is a partner in Cotchett, Pitre & McCarthy, LLP’s Securities Practice. For more information regarding CPM’s Securities and Financial Fraud Practice visit: practices-Securities-Investor-Fraud.html
*This article was written with the assistance of law clerk Brittany Scott, who is a student at U.C. Hastings School of Law.