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Abstract:
Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. is scheduled for oral argument before the U.S. Supreme Court on October 9, 2007. It has been described as "arguably the most important securities law case to reach the Court in a decade" and as securities lawyers' "Roe v. Wade." What is the legal issue that has occasioned this much attention? Phrased as a technical legal argument, plaintiff asserts that it may establish that outside actors committed a Rule 10b-5 violation on a theory of "scheme liability;" in contrast, defendants assert that Central Bank of Denver v. First Interstate Bank of Denver, which found no statutory basis for aiding and abetting liability, precludes plaintiff's theory of liability.

What is on trial before the Supreme Court, however, may be the future of private securities fraud litigation. Beyond the legal issue, the parties' positions reflect the differing views in the ongoing debate on the value of private securities fraud litigation. Does scheme liability enhance the compensatory and deterrent functions of private litigation or does it contribute to abusive private litigation that jeopardizes the US markets' competitive position? Thirty one amicus briefs have been filed in the case, about equally divided between the plaintiff's and the defendant's position. There was disagreement within the executive branch as to which side the Solicitor General should support. Most recently, the SEC announced that it would hold a spring 2008 roundtable to debate the various positions on private securities litigation.

This paper will first analyze the legal issue in Stoneridge, describe the policy issues from the perspective of the amicus briefs and then provide some commentary on the case's significance to the law and policy of private securities fraud litigation. This paper is a work-in-progress, to be continued upon the Court's opinion.

Securities Law, Rule 10b-5, Securities Litigation

Abstract:
This Report to the Securities Industry Conference on Arbitration (SICA) documents the results of the authors' empirical study, through a one-time mailed survey, of survey participants' perceptions of fairness of securities Self-Regulatory Organization (SRO) arbitrations involving customers. The survey was designed to assess participants' perceptions of the: (1) fairness of the SRO arbitration process; (2) competence of arbitrators to resolve investors' disputes with their broker-dealers; (3) fairness of SRO arbitration as compared to their perceptions of fairness in securities litigation in similar disputes; and (4) fairness of the outcome of arbitrations. We conclude that survey participants have divided views about the fairness of securities arbitration based on their most recent experience with the process. When asked about their overall impressions of securities arbitraiton, survey participants were more negative. For almost every question in the survey, statistical analysis reveals that customers have a more negative perception of the process than non-customers. Part I of this report provides an Executive Summary of our findings. Part II details the Background of the survey's development. Part III describes the Methodologies and Procedures we implemented to conduct the survey. Part IV identifies the Error Structure potentially contained in our methodologies. Part V contains our Findings as to each survey question, including, for many questions, breakdowns that isolate responses of customers only and compares them to all other categories of survey participants, as well as comparisons of regional differences among survey participants. We conclude in Part VI by noting the complexities of the findings.

securities, arbitration, dispute resolution fairness, empirical study

Abstract:
In recent years, investors' attitudes towards the securities industry plummeted, in reaction to both the conflicted research and the mutual fund scandals. In both instances, Congress and the regulators responded by asserting the need for reforms to restore the confidence of the retail investor.

This paper first reconsiders the importance of investor confidence and argues that, in an era where adults are required to invest in the markets, the government has a moral obligation to assure that investor confidence in the markets is warranted. This paper examines the SEC's reforms, as well as its investor education initiatives, through the lens of morality and assesses whether they have improved the environment for retail investors. It concludes that the most optimistic assessment is that the SEC has plenty of unfinished business to attend to.

Securities Law

Abstract:
The article discusses what has now become apparent: that during the 1990s many investors engaged in risky trading and investing strategies without an understanding of the risks involved. It is settled law that, while brokers owe duties to their customers when they control the account or make recommendations, brokers can, in the absence of fraud, stand by and allow their customers to place financially disastrous trades, considered by the securities industry to be "economic suicide." This article first analyzes whether there are any legal principles to support an expanded view of the broker's duties to prevent the customer's economic suicide. Because most broker-dealer disputes currently are resolved through arbitration, the authors next examine arbitration awards to decide whether, as has been frequently reported, arbitrators are routinely awarding damages to customers in economic suicide cases. The article then addresses whether policy considerations support an extension of brokers' duties. It concludes: (1) arbitrators generally are following the law and not imposing liability on brokers for their customers' economic suicide; and (2) policy considerations, including the regulatory focus on full disclosure, support a modest expansion of brokers' duties to include a duty to warn investors about risky trading strategies.

securities, arbitration, investor rights

Abstract:
Arbitration in securities industry-sponsored forums is the primary mechanism to resolve disputes between investors and their brokerage firms. Because it is mandatory, participants debate its fairness, and Congress has introduced legislation to ban pre-dispute arbitration clauses in customer agreements. Missing from the debate has been empirical research of perceptions of fairness by the participants, especially investors. To fill that gap, we mailed 25,000 surveys to participants in recent securities arbitrations involving customers to learn their views of the process. The article first details the survey's background, explains the importance of surveying perceptions of fairness, and describes our methodologies, procedures, and survey error structure. We then present our findings, including our primary conclusions that (1) investors have a far more negative perception of securities arbitration than all other participants, (2) investors have a strong negative perception of the bias of arbitrators, and (3) investors lack knowledge of the securities arbitration process. We also offer several explanations for these negative perceptions. We conclude that customers' negative perceptions transform the reality faced by policy-makers and mandate reform of the process, including the elimination of the industry arbitrator requirement and further public deliberation on the value of the explained award.

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 class 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. In reality, adoption of either proposal would substantially curtail, if not eliminate, the securities fraud class action.

Part I of this paper first reviews the 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 II then describes the two proposals. Part III explains why these proposals are impermissible under the anti-waiver clause, Section 29(a) of the Securities Exchange Act. Part IV explains why these proposals are also, under state law, illegal, unfair to current shareholders that do not vote in favor of them, and unenforceable as to future stock purchasers. Part V concludes by calling for a national debate on the future of the securities fraud class action. The arguments for and against the securities fraud class action involve complexities and uncertainties that make "quick and dirty" solutions like these two proposals inappropriate.

Abstract:
This short paper, originating in remarks made at the Institute for Law and Economic Policy's 15th Annual Conference on Compensation of Plaintiffs in Mass Securities Litigation, addresses an issue that has surfaced post-Dura Pharmaceuticals: can investors recover damages resulting from declines in stock price attributable to the market's reassessment of the integrity of management or the corporation's internal controls? Some finance scholars label these damages as non-recoverable 'collateral damage' that are not attributable to the original fraudulent disclosure. I argue that this position is based on a mischaracterization of the original fraudulent disclosure and that there is no basis in law or policy for denying plaintiffs recovery for what are properly considered as reputational damages.

damages, loss causation, securities fraud, securities class action

Abstract:
This essay, originating in a presentation made at the University of Dayton School of Law's Fallout from the Bailout Symposium on March 20, 2009, first sets forth some comparisons between other recent financial crises and the 2008 financial meltdown. It then provides an assessment of the SEC's role during the financial crisis and concludes with a review of the key provisions of the Obama Administration's proposed financial regulatory reform that affect the SEC and investor protection. The Obama proposal offers no redesign of the SEC, relying instead on SEC Chairman Mary Schapiro's commitment to re-energize and re-commit the agency to investor protection. It remains very much to be seen whether these efforts will be sufficient to protect the retail investor from future fraud and to restore her confidence in the markets.

financial meltdown, SEC, investor protection, retail investor

Abstract:
Nearly all investors, particularly those who seek investment advice, must rely on the services of brokerage firms, who, in turn, solicit customers by advertising the quality of their advice and their attention to their customers' needs. Because of this, investors are entitled to expect that their brokers will perform these services competently and carefully.

Yet many investors are victims of negligent treatment by the brokers. Moreover, a major deficiency in the federal regulatory system, as currently interpreted by the federal courts, is that investors have no federal remedy to compensate them for injuries caused by incompetent and careless brokers. This is the law, despite the fact that Congress, the Supreme Court, the SEC, and the self-regulatory organizations all agree about the centrality of broker competence and care in the federal regulatory system. Unfortunately, then, their lofty language is largely rhetoric.

This paper argues that Congress should adopt federal standards of competence and care for brokers and provide investors with a damages remedy for violation of these standards. I first explain why state law does not provide adequate protection for investors. I then set forth my proposal for federal standards. I next consider, as an alternative to congressional enactment, promulgation of these standards by the SEC and explore possible ways that investors could use them as the basis of a damages claim. I then assess the policy objections made by the Supreme Court and other federal courts to expanding private damages remedies for investors and find them inapplicable or not convincing in the context of the customer-broker relationship, where virtually all of customers' claims are resolved through SRO arbitration. Finally, I explain why adoption of legal standards of competence and care is important as SRO arbitration moves away from its origins as an equitable forum toward a quasi-judicial system where investors' claims may need a firmer grounding in legal principles.

Investors, Brokers, Investment Advice

Abstract:
In his article The Corporate/Securities Attorney as a "Moving Target" - Client Fraud Dilemmas, Professor Marc Steinberg demonstrates that the tightening of ethics standards imposes greater responsibilities on attorneys who represent clients that engage in securities fraud, and, as he observes, private claimants increasingly seek redress from attorneys for damages caused by their clients' fraud. Courts, however, are skeptical, generally, about the deterrent value of private securities fraud cases, express concern about the costs they impose on corporate defendants, and, in particular, are suspicious of plaintiffs' efforts to recover from deep-pocket secondary participants like attorneys. Congress has also made it more difficult for plaintiffs to bring securities fraud actions by imposing rigorous pleading standards and preempting state law securities fraud class actions. It would not be surprising, therefore, to find judicial reluctance to impose monetary liability on attorneys for failing to confront their clients' fraud. Professor Steinberg's insightful analysis of the ethical rules provides a useful opportunity to explore the state of the law on private claims for damages for attorneys' breach of these duties. The first part of this paper examines judicial treatment, after Central Bank of Denver v. First Interstate Bank of Denver, of federal securities claims made by purchasers and sellers of securities alleging that the issuer's attorney participated in the corporation's fraud. The second part of the paper explores the Securities and Exchange Commission's (SEC) Rules of Professional Conduct as a basis for malpractice claims brought by or on behalf of the corporation itself against its attorneys for failing to report fraud by the corporate management that injured the corporation. The third part considers additional state law theories. I conclude, in the fourth part, that the likelihood that courts will impose liability on attorneys for involvement in their clients' fraud is not substantial.

securities, malpractice

Abstract:
This essay introduces the Investor Rights Symposium held at Pace Law School in 2005 and summarizes the papers presented at the symposium.

securities, arbitration, investor rights

Abstract:
This article addresses an issue of securities arbitration that has largely gone unexamined: whether arbitrators have to apply the law in deciding customers' disputes with their brokers. Because of the Supreme Court's 1987 opinion in Shearson/American Express v. McMahon, most customers' disputes with their broker-dealers are resolved today in an arbitration proceeding before a securities industry-sponsored forum. While the Supreme Court assumed that arbitrators would apply the law, there is considerable evidence that they do not. This article assesses what has happened to securities arbitration since the privatization of the law. While the regulators have focused on efforts to make the procedure more like litigation, very little effort has gone into ensuring that the arbitrators are trained to apply the law. However, given the difficulties investors would encounter in pleading and proving their claims in court, they may well be better off in a system where less attention is paid to the law and more to the equities of the actual dispute before the arbitration panel. While this is not a system where accountability and predictability of results can be achieved, investors may, in fact, fare better than they might expect.

securities, arbitration, investor rights

Abstract:
Most disputes between customers and their brokerage firms are resolved through arbitration as a result of the Supreme Court's holding in Shearson/American Express, Inc. v. McMahon. McMahon was part of two larger trends of the Supreme Court: the Court's general pro-arbitration trend and its efforts to remove private securities fraud claims from federal court. Many investor advocates viewed McMahon as anti-investor, a view that continues to have support today.

This is an assessment of the current securities arbitration process from the perspective of an investor advocate. In my view, investors may fare better in arbitration than in litigation. Accordingly, the trend to transform securities arbitration into a more judicial process may not be advantageous to investors. There are additional reasons to be concerned about the securities arbitration structure created in response to McMahon in light of the proliferation of securities arbitration claims and the demands they place on the current system. In addition, this article addresses the special concerns of the small claims investors.

Securities arbitration

Abstract:
With the development of the modern corporation, corporate boards have been the locus of corporate authority, and particularly since the 1980s, boards and their performance have been under intense scrutiny. Nevertheless, corporate law has not developed a consistent theory for what boards are supposed to do; instead, it sends mixed messages about the functions and expectations of boards and the appropriate people to sit on them. The HP saga illustrates some of the dilemmas faced by directors confronted by these competing pressures.

corporations, board of directors

Abstract:
The article addresses two recent developments - the adoption by the SEC of a rule that allows brokerage firms to market fee-based accounts without registering as investment advisers and the increase in brokerage advertising that promotes the image of the broker as a trusted family friend and financial adviser. Professor Black argues that as a result of these developments investors are likely to be misled into believing that their brokers are investment advisers, with the fiduciary obligations the law requires of them, instead of brokers, whom the law generally treats as salespersons. She proposes two recommendations: (1) that brokers should not be allowed to call themselves "financial advisers" or "financial consultants"; or, assuming the SEC will not adopt this recommendation, (2) brokers should be held to their word and be obligated to provide the "competent, unbiased and continuous advice" that they promise.