Sounding A False Alarm: Federal Preemption of State Securities Fraud Causes of Action
Richard W. Painter
University of Minnesota Law School
Cornell Law Review, Vol. 84, No. 1, 1998
This Article evaluates, from both an economic and a political perspective, the Uniform Securities Litigation Standards Act of 1998, a bill that preempts most securities fraud class actions under state law. The Article, drawn in part on the author's testimony before committees of the Senate and the House of Representatives, concludes that the purported benefits of requiring securities fraud claims to be litigated under federal law are ephemeral, because relatively few class actions are filed in state court and because claims of fiduciary breach are already litigated under state corporate law. The statistical evidence that plaintiffs fled to state court after the 1995 Reform Act is at best ambiguous; other statistical evidence suggests that the 1996 increase in state-court litigation was temporary and that the number of state securities class actions in 1997 returned to pre-1995 levels. Three quarters of these suits were filed in one state, California, against companies having most of their operations there. An analysis under public choice theory of trends in state law also suggests that California and most other states will favor issuers that base operations and/or sell a substantial amount of securities within the state, although a few smaller states could be dominated by pro-plaintiff interests. The Uniform Standards Act thus responds to a problem that doesn't exist, and furthermore fails to address problems that are real and need to be addressed. These include use of state court litigation by individual plaintiffs to circumvent stays on discovery in federal court and collusive agreements by class action lawyers to settle federal securities claims as part of settling corporate law claims in state court.
JEL Classification: K22Accepted Paper Series
Date posted: February 19, 1999
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