Arbitration vs. Litigation?
Despite arbitration’s endorsement by Congress and the U.S. Supreme Court, it seems like the Securities and Exchange Commission (SEC) has a problem with it.
Hal Scott and Leslie Silverman recently wrote a commentary for the Wall Street Journal in which they point out that the SEC rejected proposals by the Carlyle Group, Pfizer and Gannett to mandate arbitration instead of litigation in disputes between investors and management. The SEC gave no explanation for the decision related to the Carlyle Group and said only that the other proposals from Pfizer and Gannett “might” violate securities laws.
Securities class actions undercut the competitiveness of the U.S. capital markets. From 2000 to 2011, the total value of all U.S. securities class action settlements was approximately $64.4 billion, according to NERA Economic Consulting. As Scott and Silverman point out in their opinion piece, securities class actions, unlike mass tort litigation, involve stockholders who are often both plaintiffs and investors in the defendant corporation.
These suits are invariably settled before trial, generally for pennies on the dollar. Small investors recover so little they often do not bother to file for their money. Between 40 to 60 percent of settlement funds generally go unclaimed, while plaintiffs’ attorneys walk away with 35 percent of the total settlement.
These lawsuits do little to deter wrongdoing. The stockholders funding a settlement generally have no knowledge of management misdeeds while the actual wrongdoers rarely pay a dime. The corporation’s directors’ and officers’ insurance covers the settlement cost.
On an issue as big as this, the SEC has to explain its reasoning for not allowing arbitration. They should be protecting shareholders, not plaintiffs’ lawyers.