Facilitating Economic Recovery and Sustainable Growth through Reform of the Securities Class-Action System: Exploring Arbitration as an Alternative to Litigation

INTRODUCTION I. THE ECONOMIC COSTS AND BENEFITS OF SECURITIES CLASS-ACTION LAWSUITS A. The Burdens on the Federal Judiciary B. The Costs to Individual Companies C. The Costs to the United States Capital Markets and Economy D. Analysis of the Purported Benefits of Securities Class-Action Lawsuits II. ARBITRATION OF SECURITIES LAW CLAIMS A. The Development of the Law B. The Integrity of Securities Arbitration C. Key Benefits of Arbitration D. Criticisms of Arbitration III. ARBITRATION OF SECURITIES CLASS-ACTION CLAIMS AFTER THE MOTION-TO-DISMISS STAGE IV. ALLOWING NEW ISSUERS TO ELECT ARBITRATION AT THE TIME OF THE INITIAL PUBLIC OFFERING CONCLUSION INTRODUCTION In the aftermath of the global economic collapse of 2008, policymakers from around the world have been considering regulations designed to reduce the risk of future economic turmoil. Their focus has been on powers and procedures designed to reduce systemic risk and to help ensure financial stability in the world markets. (1) Although policymakers should explore prophylactic measures and use counterfactual reasoning, they should not confine their analysis to preventing the next crisis. Regulating against the risk of unpredictable disaster--a so-called black swan (2)--is imprecise and, if done improperly, can hinder economic growth. Along these lines, policymakers must be cautious to avoid a regulatory overreaction to the current economic problems. (3) In an effort to promote long-term economic prosperity, policymakers should avoid the temptation to overregulate in the near term. Policymakers also must alleviate unnecessary burdens to economic growth, both in the United States and abroad. But a monetary response, such as a stimulus spending package, provides only short-term economic relief and could cause a host of problems not discussed in this Article. To promote long-term and sustainable growth, policymakers must consider regulatory measures designed to facilitate capital formation and encourage investment, while providing appropriate safeguards against fraud to investors. Of course, the legal and regulatory systems may pose the greatest impediment to economic growth. (4) The United States has its own unique hindrance to economic growth: private securities class-action litigation. Along with Canada and Australia, the United States is one of three G-20 nations to permit securities class actions. (5) Although originally envisioned as a means to provide relief to aggrieved investors, securities class-action litigation has become an inefficient and grossly incomplete means of redress for investors, a costly encumbrance to businesses, and a threat to capital formation in the United States. To be sure, access to a properly administered class-action framework provides aggrieved plaintiffs with a valuable legal recourse. Despite the drawbacks, class actions--as opposed to individual actions--are necessary to avoid the collective action problem that exists when investors accrue claims against publicly held corporations. In the absence of a class action, an individual shareholder might have little incentive to litigate an alleged securities law violation because he would be forced to bear all the costs of litigation while receiving only a fraction of the potential benefits paid to all shareholders. Class-action litigation avoids the collective action problem by allowing a class of shareholders, following the efforts of lead plaintiffs and plaintiffs' attorneys, to share the costs and benefits of a unified action proportionately. The problem with the existing class-action framework in the United States is the overuse and abuse of the litigation system. The magnitude of securities class-action litigation in the United States is astonishing. Nearly half of all class-action lawsuits in 2004 involved allegations of federal securities law violations. …

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