Columbia Law School Blue Sky Blog Publishes BR&B Attorneys' Article About Mandatory Arbitration

8/28/2017 - The Columbia Law School’s Blue Sky Blog published an article by BR&B partner Samuel M. Ward and associate Michael A. Toomey rebutting a prior article by Harvard Law School Professor Hal S. Scott.  Professor Scott argued that mandatory arbitration provisions in corporate charters would be good for stockholders and that the current system of federal oversight is sufficient to inhibit and remedy corporate fraud.  BR&B’s attorneys explain that, as stated by the U.S. Supreme Court and U.S. Securities and Exchange Commission, private enforcement of the federal securities laws is an essential supplement to federal oversight given the limited resources available to the SEC and the U.S. Department of Justice.  The article also describes why mandatory arbitration would curtail investors’ rights to pursue class or individual cases in court, where discovery in the form of internal corporate records, non-party records, and sworn testimony is available to support their claims.  As the article states: “The truth is that securities class actions are uniquely suited to provide relief for thousands of investors where individual actions – in court or in arbitration – would not be financially feasible.”  Indeed, consistent with the intent of Congress in enacting the Private Securities Litigation Reform Act of 1995, 91 of the 100 largest federal securities class actions recoveries have been achieved in cases led by institutional investors, which have recovered approximately $60 billion for investors.  The article further notes that, contrary to Professor Scott’s assertion that arbitration is more effective at redressing stockholder claims, the results of a recent seven-year Consumer Financial Protection Bureau study of arbitration demonstrated that compared to arbitration, “group lawsuits get more money back to more people.”  As article concluded

Corporations should not be permitted to commit fraud with impunity.  Investors who purchase stock at prices inflated by a company’s materially false or misleading statements about its financial, business, or operating conditions should have the right to pursue claims in court, where discovery of the facts and the evidence supporting their claims is permitted.  The results of those lawsuits are public while in contrast, arbitration is conducted behind closed doors and is not an effective vehicle to provide redress for investors.

In the end, as its name suggests, mandatory arbitration is not about shareholder choice.  It is about depriving shareholders of their only viable method of banding together to redress corporate fraud.  Mandatory arbitration will only embolden corporations to engage in fraud and deception while leaving investors out in the cold, thereby weakening rather than strengthening investor faith in our capital markets.

The posting is accessible at: http://clsbluesky.law.columbia.edu/2017/08/28/mandatory-arbitration-does-not-give-stockholders-a-choice/.