The intervening subprime meltdown makes it seem longer ago than it really was, but it was only a short time ago that regulatory reform was a very hot topic (as noted, for example, here). Dramatic intervening events have advanced other priorities. Indeed, efforts to increase rather than reduce financial markets regulation seem to be the current fashion.


Many of the same people whom only a short time ago were pleading that overregulation was harming U.S. financial markets’ global competitiveness are now clamoring for increased regulation. As former SEC Chairman Arthur Levitt noted in a March 21, 2008 Wall Street Journal op-ed piece entitled “Regulatory Underkill” (here), it is “ironic” now that the “most eminent voices in the business community” were “fixated on questionable measures of financial health” even while “the seeds of today’s market turmoil were being nourished not by regulatory excess, but by fundamental failures in oversight at almost every level.”


Even thought the climate unquestionably has changed, on July 24, 2008 the U.S. Chamber of Commerce’s Institute for Legal Reform released yet another call for reform, particularly with respect to securities class action litigation. The Institute’s Report, which is entitled “Securities Class Action Litigation: The Problems, its Impact and the Path to Reform,” can be found here. The Institute’s July 24 press release can be found here.


Among other things, the Report decries the “culture of abusive class actions” that is “eroding the competitiveness of U.S. capital markets at a time when the face perhaps their greatest threat from foreign competition.”


The Report is interesting and it is effective in summarizing the excesses and abuses of the current U.S. securities litigation system. The Report also contains some useful proposals. In particular, the Report focuses on the potential of abuses of a “pay to play” system where public officials responsible for public pension funds solicit campaign contributions from plaintiffs’ firms that are later selected to act as the pension funds’ litigation counsel. The Report advocates passage of the currently pending “Securities Litigation Attorney Accountability and Transparency Act” (H.R. 5463) to eliminate pay-to-play conflicts and other suspicious connections between attorneys and elected officials.


The Report also advocates a number of procedural reforms, including taking steps to ensure greater coordination between public and private enforcement, and enacting provisions to allow defendants whose motions to dismiss are denied to take immediate interlocutory appeals.


Overall, the Report’s recommendations are useful. There unquestionably is value in examining these issues, and the current litigation system unquestionably suffers from excesses and abuses. I question whether any of these kinds of reform proposals are likely to gain much traction in the current environment.


I also think that any reform initiative should also acknowledge several important additional considerations. The first is that our securities enforcement approach presumes active private litigation. As the Supreme Court noted in its 2007 Tellabs opinion, “meritorious private actions to enforce federal antifraud securities laws are an essential supplement to criminal prosecutions and civil enforcement actions.” While there unquestionably are excesses and abuses in the current system, any reform attempt should also acknowledge private securities litigation’s important role.


The other important consideration relates to the fundamental question of U.S. competitiveness in the global economy. Ultimately, the greatest advantage that the U.S. markets historically have enjoyed is their reputation for integrity. As Arthur Levitt wrote in the op-ed piece cited above,

Ultimately, those who were so concerned with Wall Street’s competitiveness need to realize that the true competitive advantage of America’s capital markets has long been their high quality. With that quality in doubt, leaders and policy makers need to put their ideological fixations aside and commit themselves to giving investors the levels of transparency and accountability they deserve and expect from the world’s strongest markets.

It may well be useful and even important to consider ways to improve our system of private securities litigation. But it is also critically important that any reform proposal appropriately take into account the very things that have historically given the U.S. markets their strength — that is, their reputation for transparency and integrity, a reputation that U.S. financial markets already have much work to do to rehabilitate. Somehow, these rehabilitation efforts seem higher priority now than proposals for securities class action reform, no matter how meritorious.


Special thanks to several loyal readers for forwarding a link to the Institute’s Report.


More Credit Crisis Litigation: In prior posts (most recently here), I have detailed that the current litigation wave has spread far beyond the subprime lending arena where it first originated. A recently filed lawsuit underscores the extent of this spread.


As detailed in the plaintiffs’ counsel’s July 25, 2008 press release (here), plaintiff shareholders have filed a purported securities class action lawsuit in the United States District Court for the Southern District of New York against CIT Group and certain of its directors and officers. A copy of the complaint can be found here.


CIT is a commercial and consumer finance company whose share price fell in March 2008 after reports circulated about the possibility that the company would have to charge off loans made to students of Silver State Helicopter, which had filed for bankruptcy. The complaint alleges that the defendants made false statements about the company’s financial condition, and specifically that “CIT’s public financial statements failed to account for tens of millions of dollars in loans to [Silver State], which were highly unlikely to be repaid and should have been written off.”


These have been prior lawsuits as part of the current credit crisis litigation wave that have involved student loans. For example, both Sallie Mae (refer here) and The First Marblehead Corporation (refer here) previously have been sued in securities lawsuits arising from troubled student loans. Whether or not there will be further lawsuits relating to student loans, there undoubtedly will be further litigation involving other types of credit as the current economic turmoil unfolds.


In any event, I have added the CIT Group lawsuit to my running tally of subprime and credit crisis related litigation, which can be accessed here. With the addition of the CIT Group lawsuit, the current tally of subprime and credit-crisis related securities lawsuits now stands at 102, of which 62 have been filed in 2008.


Break in the Action: The D&O Diary will be on a reduced publication schedule for the next week. The D&O Diary will resume its normal schedule during the week of August 4th.