Corporate America is working to ensure investors who are harmed by financial fraud cannot join together and hold them accountable. We are fighting to secure the savings of hardworking Americans by calling on the Securities and Exchange Commission (SEC) to preserve investors’ long-standing right to defend themselves and their savings against corporate criminals in court.
AN URGENT NEED FOR ACTION
The SEC is threatening to change long-standing policies that protect the retirement savings of hardworking Americans. For decades, if a big corporation misled or deceived its investors, those harmed by this fraud could band together in a class-action lawsuit to hold them accountable in public court. Now that fundamental American right is at risk.
Class actions have recovered billions of dollars for cheated investors, ranging from large pension funds for police officers and firefighters to everyday Americans holding IRAs and 401(k)s. These actions have also been central to holding corporations accountable for scams and fraud. Now, however, there are serious indications that SEC leadership is considering letting corporations include forced arbitration “rip-off” clauses in their bylaws or offering documents, forcing investors to give up their right to participate in class actions as the price of owning the company’s stock.
This policy reversal would allow companies to block hardworking Americans from banding together as a group to recover the losses they suffer as a result of widespread violations of securities laws. It would also remove an important deterrent to fraud that harms, not just individual investors, but the basic integrity of our nation’s capital markets on which the health of our economy depends.
BILLIONS HANG IN THE BALANCE FOR DEFRAUDED INVESTORS
Class actions provide a practical way for groups of investors who have suffered similar harm to join together in court and hold the corporation accountable. Forced arbitration clauses that ban class actions often block harmed investors from recovering any of their stolen money – because the issues in a financial fraud case are often too complex, and the costs of building a case are too high, for these claims to be dealt with effectively through individual arbitration.
Recent high-profile cases of securities fraud make clear that private enforcement is central to ensuring accountability and protecting Americans’ investments. Even when the federal government steps in, defrauded investors typically get more money back in private class actions. For instance, while the SEC recovered penalties and fees totaling $1.8 billion against Enron, WorldCom, Tyco, Bank of America and Global Crossing, private securities class actions returned $19.4 billion to defrauded investors – more than ten times as much.
WHAT'S AT STAKE FOR AMERICAN INVESTORS
American investors benefit significantly from the crucial role shareholder lawsuits play in deterring financial fraud and protecting the integrity of U.S. capital markets – even if they never personally bring a claim. Securities class actions are often the only way corporate criminals are held accountable for fraud that weakens our entire financial system.
If the SEC allows corporations to ban class action lawsuits in their IPOs, investors will lose their most effective tool to fight back against securities fraud that could decimate their savings. Instead, the retirement savings of every hardworking American investor – including anyone with an IRA or 401(k) – will be at the mercy of Wall Street firms. Such a move would also sharply conflict with President Trump’s promises to strengthen U.S. business against our competitors. One of the main reasons foreign investors hold more than $6.2 trillion in stocks in U.S. corporations is that American markets are particularly well policed compared to those in many other countries.
A more recent case demonstrates the harm a reversal of SEC policy could inflict. Petrobras, a Brazilian oil company, is charged with misleading investors about their financial statements and business operations. When claims were filed, the court found there were two different sets of investors: those who purchased securities on the U.S. market and those who purchased securities on the Brazilian stock exchange. Thanks to the U.S. securities law, the first group of investors was able to bring class actions despite a forced arbitration clause banning class actions in Petrobras’ bylaws. These investors are set to recover more than 90 percent of the $3 billion fraud settlement. The second group of investors, at the mercy of Brazilian law, were forced into individual arbitration and barred from joining a class action. They are not expected to recover a dime.
For decades, veteran pipeline operator Charles Prestwood scrimped and saved nearly $1.3 million so he could live out his retirement on a three-acre property north of Houston, Texas. But three years into retirement, his former employer, Enron, was caught in historic securities fraud that soon led to its collapse. Top executives had overstated the company’s earnings by several hundred million dollars. Shares in the company soon plummeted – from $90.75 at their peak to a low of 67 cents. “Thirty-three years working in the sun,” Charles said. “And now it’s not worth a nickel.”
After Enron’s collapse, Charles had to make ends meet on just $450 a week and was later forced to sell his family’s land to stay afloat. He told reporters that he was praying for justice so “we can get our day in court.” Thankfully, Charles and the other victims of Enron’s massive fraud did receive justice a few years later when securities class actions returned more than $7 billion to defrauded employees and investors – the largest settlement in U.S. securities litigation to date.