Common law tort liability for fraud is a basic protection that all markets need. Private lawsuits are a market-based solution to deterring fraud and providing remedies to the victims of fraud. Combined with contingency fee arrangements, robust civil remedies for fraud create a depoliticized mechanism for policing markets. No government funds are expended and political connections will not serve to deter lawsuits brought by a private contingency fee attorney.
Typically, fraud remedies evolved in courts under the watchful eye of the judiciary. Of course, the judiciary is composed of lawyers meaning they constitute an elite group, which represent elite interests. That is just plain economic reality as lawyers are generally faced with compelling economic incentives for representing wealthy clients. In addition, the wealthy can afford the best lawyers.
As a former private securities litigator and former SEC enforcement attorney, I have represented the government, defendants and plaintiffs in a wide variety of securities lawsuits. I also have served as a securities arbitrator for the NASD. I can tell you that if anything the advantage heavily favored defendants who typically had far superior resources and attorneys that were expert in using those resources to protect their clients' interests. Judges hailed more often from corporate firms, and thus any bias there also favored defendants.
However, just holding more sway before judges and having superior representation and resources was not enough. Monied interests went to Congress and obtained powerful insulation from liability for securities fraud. First came the Private Securities Litigation Reform Act of 1995 (PSLRA). Then came the Securities Litigation Uniform Standards Act of 1998 (SLUSA). The PSLRA and SLUSA for the first time in our history gave special protection to securities fraudfeasors under federal law. This was a fundamental betrayal of the federal securities laws which were enacted after the Great Depression to provide more generous remedies to victims of securities fraud. Huge lobbying expenses turned federal law upside down. The SLUSA act actually eliminated the bulk of liabilities under state law. After the PSLRA and the SLUSA, securities fraud was downright profitable.
The cost of this legal promiscuity has been a non-stop run of scandals culminating in the Great Subprime Securities Fraud of 2005-2007.
Conservatives were bamboozled here. Conservative rhetoric painted securities litigation as oppressive to the most powerful elements of our society--and many conservatives bought it hook, line and sinker--even in the absence of any evidence that innovation was somehow being stifled during the 60 years of prosperity that followed the enactment of the federal securities law. Even today, in the face of compelling evidence of what a fraud-laced securities market looks like and performs like they still lip synch to the tune of corporate elites.
A new white paper has been released recently featuring our own dre cummings. It walks through the whole sordid mess. It is a story of the dangers of conservative rhetoric and the power of ideologues who substitute partisan rants for thought. True conservatives would be deeply suspicious of any special legislative indulgences for fraudfeasors.
Shredding common law notions of accountability never makes sense. Almost always behind the rhetoric is raw economic power seeking to subvert the rule of law. And, almost also allowing the powerful to escape legal accountability will prove costly.