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Lawmakers Warn SEC: Don’t Encourage Securities Fraud

Lawmakers Warn SEC: Don’t Encourage Securities Fraud

by Paul Bland
Executive Director

For many decades, if a corporation made deceptive statements to its investors or otherwise cheated them out of their savings, those cheated investors have been able to join together in a class action to recover what they lost.  Recently, though, some Trump Administration officials have begun to signal that they favor eliminating securities fraud class actions, and even support urging corporations to add fine print language to various documents that would bar investors from going to court if they are illegally cheated (forcing them, instead, into a private arbitration system), and using that same fine print tactic to ban class actions.

In a sign of just how serious they are about shielding their friends in the corporate board rooms of America from any liability or accountability for their actions, these same officials have also signaled that they are thinking of quietly taking this step at the SEC staff level, without any public debate or notice, much less a full public on-the-record vote by the actual commissioners of the SEC.

Fortunately, some Members of Congress seem determined to stop such a move, and are speaking out forcefully against it.

Today, all 26 Democratic Members of the House Financial Services Committee wrote to Jay Clayton, the new Chair of the SEC, to strongly oppose any such move.  Led by Representative Carolyn Maloney (pictured), the Ranking Member of the Subcommittee on Capital Markets and Government-Sponsored Enterprises, the lawmakers’ letter notes that Congress has repeatedly passed laws recognizing that private securities fraud class actions are “an indispensable tool with which defrauded investors can recover losses without having to rely upon government action.”

Rep. Maloney’s letter goes on to note that:

  • There is long history of investors having a right to bring securities class actions, and any proposal to ban them would be a dramatic shift from well-established practice;
  • Banning class actions would violate the federal securities laws; and
  • Private securities fraud class actions have historically been more effective at recovering funds for cheated investors than government enforcement.

Finally, Rep. Maloney’s letter also makes the crucial point that if Trump Administration officials at the SEC wish to pursue this dramatic change, they should at least do so in a public and transparent way.  As the Representatives signing the letter forcefully explain: “Anything less will be seen as a stealth attempt by the Commission to circumvent U.S. securities laws and the fundamental rights of shareholders.”

The importance of Rep. Maloney’s letter cannot be overstated. She and her colleagues in the House are fighting against a draconian Trump Administration policy that would jeopardize the savings of Americans, and demanding that the SEC prioritize the rights of investors ahead of the political favors being demanded by corporate executives attempting to cover up some of their worst behaviors. Voters – and especially retirees, pensioners and others who are counting on today’s investments to help make tomorrow’s ends meet – need to be equally strong in insisting the SEC not give that bad behavior, or those bad actors, a pass.