Federal Securities Class Actions in the United States - A Historical and Social Perspective
Abstract
The development of American federal securities class actions reflects the conference’s theme – collective actions, access to justice and multilayer interests. After the stock market crash of 1929 and election of Franklin Delano Roosevelt, his New Deal legislative agenda created both the Securities Act of 1933 and Securities and Exchange Act of 1934. These federal securities laws were designed among other things to protect investors primarily through disclosure. Much of the details of the legislation was delegated to the Securities and Exchange Commission that was created in 1934. The Commission also was given certain enforcement powers to protect investors. In addition, the legislation gave private investors some express private remedies. But most federal securities private class actions are brought because the courts found that investors had an implied cause of action under certain provisions of the law. The rationale for such actions was a finding that the purpose of the particular legal provision was investor protection and so Congress intended to give them a right to sue.
There is a long history of the development of these implied causes of actions with the courts and the Congress involved in their expansion and contracting. It was in 1946 that an implied cause of action under the federal securities law was first recognized by the courts but in the 1960s these actions were expanded reflecting a different attitude towards litigation in the courts. Beginning in 1975, the Supreme Court began to cut back on these actions in a number of decisions. Just this year the Court further limited these actions in Morrison v. Nat’l Austl. Bank Ltd (dealing with the ability of foreign investors to use federal securities laws in purchases overseas). In the 1990s the Congress also legislated restrictions on these causes of action. Later Congressional attempts to overturn some of the judicial limitations generally have not succeeded. In the midst of the financial scandals in 2001 involving Enron and others, lower courts tried to ease some of the restrictions but appellate courts did not permit it.
The history of these implied actions reflect a number of competing policies and the tensions between them. Private enforcement can serve a useful purpose in supplementing public regulation, providing compensation for injured investors and deterrence of bad behavior. This protection arguably enhances investment and contributes to the deep and liquid markets in the United States. But such litigation raises concerns such as their costs and who should bear them, the agency problems of attorneys controlling the litigation, their effect on risk taking and whether they make our capital markets less attractive. The history also reflects the importance of the stock markets, changes in share ownership, changing attitudes towards the particular litigation and litigation in general and politics. Lastly the history of these class actions is also a good example of the role of the common law in investor protection.