The Wall Street Journal‘s editorial today, “Dodd’s Lawsuit Makeover“:
We like to think of the 1995 Private Securities Litigation Reform Act as Senator Chris Dodd’s finest hour. Joining with House Republican Chris Cox, Mr. Dodd led an override of a Bill Clinton veto to end the scourge of “strike suits.” Prior to the law, trial lawyers would wage legal biltzkrieg against companies guilty only of a falling stock price. Since its enactment, lawyers have had to present some evidence of actual fraud before launching fishing expeditions under the civil discovery process.
So imagine our surprise to find, buried on page 795 of Mr. Dodd’s new financial regulation bill, a gift for every member of the securities trial bar that opposed his earlier reforms. We’ll have more to say about the rest of Mr. Dodd’s legislative opus, but his about-face on securities litigation is among the most dismaying of the flaws within its 1,136 pages.
The Connecticut Democrat would create new civil liability for anyone “aiding and abetting” those who violate the securities laws, making these new defendants just as liable as people who actually commit a fraud.
The provision is akin to Sen. Arlen Specter’s S. 1551, to extend liability for securities fraud to third parties — such as suppliers and manufacturers — not directly involved with the fraud. This is an attempt to return to the more-litigious lay of the land that existed before the U.S. Supreme Court’s 2008 decision in Stoneridge v. Scientific-Atlanta. (ScotusWiki entry.) In casting as wide as net as possible through “scheme liability,” trial lawyers hoped to catch big settlements from non-culpable companies. (The NAM was involved as a friend of the court. See our Legal Beach entry for more.)
Enacting the provision would further discourage investment in U.S.-traded companies and do nothing to create jobs — except in the law offices that specialize in these sorts of shakedowns.
Earlier posts on Stoneridge.