“It Just Isn’t Justice”

The proposed $500 million settlement to be paid by WorldCom to the SEC for distribution to the company’s injured shareholders raises questions about the role of private securities litigation in large corporate fraud cases.
The heart of the issue is the interaction between the Fair Funds for Investors provisions in the Sarbanes-Oxley Act of 2002 and securities class actions. Section 308 of Sarbanes-Oxley allows the SEC to combine civil penalties with the disgorgement obtained from a securities law violator into a fund for the benefit of the victims of the violation. Recent legislation proposed by Rep. Richard Baker (R-La.), the Securities Fraud Deterrence and Investor Restitution Act of 2003, would both increase the civil penalties the SEC could obtain and make it easier for the agency to disburse those funds to investors (the Corp Law Blog has an excellent summary of the proposed bill).
In the wake of Enron and other corporate scandals, Congress is clearly attempting to transfer some of the responsibility for the compensation of injured investors from private securities litigation to the SEC. As stated by Rep. Baker in his press release announcing the new legislation:

“If you’re the victim of a crime, you might get some satisfaction out of knowing that the car thief has been caught and thrown in the slammer and that your stolen property has been recovered. But to watch the sheriff and a bunch of lawyers, after the trial, pile into your car and drive away with it just isn’t justice and isn’t an outcome you’re likely to consider fair.”

The problem is that Sarbanes-Oxley and the Securities Fraud Deterrence Act address the “sheriff” (the SEC) but are silent on what to do about the “bunch of lawyers” (private securities litigation).
Which leaves the following question: If injured WorldCom investors receive $500 million from the SEC, what effect should this have on the pending securities class action? Thoughts and comments from readers are welcome.

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