The Grundfest Theory

Forget about reforming securities class actions, let’s just get rid of them. Or so suggests Professor Joseph Grundfest in a provocative Wall Street Journal op-ed (subscrip. req’d) in yesterday’s edition. Professor Grundfest is a former SEC commissioner, so his decision to kick securities class actions when they are down (based on number of filings) cannot be dismissed lightly.

The op-ed puts forward a simple, but debatable, theory: “fewer companies are being sued for fraud because there is less fraud.” The reason for the decline in corporate fraud is the rigorous post-Enron enforcement activity of the SEC and DOJ, which provides a much greater “deterrent effect” than private securities litigation. Moreover, Sarbanes-Oxley has given the SEC the ability to compensate investors without the high attorneys’ fees associated with securities class actions. Accordingly, investors would be better off if they “simply allowed the SEC to control the process.”

Quote of note: “As long as the government’s enforcement activities remain sufficiently vigorous, the private class-action securities fraud lawsuit can be viewed as an expensive, wasteful and unnecessary sideshow that generates little deterrence and offers questionable levels of compensation. The question then is not why these lawsuits have been shrinking so rapidly in recent months, but when and whether they should exist at all.”

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