40 WMMLR 1055

(Cite as: 40 Wm. & Mary L. Rev. 1055)

William and Mary Law Review

April, 1999

*1055 ARBITRATION AND REFORM IN PRIVATE SECURITIES LITIGATION: DEALING WITH

THE MERITORIOUS AS WELL AS THE FRIVOLOUS

Steven A. Ramirez [FNa1]

INTRODUCTION

An important debate is raging regarding the federal regulatory role in the securities markets. On one side of this debate are those arguing that private securities litigation is dominated by greedy attorneys who use protracted litigation to extort large settlements from legitimate business, imposing a pernicious "litigation tax" upon the cost of capital in America and flooding our courts; [FN1] on the other side are those arguing that private litigation *1056 is the only realistic means of enforcing federal regulation, that the American financial markets are widely perceived to be the fairest and most efficient in the world, and that there is little, if any, evidence that the system has been abused. [FN2] The stakes in this debate are huge. [FN3] American fortunes ride upon the success of our financial markets as never before because of increased international economic competition and important demographic trends. [FN4] Unfair financial markets are a breeding *1057 ground for panic. [FN5] Inefficient markets, like those that impose arbitrary costs upon capital, stunt economic growth. [FN6] Most importantly, the public must have confidence in the integrity of our financial markets in order to insure a stable and inexpensive source of capital for American business growth. [FN7]

*1058 Recently, those arguing in favor of restricting private enforcement of the federal securities laws have scored near-fatal restrictions in the scope of private remedies available under the federal securities laws. In late 1995, Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA), [FN8] which restricted private claims generally and class actions in particular. [FN9] Congress enacted this legislation for the purpose of restricting "strike suits." [FN10] Congress viewed these suits as a threat to the ability of financial markets to finance start-up companies and generate jobs. [FN11] One notable effect of these "reforms" is that *1059 securities litigation has shifted to state courts. [FN12] Consequently, Congress has recently preempted state law claims when raised in class action suits involving publicly-held companies. [FN13] Perhaps *1060 the most critical effect of the PSLRA, however, is that it leaves private enforcement of the federal securities laws in near terminal condition. [FN14] This Article proposes an approach to resolving the tension between weeding out frivolous securities claims and permitting meritorious claims to proceed that neither side in this debate is likely to embrace. [FN15] Specifically, this Article proposes that private securities claims relating to public companies be arbitrated to the maximum extent possible. [FN16] Arbitration has a long and successful history in the securities broker-dealer industry, in which it is the dominant form of dispute resolution. [FN17]

*1061 Arbitration is capable of achieving rapid adjudications that undermine the possibility of extortionate settlements. [FN18] Arbitration can reduce defense costs [FN19] and permit meritorious claims to be resolved quickly by expert panels [FN20] at little or no net cost to *1062 taxpayers. [FN21] Most importantly, industry-sponsored arbitration in the securities broker-dealer industry under Securities and Exchange Commission (SEC) supervision provides investors with a fair process for the resolution of securities claims. [FN22] In short, arbitration can enhance the quality of justice available in this vital area as well as protect incipient capital formation from the costs of "strike suits." This Article recognizes that proposing an arbitration regime to resolve these claims raises a host of issues and it attempts to address the most important of these problems as well as to open a dialogue on alternative methods of resolving securities claims. This Article thus endeavors to begin a process. Indeed, one thesis of this Article is that lawmakers should proceed cautiously in addressing the proposal advanced here and implement any arbitration process in a gradual fashion in order to avoid unintended consequences. For example, the creation of a system of arbitration that becomes mired in litigation regarding its legitimacy would be counterproductive.

The Article concludes that Congress or the SEC should begin to implement an arbitration program that ultimately would require agreements to arbitrate all securities disputes involving publicly-traded companies before a SEC-sponsored forum. Under the authority and supervision of the SEC, arbitration of these disputes can be regulated and monitored to preserve substantive *1063 fairness while securing the benefits of arbitration, especially lower costs, speedier resolutions, and the elimination of frivolous claims. [FN23] This Article does not propose to modify the substantive law applicable to such disputes or to preempt any relevant state law. Rather, this Article posits that simply changing the way such disputes are resolved may enhance the quality of justice achieved, as well as eliminate abuses stemming from the pursuit of frivolous claims. Although no state law would be preempted, this Article does propose that an investor's ability to pursue state law remedies in state court be restricted pursuant to arbitration agreements. In other words, this Article proposes a more limited, less formal preemption than the proposal recently adopted by Congress. Investors could pursue all substantive claims, both state and federal, but only in arbitration.

Part I of this Article traces the evolution of private enforcement of the federal securities laws, including recent developments restricting private enforcement. Part I of the Article concludes that policymakers recently have given inadequate weight to the overallsuccess of federal regulation of the securities markets and the role of private enforcement in that success. As a result, recent initiatives to restrict private enforcement expose our securities markets to unjustified risks of deregulation. On the other hand, the Article notes that frivolous lawsuits present other risks to the securities markets and should be deterred in a balanced manner.

Part II of this Article demonstrates that arbitration of securities- related claims against publicly-traded companies can be used to help extinguish frivolous suits while permitting private enforcement to function properly to remedy investor injuries and deter misconduct. First, the arbitration of securities claims in *1064 the context of broker-customer disputes provides a sound basis for concluding that arbitration can be an effective means of resolving disputes in this vital area. Second, there is now a wealth of knowledge regarding the efficacy of Alternative Dispute Resolution (ADR) that suggests that arbitration of these types of claims is a prudent policy course. Third, this mode of resolution is inimical to frivolous suits. Finally, both the SEC and Congress have broad powers to implement this kind of arbitration regime. The Article concludes that the SEC and Congress should take all necessary steps to encourage the development of a system of arbitration of securities-related claims involving publicly-held companies.

I. THE PSLRA: WRONG REFORM IN THE WRONG INDUSTRY AT THE WRONG TIME

Any discussion of the proper method of resolving private securities claims must begin with the historical basis of such litigation. Private securities litigation under federal securities laws is only a part of the overall enforcement of the federal regulatory regime. [FN24] This regulatory regime includes the imposition of registration requirements designed to achieve full disclosure of material facts to the financial markets, [FN25] the regulation of the securities brokerage industry, [FN26] and the prohibition of fraudulent conduct through the broad antifraud provisions of the federal securities laws. [FN27] Enforcement mechanisms consist of SEC civil enforcement proceedings and penalties, [FN28] including administrative sanctions, [FN29] criminal sanctions, [FN30] and the extension of private *1065 remedies to injured investors. [FN31] The broadest private remedy and antifraud provision is Rule 10b-5, which the SEC promulgated pursuant to statutory authority under the Securities Exchange Act of 1934 ("Exchange Act"). [FN32] Although Congress has tightened this regulatory regime periodically, Congress had left its basic structure largely intact until it enacted the PSLRA. [FN33] Before that, this regulatory scheme had functioned successfully for over sixty years. [FN34]

*1066 A. A Short History of Private Securities Litigation

The federal role in securities regulation has its roots in the ultimate financial catastrophe--The Great Depression. [FN35] Shortly after taking office, as one of the earliest New Deal initiatives, President Franklin Roosevelt proposed legislation that ultimately became the Securities Act of 1933 ("Securities Act"). [FN36] The Securities Act required the registration (and accompanying full disclosure) of initial distributions of securities. [FN37] The Securities Act focused only upon initial offerings of securities, therefore Congress enacted the Exchange Act, which provided for regulation *1067 of the securities industry and required periodic disclosure for publicly-held companies. [FN38] Roosevelt made clear that these acts were designed to heighten fiduciary obligations in securities transactions in order to restore public confidence in the nation's financial markets. [FN39] Congress joined the President in emphasizing the importance of investor confidence within a modern economic system. [FN40]

The courts initially embraced the remedial nature of the federal securities laws and broadly interpreted their provisions to achieve those ends. [FN41] Further, the courts, as well as the SEC, recognized the crucial role of private securities enforcement proceedings as an essential supplement to the SEC's limited enforcement resources. [FN42] Indeed, in 1946, the federal courts began to imply private rights of action under the federal securities laws. [FN43] Since then, the Supreme Court has determined the existence *1068 of a private action under Rule 10b-5 to be "beyond peradventure," [FN44] and has proceeded to define this implied private right of action in a series of opinions. [FN45] The Court, with the support of the SEC, [FN46] allowed the private remedy under Rule 10b-5 to thrive, and no Justice has ever seriously questioned the propriety of recognizing such a remedy. [FN47]

After many decades of remarkable success, [FN48] and with fading memories of the cataclysm of the Great Depression, the judicial *1069 view of private securities litigation "evolved" from a "necessary enforcement supplement" to a positively vexatious tool. [FN49] In an era of pervasive demonization of attorneys, the private securities lawyer became the caricature of the greedy, self-serving destroyer of upstanding captains of industry. [FN50] Courts began to take a more restrictive approach to private securities claims. [FN51]

By the 1990s, the Supreme Court in particular seemed determined to reign in private securities claims. In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, [FN52] the Court dramatically shortened the statute of limitations applicable to private claims under Rule 10b-5. [FN53] In Central Bank of Denver, N.A. v. *1070 First Interstate Bank of Denver, N.A., [FN54] the Court eliminated aiding and abetting liability in private actions under Rule 10b-5. [FN55] In Gustafson v. Alloyd, [FN56] the Court restricted the availability of rescission claims under the Securities Act by engrafting a requirement that a plaintiff in such an action be a purchaser in a public offering. [FN57] These are only the most recent judicial retrenchments. Some commentators have noted that the Court has been scaling back investor protections under the federal securities laws for twenty years. [FN58]

The lower federal courts, taking a cue from the Supreme Court, have developed broad doctrinal rules that have resulted in an increasing number of early dismissals or summary judgments in private securities cases. [FN59] For example, the federal courts used Federal Rule of Civil Procedure 9(b) as a means of terminating private securities claims, often in ways that turned that rule on its head. [FN60] Similarly, the lower courts developed doctrines that effectively robbed juries of the ability to determine if *1071 the given conduct constituted fraud by granting judicial discretion over the issue, which invariably resulted in claim termination. [FN61] Securities claims were blamed for much of the flood of litigation allegedly swamping the federal courts. [FN62] The tone of many judicial opinions changed as well, from open sympathy for the purposes of the federal securities laws to open hostility toward private claims. [FN63] Securities plaintiffs, beginning in the 1980s, began facing the frequent imposition of sanctions. [FN64] Although the Court has continued to interpret the federal securities laws broadly in areas dominated by public enforcement *1072 action, it recently has expressed little support for private enforcement of the federal securities laws. [FN65]

In 1995, Congress significantly curtailed the availability of private securities claims under federal law by enacting the PSLRA. [FN66] The PSLRA modifies the sanctions available against private securities claimants in a manner approaching a "loser pays" regime. [FN67] Under Federal Rule of Civil Procedure 11, federal courts are granted discretion to impose sanctions against those pleading claims that are not legally warranted, supported by evidence, or pursued for a proper purpose. [FN68] Under the special *1073 sanctions provisions now applicable to securities claims, courts must scrutinize pleadings for compliance with Rule 11 at the end of a case and must assess sanctions if a violation is found. [FN69] The PSLRA also creates a presumption that the appropriate sanction for a complaint that violates Rule 11(c) is an award of all attorneys' fees and costs incurred by the defendants during the entire action. [FN70] There is no similar provision for answers that violate Rule 11(c).

Ironically, Congress amended Rule 11 in 1993 specifically because it had led to abusive "satellite" litigation. [FN71] Congress unintentionally *1074 dealt a near fatal blow to private securities enforcement with this provision because it miscalculated the frequency of sanctions in securities litigation. [FN72] Private enforcement is so perilous now that few lawyers seem to be pursuing federal class action claims. [FN73]

The PSLRA imposes heightened pleading standards in actions under the Exchange Act's antifraud provisions that are a dramatic departure from the notice pleading standards generally imposed under the Federal Rules of Civil Procedure. [FN74] Under the Federal Rules of Civil Procedure, allegations as to a defendant's state of mind may be alleged generally, at least if one takes a plain meaning approach to the statute. [FN75] Now, for private claims under the federal securities laws, a plaintiff must plead facts "giving rise to a strong inference" of scienter. [FN76] Judicial interpretations of this new pleading requirement have raised the question of whether it can be satisfied at all, short of explicit admissions of an intent to defraud. For example, courts have held that pleading a mere motive and opportunity to commit fraud fails *1075 this heightened pleading standard. [FN77] Even before the PSLRA, courts had used Rule 9(b) to terminate claims that seemed improbable to them; [FN78] now it seems courts are eager to use the PSLRA as a basis for even wider terminations. [FN79]

This heightened pleading standard endangers important securities law principles, such as the "group-published" information doctrine, which had operated to preclude defendants with joint drafting responsibility for documents from shifting the responsibility to some other drafter. [FN80] Under the PSLRA, a court could *1076 conceivably hold that a plaintiff must allege facts giving rise to a strong inference of scienter against each defendant. [FN81] The PSLRA also denies a plaintiff discovery until this pleading standard is satisfied. [FN82] Thus, not only must a plaintiff allege facts "giving rise to a strong inference" of fraud, the plaintiff also is denied discovery in aid of uncovering such facts.

The PSLRA creates a safe harbor for certain fraudulent misstatements in "forward looking statements." [FN83] Specifically, the PSLRA protects specified persons from liability for such statements if the statement is accompanied by "meaningful cautionary statements" that identify important factors that could cause actual results to diverge from projections, even if the statements are made with a fraudulent intent. [FN84] Persons who enjoy this insulation from liability include issuers, underwriters, and reviewers of information provided by issuers. [FN85] The PSLRA provides various exemptions from the applicability of the safe harbor and limits the application of the safe harbor to statements relating to issuers that are required to register under the Exchange Act. [FN86]

The PSLRA statutorily prescribes causation standards that may be interpreted to support broad pretrial terminations of *1077 securities actions. [FN87] It requires that plaintiffs plead loss causation in all claims brought under the Exchange Act. [FN88] Similarly, defendants now may avoid rescission liability under section 12(2) of the Securities Act if they can prove an absence of loss causation. [FN89] Loss causation is a form of proximate cause that requires a plaintiff to allege and prove that, but for the defendant's wrongdoing, the plaintiff would not have incurred the damages that form the basis of the suit. [FN90] Thus, if a plaintiff invested because a securities promoter did not disclose his criminal background, but the plaintiff suffers damages because of a crash in oil prices, the plaintiff can show only transaction causation and not loss causation. [FN91]

This provision of the PSLRA directly overruled many federal decisions that required only "but for" causation or "substantial factor" causation for claims under the federal securities laws. [FN92] For example, under the proxy rules, courts have long held that materiality satisfied causation requirements for private litigants. [FN93] Loss causation generally is a form of proximate cause that cuts off claims for injuries that are deemed too remote from the alleged misconduct. [FN94] As a result of the PSLRA, courts will *1078 now dismiss more claims of securities fraud for failure to demonstrate causation. [FN95] State courts generally have been far more lenient in dealing with causation in the securities area, leaving the issue to the jury. [FN96]

Prior to the PSLRA, securities violators were jointly and severally liable. [FN97] Under the PSLRA, only defendants who knowingly commit violations of the Exchange Act are jointly and severally liable. [FN98] Other defendants are liable only for the proportion of damages for which the trier of fact finds them responsible. [FN99] Thus, under the PSLRA, the trier of fact must determine each defendant's liability. The PSLRA includes certain exceptions to the operation of the modified system of proportionate liability it imposes, [FN100] such as preserving joint and several liability against those who commit knowing violations of law. [FN101] This "reform," which essentially shifts the risk of an insolvent or judgment-proof defendant to the plaintiff, specifically operates only with respect to meritorious claims. [FN102]

The PSLRA also takes aim at private class actions brought under the federal securities laws. [FN103] Class actions frequently *1079 have been the subject of scholarly analysis and have been criticized for creating divergent interests between class members and class counsel. [FN104] The PSLRA presents a multi-pronged attack upon private securities class actions. First, individuals are restricted from acting as lead plaintiffs in such actions without certifying that they meet certain eligibility requirements and have received no payments for serving as class representatives. [FN105] Congress intended these eligibility requirements to eliminate "professional plaintiffs." [FN106] Second, the incentives for initiating class actions are diminished because control over such actions now generally vests in a lead plaintiff, who is presumed to be the person with the greatest economic stake in the litigation. [FN107] Congress intended this provision to encourage institutional investors, or other significant investors, to control class counsel and to assure that the litigation is pursued for the benefit of the class. [FN108] Third, class settlements of securities claims must be supported by far more extensive disclosures than those required for other claims. [FN109] This provision serves to assure settlements are fair to investors. These provisions have a common thread: Congress wanted a check on the power of class counsel to manage the litigation in their own interest. [FN110] Along these lines, Congress also required that attorneys' fees awarded pursuant to any class settlement not exceed a reasonable percentage of the damages awarded the class. [FN111]

*1080 The PSLRA has a very controversial history. The Supreme Court's restrictive approach to the statute of limitations under Rule 10b-5 triggered the process of legislative reform. At first, opponents of the restoration of a more realistic statute of limitations resisted, claiming that frivolous claims also must be addressed. [FN112] After the congressional elections of 1994, efforts to extend the statute of limitations disappeared and the prevention of frivolous suits became the primary motivation for reform. [FN113] Congress held extensive hearings on the issue of frivolous lawsuits [FN114] and eventually passed the PSLRA over President Clinton's veto. [FN115] President Clinton objected on three grounds: first, the PSLRA's pleading standards were too stringent; second, the sanctions provisions too closely resembled a "loser pays" system, particularly for plaintiffs; and third, the safe harbor for forward-looking frauds was too broad. [FN116]

B. An Assessment of the PSLRA

One effect of the PSLRA is that many plaintiffs have pursued securities claims in state court. [FN117] Thus, the "reforms" wrought by the Court and Congress have resulted in the de facto de-federalization of private securities claims. [FN118] Another result is sure to be weaker enforcement of the federal securities laws and, therefore, less incentive for compliance. Despite its likely effects, the PSLRA was passed with little debate of the risks of returning to a pre-Depression regime of investors being relegated to *1081 state law remedies, [FN119] or the dangers of deregulation in the financial services industry. [FN120]

With federal regulation emasculated, discussion of the prospects for a "race to the bottom" among the states in securities regulation takes on a new importance. [FN121] Every state would want to encourage business development within its borders, especially if the costs of doing so can be shifted to out- of-state investors. [FN122] In fact, Arizona already has passed legislation modeled on the PSLRA. [FN123]

One also must question whether Congress really is prepared to increase the resources allocated to the SEC or to rely on the states to increase regulation to compensate for decreased private enforcement. [FN124] Indeed, Congress recently preempted state law *1082 remedies in certain cases, and now forces plaintiffs to run the gauntlet in federal court in some cases involving publicly-traded companies. [FN125] This is a further move toward the risky strategy of financial deregulation. [FN126] The original conception of federal securities regulation--that the nation needed federal regulation to create more stringent standards of conduct than those prevailing under state law--seems to have been lost in the shuffle. [FN127]

Additionally, to the extent that Congress has now joined the Court in a bias away from private enforcement, such a bias seems fundamentally misguided. First, virtually all experts working in securities law enforcement recognize the crucial role private enforcement plays in assuring compliance with the federal securities laws. [FN128] Second, private enforcement, unlike public *1083 enforcement, is fundamentally remedial in nature, [FN129] reflecting one of the basic goals of the federal securities laws--to provide remedies to injured investors. [FN130] Third, the compensatory nature of the federal securities laws is fundamental to investor confidence. [FN131] Investors are most sensitive to their pocketbooks and only private enforcement truly protects this interest. Moreover, stacking the deck against securities plaintiffs is a sure-fire way of destroying the confidence of investors in the fairness of financial markets. [FN132] The preservation of investor confidence is another foundational goal of the federal securities laws. [FN133]

The system that worked so well appears to have been taken for granted. Indeed, Congress appears never to have really considered issues of investor confidence, de-federalization, enforcement costs, and remediation of investors' losses. [FN134] In sum, federal *1084 law, originally promulgated to enhance the rights of investors relative to state law [FN135] now serves only to diminish the rights of investors. The recent "reforms" of private securities litigation are a betrayal of several fundamental goals of the federal securities laws and expose our financial system to risks that are not fully appreciated. [FN136] A more reactionary cycle could hardly have been imagined by the promulgators of the federal securities laws in the early 1930s. [FN137]

*1085 The federal securities laws have been a success. For six decades after their promulgation, panics largely have disappeared and American capital markets have successfully fueled the demand for start-up capital, thereby aiding the economy's ability to generate continued growth through innovation. [FN138] The market disruptions that have occurred have not damaged the economy and have been temporary in nature. [FN139] America's financial system has served as a model for the world. [FN140]

With such a successful record, any argument for a substantial structural change should be supported by compelling evidence. [FN141] After all, public participation in the securities markets is at very high levels. [FN142] Initial public offerings are soaring. [FN143] The stock market is booming. [FN144] The economy is enjoying low inflation, low unemployment, high growth, and surging productivity. [FN145] The defederalization of private securities litigation and the virtual elimination of private enforcement are substantial structural *1086 changes. [FN146] The evidence supporting a finding that the federal securities laws were in need of repair, however, is based largely on anecdotal evidence and unproven theories. [FN147]

The putative problem is that federal securities laws are abused by "entrepreneurial" attorneys bent upon extracting extortionate settlements from innocent issuers and associated persons. [FN148] The leverage for these sharp practices is the large costs of defending such claims through endless pleading and discovery squabbles to trial. [FN149] Supposedly the merits of these claims do not matter, and settlement is achieved based upon the costs of the litigation. [FN150] Stock price volatility invariably leads to claims of fraud. [FN151] Thus was born the "litigation explosion" that impaired American capital formation, discouraged risk taking, and enriched lawyers at the expense of American workers. [FN152] The story currently makes excellent politics, but there is little or no evidence to support it. [FN153] Scholars have shown an utter absence of a "litigation explosion," have demonstrated that any evidence that capital formation has been stunted is weak, and have opined that the merits matter very much to the price paid for *1087 settlement of claims. [FN154] Indeed, this was abundantly clear at the time the PSLRA became law. [FN155] The growing perception is that the PSLRA is not about "merits" at all, but rather is simply about money and influence peddling. [FN156] This is a dangerous perception.

Moreover, there is even less evidence that the putative solution to the putative problem will work. [FN157] The solution embodied in the PSLRA simply makes it much more difficult and expensive for plaintiffs to prevail and, ironically, makes a merits-based adjudication even more difficult to obtain. [FN158] For example, PSLRA's class action reforms will lead to even more litigation regarding who will serve as "lead plaintiff." [FN159] The PSLRA has the obvious side-effect of throwing out the meritorious with the frivolous. This is problematic inasmuch as it sacrifices justice in order to chill the pursuit of weak claims. [FN160] Worse yet, it appears *1088 that the "reforms" fail to curb the supposed abuses. Each of the primary "reforms" suffers from an inherent flaw in logic: increasing the risks of sanctions for claims that fail is useless against frivolous claims that settle [FN161] and fails to recognize that discovery often is needed even to assess the merits of claims. [FN162] Similarly, the PSLRA safe harbor has failed to encourage more meaningful forward-looking disclosures. [FN163] Increasing the pleading standards of claims certainly will prevent many claims from proceeding, but there is no assurance that only the weak claims will fail to clear this hurdle. [FN164] Proportionate liability requires a specific finding by the trier of fact (as to whether the defendant committed a "knowing" violation of the federal securities laws); therefore, outside professionals still are faced with the risk of *1089 huge jury awards and, thus, pressure to settle. [FN165] Even if the existence of a problem is conceded, the solutions offered thus far, specifically the PSLRA, are not narrowly tailored to meet the problem identified. [FN166] Indeed, they simply seem to be an arbitrary means of terminating or chilling claims. In all, far from facilitating a merits-based adjudication, the PSLRA seems certain to further delay any merits reckoning.

Any argument in favor of the PSLRA garners no support from the record of the securities industry over the past ten or fifteen years. Although empirical evidence on this score is hard to come by, most commentators agree that the business of issuing, selling, or buying securities has not advanced to such an ethical and fair level that traditional regulatory strictures should be relaxed. [FN167] In fact, many believe the contrary to be the case. [FN168]

Indeed, the 1980s and early 1990s were a sordid time for financial markets in the United States. [FN169] Regulators uncovered massive insider trading scams. [FN170] Outlaws built a new market *1090 for a new kind of security--junk bonds--on a foundation of fraud and manipulation. [FN171] This, in turn, extended to corporate take-over artists the necessary financial firepower to run roughshod over, dismantle and dismember long-established businesses. [FN172] Rogue divisions of previously respected broker-dealers systematically channeled retirees and IRA funds into reckless limited partnership investments in blatant breach of all standards of law and the securities profession. [FN173] Prestigious Wall Street *1091 firms bilked savings and loans, banks, insurance companies, and even municipalities on a scale previously thought impossible. [FN174] No market was safe from such skulduggery, as one pillar of Wall Street even manipulated the market for U.S. Treasury obligations. [FN175] This pervasive run of fraud, theft, and malfeasance imposed astounding costs upon our economy; trillions were lost, [FN176] much of which is still being paid off. Such frauds militate strongly against relaxing any sanctions available under the federal securities laws. [FN177]

*1092 Other economic developments support the argument against imposing restrictions upon investor remedies. In fact, public participation in, and reliance upon, the financial markets is greater than ever. [FN178] When the baby-boom generation begins to retire at the end of the next decade, the capital markets will be expected largely to finance this huge claim on capital. [FN179] This could well begin an unstable economic era that will test investors' confidence in the financial system. [FN180] When Congress was debating the PSLRA, this issue caused concern among some members. [FN181] Consequently, the PSLRA included a provision directing the SEC to study the impact of the PSLRA upon the investments of senior citizens. [FN182] Ironically, that study concluded that, while seniors may be susceptible to fraud and abuse, it was "too soon" *1093 to determine the impact of the PSLRA upon this important group of investors. [FN183] This is, however, an issue that cannot be left to chance. These investors must have the highest degree of confidence in the fairness of our financial markets because they will control a large source of capital. Even now, investors over sixty- five own, directly or indirectly, one-third of all shares; by 2020, there will be more than twenty million new seniors. [FN184] The aging population also means that there is no crisis in the securities industry, as profits are at record levels. [FN185]

Neither the regulatory record of the securities industry nor the economic circumstances facing that industry can justify the restriction of investor rights that has occurred as a result of recent court decisions and the PSLRA. Moreover, even if there is a problem with abusive class actions, the PSLRA is hopelessly overbroad and does not really address how to stem such abuses. Instead, the PSLRA merely rigs private securities claims so that defendants almost always win. The PSLRA is a betrayal of the policy foundations of the federal securities laws and a threat to the long term stability of our securities markets.

C. Why the Merits of the PSLRA Matter

This Article does not argue that frivolous lawsuits do not exist, or that such lawsuits do not cause injuries to innocent defendants, investors, the marketplace, and the economy generally. Discouraging frivolous lawsuits is a laudable goal. Allowing investors to have greater control over class actions also is laudable and the PSLRA includes innovative provisions for achieving this goal. [FN186] Although empirical evidentiary support for an explosion of frivolous litigation is weak,