Securities Litigation in the 1990s
| Publication year | 1990 |
| Pages | 2045 |
| Citation | Vol. 19 No. 10 Pg. 2045 |
1990, October, Pg. 2045. Securities Litigation in the 1990s
As the stock market recovers from its nadir of October 1987, and as various economic cycles and world events cause prices and yields of investment securities to fluctuate, investors continue to seek to maximize returns through the judicious purchase and sale of those investment securities. Another way some investors seek to maximize returns is to bring claims against the issuers, underwriters and broker-dealers who originated and sold the securities.
The legislature and courts continue to define the remedies and methods available to investors and others claiming rights to recovery under the securities laws. Because institutions emphasize economy in the processing of securities claims, there is an increasing use of arbitration as a method of resolution. This article gives a broad overview of some key trends in securities litigation that are developing in the 1990s.
In two recent cases,(fn1) the U.S. Supreme Court clearly established the principle that claims under the Securities Exchange Act of 1934 ("1934 Act"), particularly § 10(b), and RICO claims are subject to mandatory arbitration. The Court also established that claims under the Securities Act of 1933 may be compelled to be submitted to arbitration.
The 508-point freefall of the Dow Jones Industrial Average on October 16, 1987, was the beginning of a surge in new securities cases to be arbitrated. In 1988, arbitration filings before the National Association of Securities Dealers ("NASD") rose 38 percent to almost 4,000 new matters, and New York Stock Exchange arbitration filings increased 67 percent. That year, securities arbitrations before the American Arbitration Association ("AAA") increased 265 percent.(fn2)
Statistics reveal why arbitration is attractive to investor claimants. One recent study shows that claimants of all types in securities arbitrations won more than 60 percent of the time, recovering more than 42 percent of their claimed damages.(fn3) Because it is common for brokerage houses to include a mandatory arbitration provision in their customer agreements, it can be expected that customer disputes will continue to be heard in arbitration. The Federal Arbitration Act(fn4) provides for the enforcement of contractual arbitration provisions. Further, many Colorado disputes will be subject to arbitration under the Colorado Mandatory Arbitration Act.(fn5)
At least one state has tried to legislate the abolishment of the private agreements
of parties to require arbitration of securities claims. The attempt by Massachusetts to make such contractual provisions unenforceable was invalidated by the First Circuit Court of Appeals on the ground of preemption by the Federal Arbitration Act.(fn6) The U.S. Supreme Court denied review of the decision of the First Circuit.
Florida recently enacted a statute that requires brokers to allow their customers the freedom to take their disputes to the American Arbitration Association. The Securities Industry Association has stated that it intends to challenge the Florida law, as it did the Massachusetts statute. Generally, it is thought that AAA arbitration is less favorable toward the broker-dealer community than are industry arbitration forums.
Punitive damage awards are occurring more frequently in securities arbitration cases decided in favor of claimants. A substantial punitive damage award of ten times the amount of the trading losses was issued in favor of a claimant in an earlier Tenth Circuit case.(fn7) However, a Colorado statute limiting punitive damages to the amount of compensatory damages should be a limiting factor in determining the attractiveness of securities claim arbitration in Colorado.(fn8)
In this author's opinion, arbitration will continue to be a popular, speedy method of resolving securities claims arising from the retail securities business. To be effective, parties involved in these cases must be aware of the rules of procedure of each self-regulatory organization. They also must be prepared to present their cases to panels generally made up of non-lawyers.
Continued growth in the rights of those who purchase securities and the obligations of those who sell them parallels the increasing use of arbitration. These expanded rights and obligations are discussed below.
At the federal level, expansion of the rights and obligations of those involved in securities transactions...
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