Corporate Corruption and Wall Street Finagling: How Will it Play in Kansas After Slusa?

JurisdictionKansas,United States
CitationVol. 72 No. 8 Pg. 14-20
Publication year2003
Kansas Bar Journals
Volume 72.

72 J. Kan. Bar Assn. 8, 14-20 (2003). Corporate Corruption and Wall Street Finagling: How Will it Play in Kansas After SLUSA?

Kansas Bar Journal
72 J. Kan. Bar Assn. 8, 14-20 (2003)

Corporate Corruption and Wall Street Finagling: How Will it Play in Kansas After SLUSA?

By Professor Steven Ramirez and Jeffrey S. Kruske

I. Introduction

The parade of scandals continues unabated on Wall Street and in corporate boardrooms across America.[1] The Sarbanes-Oxley Act of 2002 appears increasingly ineffective in stemming the flood of white collar crime that threatens to inundate our capital markets.[2] The ability of the federal government to effectively police those markets is now being called into question both domestically and internationally.[3] For Kansas, however, it is déjà vu all over again. Kansas has one of the most pro-investor blue sky acts in the nation, a tradition in Kansas that dates at least since 1911 when it became the first state to statutorily regulate the securities markets.[4]

Similarly, Kansas provides its citizens with the protection of a broad Consumer Protection Act, which the state Legislature recently strengthened.[5] These acts, unfortunately, did not serve to discourage the recent run of skullduggery that has plagued the investing public and our business sector over the past two years, since Enron Corporation collapsed in November 2001 and left millions of investors suffering billions in losses.[6] This article seeks to show that these acts should operate to shield the citizens of Kansas from the worst effects of the self-destructive greed that seems to have seized significant portions of our capital markets, by providing reasonable remedies that far exceed those available elsewhere or under federal law.[7]

Of course, Kansas law may well have acted to quell some of the misconduct, to the extent the wrongdoers conducted nationwide operations that included nefarious deeds that victimized Kansas citizens. Congress decided in 1998, however, to pre-empt state securities laws in order to indulge special interests.[8] These special interest groups had recently eviscerated the federal securities laws by spending millions to ensure the passage of the Private Securities Litigation Reform Act (PSLRA) of 1995, over a presidential veto.[9] After the PSLRA, special interests set their sights on the emasculation of state blue sky acts so that pesky private securities litigation would no longer threaten wrongdoers. For the first time since the U.S. government entered the securities regulation business in 1933, these special interests, with the accounting industry leading the way, sought to use federal law to diminish investor protections and remedies.[10] They largely succeeded with the passage of the Securities Litigation Uniform Standards Act of 1998 (SLUSA or "the Act"). It is certainly fair to say now that after 1998 neither federal law nor state law acted to deter some of the most heinous frauds in our securities markets that our nation has seen in modern times.

Nevertheless, this article attempts to show that while the self-destructive legislative excesses of the 1990s served to leave deterrence hopelessly compromised, Kansas law can still act today to provide viable remedies to many Kansas citizens. Congress clearly limited its pre-emption, presumably because sufficient political forces could not be amassed for a more complete pre-emption. Events since 1998 vividly illustrate that there is little reason to undo this legislative result with promiscuous judicial outcomes in favor of those who are responsible for the recent devastation that has been inflicted upon the investing public, including the citizens of Kansas as well as Kansas businesses, through the higher cost of capital implicit in a regulatory regime that allows wrongdoers to run amuck.

Part I of this article will present an overview of relevant securities laws and demonstrate that Congress specified that these Acts be pre-empted only to a limited extent, focusing on class action litigation. The plain meaning of the pre-emption statute broadly permits direct actions against consumer and securities fraudfeasors that rely upon state law statutory remedies such as those provided to citizens of Kansas.

Part II of this article will review the Kansas Blue Sky Law, the Kansas Consumer Protection Act, and common law, specifically in light of the collapse of companies like Enron, WorldCom, and HealthSouth, and in light of recent revelations that Wall Street firms issued corrupt research analyses while pawning themselves off to the public as disinterested experts and professionals. The article will conclude that courts should not hesitate to punish these perpetrators and to stanch the tremendous loss of capital suffered by Kansas retirees, Kansas families that are striving to send their children to college, and young Kansas workers hoping someday to retire. Ultimately - if courts apply the law as written - both Kansas investors and Kansas business will benefit, and the rest of the nation may perhaps yet enjoy the promises of capital markets that abide by the law, as they did between 1933 and 1995 when states like Kansas and the federal government regulated the securities markets effectively.

II. The Securities Litigation Uniform Standards Act of 1998 [11]

Congress passed the SLUSA in response to claims that the PSLRA[12] was being inappropriately circumvented through the use of state blue sky laws.[13] In fact, Congress made its policy and objectives quite clear in passing this legislation, as indicated in its findings:

[The PSLRA] sought to prevent abuses in private securities fraud lawsuits; since enactment of that legislation, considerable evidence has been presented . . . that a number of securities class action

lawsuits have shifted from federal to state courts; this shift has prevented that Act from fully achieving its objectives; and in order to prevent certain state private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the [PSLRA], it is appropriate to enact national standards for securities class action lawsuits involving nationally traded securities, while preserving the appropriate enforcement powers of state securities regulators and not changing the current treatment of individual lawsuits.[14]

The specific language of SLUSA is limited in its reach. In sum, SLUSA states that no covered class action based upon state common law or statutory law can be brought in state or federal court by a private party alleging the typical securities fraud violations: untrue statements or omissions of a material fact in connection with the purchase or sale of a security or the use of manipulative or deceptive devices used by a defendant in connection with the purchase or sale of a security.[15]

The Act further provides that "any covered class action brought in any State court involving a covered security . . . shall be removable to the federal district court for the district in which the action is pending and shall be subject to [the Act's pre-emption]."[16] The Act also broadened the definition of a class action so that individual actions by more than 50 people in the "same court" could be consolidated and considered class actions, when the claim raises common questions of law or fact.[17]

The Act clearly articulated certain exceptions to its broad rule that securities class actions involving misrepresentations in connection with the purchase or sale of a covered security could no longer be maintained under state law. Specifically, the Act does not apply to actions maintained in state or federal court by a private party under the law of the state of incorporation or organization,[18] to derivative actions,[19] to actions by state officials,[20] to actions under contractual agreements between issuers and indenture trustees,[21] or to the so-called "Delaware carve-out."[22] The Act, however, limited the possible adverse effects of these exceptions by allowing a federal court to order a stay of discovery in "any private action in a state court" while a federal action is pending and a stay has been ordered in the federal action.[23] In this way, the Act sought to ensure that plaintiffs' attorneys could not file parallel actions in state and federal court and then use the state court discovery process to obtain discovery for use in the federal action.

Since the passage of SLUSA, a limited number of cases have been decided concerning the scope of its pre-emptive reach. Courts have held that SLUSA applies to the full gamut of publicly traded securities, including mutual funds,[24]...

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