Trump SEC Pick Peirce to Cheated Investors: No Day in Court

Prior to the election of Donald Trump as President of the United States, every Commissioner and Chair of the Securities Exchange Commission (SEC) to speak about the question had agreed that American investors had a right to band together in a class-action lawsuit if they had been misled or deceived.

This has been a great thing for investors. Time and again, investors who were cheated out of their savings have been able to recover very substantial sums through class actions (many billions of dollars over time), protecting large pension funds for police officers and firefighters and the life savings of regular Americans holding IRAs and 401(k)s. And if a corporate actor was considering making a deceptive statement, they had to consider the risk that the corporation (and they) could be held accountable in a substantial and successful lawsuit.

Hester Peirce, picked by Donald Trump to a seat on the SEC, takes a different view. Yesterday, she told Politico that she “absolutely” believes that corporations should be able to insist upon mandatory arbitration provisions, essentially giving a green light to bolting shut the courthouse doors to those who have been cheated.

This radical proposal would have dramatic implications for millions of people, from retirees depending on investments for their golden years to young people building up their 401(k) for future financial security.

In five of the largest and most infamous securities fraud cases ever recorded (Enron, WorldCom, Tyco, Bank of America and Global Crossing), private class actions recovered $19.4 billion for investors, while the SEC’s enforcement actions recovered penalties and fees of $1.8 billion. This gap is only going to grow, given that the SEC has done less and less since 2016. (In the same interview where she endorsed forced arbitration, Commissioner Peirce defended her votes to limit enforcement actions in several settings.) Since 2016, there has been a 33% decline in federal securities enforcement and more than an 80% drop in SEC settlements, showing why private enforcement of the laws is particularly crucial.

Proposals to allow corporations to force investors into arbitration clauses that ban class actions have been widely and sharply opposed by many investors and their advocates. For example, a bi-partisan coalition of State Treasurers have written to the SEC, strongly opposing the use of forced arbitration in securities contracts. Similarly, the American Legion has also spoken out strongly, pointing out that the example of Bernie Madoff’s fraud shows how “investors benefit when they band together in complex fraud cases — an option that would be foreclosed if the SEC permits forced arbitration.” A coalition of 133 consumer, union and social groups sent a letter to the SEC urging it to reaffirm the long-standing policy against forced arbitration.

One thing that’s puzzling about this move is that it sharply conflicts with President Trump’s promises to strengthen U.S. businesses against our competitors. Foreign investors hold more than $6.2 trillion in stocks in U.S. corporations precisely because American markets are particularly well policed compared to those in many other countries, thanks mostly to private securities fraud class actions.

In fact, one recent case, involving a Brazilian oil company, Petrobras, that made an IPO and sold other securities to investors, shows just what’s at stake. When details about the misleading statements made about the company’s financial statements finally emerged, there turned out to be two different sets of investors: those who purchases securities pursuant to U.S. transactions, and those purchased them via the Brazilian stock exchange. Thanks to our current U.S. securities laws — the very ones Commissioner Peirce seems to be attacking — the first group were able to bring class actions (despite a clause banning them in the company’s bylaws) and recovered more than 90% of the $3 billion fraud settlement.

The second group, at the mercy of Brazilian law, were forced into arbitration on an individual bases and barred from joining a class action. They didn’t recover a single dime.

It’s hard to believe Donald Trump and the GOP would want to model American financial policies on Brazilian laws, but if Commissioner Peirce succeeds in making our securities markets less safe, foreign investors are likely to move investments elsewhere.

There’s a lot to be concerned about what’s coming out of Washington these days, but this particular development — though not yet headline-grabbing — is among the most worrisome in that it impacts some of our most vulnerable communities, such as retirees, and threatens to give corrupt business executives a “Get Out of Court Free” card that would be among the most meaningful gifts the GOP and the Trump Administration have bestowed upon corporate America (and that, for anyone paying attention, is really saying something).

There is surely bipartisan support for protecting the retirement funds used to support firefighters, police and military veterans. We just need to make sure Commissioner Peirce, and the President, hear about it.

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