For citizens’ sake, hold corporate wrong-doers accountable
Earlier this month, the U.S. Securities and Exchange Commission announced it had charged Miami biotech billionaire Phillip Frost and nine others with securities fraud for allegedly manipulating the share price of three penny stocks “in classic pump-and-dump schemes” that allowed Front and his cohorts “to profit handsomely,” according to the Commission. Investors, the Commission stated, “were left holding virtually worthless stock.” On Friday, Frost stepped down as chairman of Miami-based financial group Ladenburg Thalmann.
The good news is that the SEC appears poised to hold Frost and others accountable for bilking investors. But the bad news — not mentioned in the ensuing press coverage — is that even while doing so, some inside the Securities and Exchange Commission are working to make it much, much tougher for investors to pursue such accountability.
At the same time that civil servants in the SEC’s enforcement arm work diligently to police the markets, Trump’s political appointees are “laying the groundwork” to reverse longstanding policies that protect investor rights and ensure the integrity of our financial system. The move has been characterized by lawmakers as “a stealth attempt by the Commission to circumvent U.S. securities laws and the fundamental rights of shareholders.”
That’s because current SEC Chairman Jay Clayton has pointedly refused to reaffirm the longstanding position of previous chairmen — both Democrats and Republicans — that defrauded investors must be allowed to pursue class action lawsuits as a way to recoup at least some of their losses, and hold corporate wrong-doers accountable in court. Indeed, SEC Commissioner Hester Peirce publicly endorsed allowing companies to sneak arbitration clauses — those fine print “gotchas” that prohibit Americans from filing suit in court — into their charters. Such a move would block investors that lose everything to “pumpand-dump” and related schemes from getting their money back.
Allowing forced arbitration in corporate IPOs and charters would destroy securities class actions — the primary avenue for cheated investors to recover when companies commit fraud. This would ensure that everyone from regular citizens with IRAs and 401(k)s to police, firefighters, and teachers relying on their pension would have no way to fight back when they are fleeced.
Those class action lawsuits are instrumental in supplementing SEC actions, and they have a history of being far more effective for investors. That’s because, even though the Securities and Exchange Commission has taken action against Frost, the agency does not have resources to police every act that illegally harms investors. And even when government enforcers collect financial penalties, the money rarely goes to investors that may have lost everything in the scheme. This is why class actions have been crucial.
We are in an urgent moment. Frost and his buddies racked up more than $27 million for themselves, and left investors penniless. If Peirce, Clayton and other SEC commissioners have their way, such unconscionable theft will become ever more common as the courthouse doors are bolted shut to wronged investors.
How many more Americans must get bilked before the SEC wakes up and promises not to strip away those Americans’ right to their day in court? Paul Bland is executive director of Public Justice. As executive director, Bland manages and leads Public Justice’s legal and foundation staff, guiding the organization’s litigation docket and other advocacy.