A Rose By Any Other Name – Are State Regulators Banned by SLUSA from Seeking Restitution for Their Citizens?
For several decades and with exceptional success, lobbying organizations for large public companies, such as the US Chamber of Commerce, have engaged in concerted efforts to whittle away at federal and state securities laws. Thus, they persuaded Congress to pass (and to override a presidential veto of) the Private Securities Litigation Reform Act (PSLRA), which made it more difficult for investors to recover stolen monies. When state regulators tried to fill the enforcement gap left by the PSLRA, Congress passed the National Securities Markets Improvement Act (NSMIA) to strip state regulators of enforcement authority. Then, when investors turned to state laws for relief, they persuaded Congress to enact the Securities Litigation Uniform Standards Act (SLUSA) to legislatively “preempt” state securities regulation, thereby forcing defrauded investors back under the PSLRA.
As a result of these and similar legislative campaigns and increasingly anti-investor court decisions, the capital markets have lost much of their credibility. Investors arguably have less confidence in our markets, and in the ability of our judicial system to right financial wrongs, than they have since the Great Depression.
But even after leading the world into financial crisis, the financial powers have not changed course. They continue to push to not just reduce, but eliminate, the accountability found in securities antifraud laws. Throughout their anti-investor campaigns, the anti-regulation (anti-free markets, really, in favor of protected markets) crowd has chanted that enforcement of securities laws is best left to regulators, rather than to entrepreneurial private attorneys.
Their hypocrisy is revealed, however, by their present effort to prevent even state Attorneys General from seeking restitution on behalf of defrauded investors as a part of their own, limited enforcement capabilities. In People v. Greenberg, (Index No. 401720/05), the New York Court of Appeals will soon consider whether a state enforcement action that seeks both civil penalties and restitution under the state’s regulatory power is really just a class action in disguise, subject to SLUSA (thus requiring dismissal).
If the defendants are successful in persuading the court that actions by regulators fall into the same traps as those by private investors, they will have succeeded in eliminating the last vestige of hope for defrauded investors to recover en masse their stolen funds under state securities laws. While SLUSA does not (yet) prohibit individual actions, the costs inherent in securities litigation make most individual cases impractical. SLUSA has banned class actions under state securities laws, and People v. Greenberg will test whether even state Attorneys General or securities commissions may still protect their citizens from financial crooks.