The Chamber of Commerce and Excessive Litigation: Be Careful What You Wish For (Part 1)

Now that SOX has faded as the whipping post for everything wrong with regulation and the US capital markets, the problem of excessive litigation has become the replacement.  These were addressed in my piece, Criticizing the Critics: Sarbanes Oxley and Quack Corporate Governance.  

Excessive litigation interferes with competitiveness and causes foreign companies to take their business elsewhere.  These arguments were made, for example, in Stoneridge and the Supreme Court repeated them back.  But in fact, there's not any real evidence supporting the position, irrespective of the number of tendentious studies churned out on the topic.  This is not to say that there isn't room for reform.  But the level of criticism and blame placed on litigation as an explanation for concerns about US competitiveness is unproven. 

In that regard, we'll spend a couple of days examining the recent report,  “Securities Class Action Litigation: The Problem, Its Impact, and The Path to Reform,” put out by the Institute for Legal Reform, a subdivision of the Chamber of Commerce.  The report mischaracterizes data (or is at least highly selective), cites as authority almost nothing except other, comparably reasoned reports, and contains arguments that are internally inconsistent.  Moreover, in analyzing the report, we have the benefit of an equally recent study, 2008 Trends, put out by the National Economic Research Associates.  The NERA report demonstrates some of the biases inherent in the Chamber report. 

The conclusions of the Chamber Report are predictable.  Securities litigation is ruining the US economic system. 

• "The costs of securities litigation are enormous, but the benefits are minuscule.  The culture of abusive class actions drive by a multibillion dollar plaintiffs' lawyer industry, is eroding the competitiveness of the U.S. capital markets at a time when they face perhaps their greatest threat from foreign competition."

In other words, the sky is falling and something needs to be done right away.  The urgency is in fact real but not for the reasons stated in the report.  Whatever happens at the presidential level, the November 2008 elections will almost certainly bring larger Democratic majorities in both chambers.  The urgency is that the days of favorable consideration of these types of arguments (which reached their apogee in the 1990s with the adoption of the PSLRA) are coming to a close.  If something isn't done now, it will only get harder in the next few years.  With that in mind, let us examine the report.  We start in the next post.