Mandatory Arbitration Provisions: Will They Undermine the Benefits of Securities Law Regulation?
In the March 12, 2012 National Law Journal, Gonzaga University professor and former law school dean Daniel Morrissey uses the example of The Carlyle Group L.P., involved in a showdown with the SEC, as a springboard to launch his argument that mandatory arbitration provisions, if they are allowed to proliferate, will be fatal to shareholder litigation.
The Carlyle Group’s prospectus for an offering provided that purchasers of securities would agree to forego class actions involving their claims. The SEC refused to accelerate the effective date of Carlyle’s registration statement, and Carlyle blinked, withdrawing its mandatory arbitration provision.
Prof. Morrissey argues that the history of securities legislation, from the Securities Act of 1933 and the Securities Exchange Act of 1934 to the Private Securities Litigation Act, evinces “the implicit congressional finding that shareholder suits are better brought as class actions in court, not individual arbitrations.”
Of course, an explicit congressional intent to exempt securities litigation from mandatory arbitration would allow plaintiffs in securities class actions to escape the grip of the Federal Arbitration Act and mandatory arbitration provisions. Congress can create an escape hatch from the preemptive effects of the FAA. Because Prof. Morrissey points to an “implicit” congressional finding, we wonder just how much litigants can count on an implicit escape hatch if they are parties to an arbitration provision.
“Arbitration will result in more investment fraud,” Prof. Morrissey concludes. “And it probably won’t be long before another company, emboldened by the unfriendly attitude of some judges there toward SEC regulation, tries a like maneuver [to Carlyle’s] and pushes it all the way to the Supreme Court.”
Goldman Sachs Fights $20.6 Million Arbitration Award
FINRA – the Financial Industry Regulatory Authority – is a private company that is the largest regulator of securities firms doing business in the United States.
On March 12, 2012, Fox Business News reports that Goldman is seeking to overturn a $20.6 million arbitration award resulting from FINRA arbitration, and confirmed by Federal Judge Jed S. Rakoff in November 2010. The matter has been appealed to the 2nd Circuit.
Goldman disputes the claims of creditors of Bayou Group LLC, a failed hedge fund, that Goldman ignored suspicious signs that Bayou Group LLC made improper transfers of funds to its account at Goldman.
On the one hand, the award is being attacked as “unreasoned and patently indefensible.” On the other hand, it is argued that upholding the award could help raise standards for banks that clear trades for hedge funds. Samuel Israel III, the former hedge fund manager for Bayou Group LLC, surrendered to federal authorities on June 9, 2008. Mr. Israel has been sentenced to a total of 22 years (including two years for faking his own suicide).
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