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Tuesday, April 17, 2007

Paulson Committee’s Next Target: You

A front page story in yesterday’s Wall Street Journal lifts the veil on an issue I’ve been concerned about for quite some time: the replacement of shareholder class action lawsuits with NASD-style arbitration. The main proponent of this initiative is once again, Secretary Paulson’s Committee on Capital Markets Reform. How no one is truly questioning this “blue ribbon” panel’s true motivation is beyond me, but that’s a story for another day…namely when I speak at the North American Securities Administrators Association (NASAA) Public Policy Conference on May 8, 2007.

The panel’s latest proposal would allow corporations to have special shareholder elections that could require anyone owning stock in the corporation to waive his or her right to initiate or join a class action lawsuit, instead electing for individual, private arbitration hearings.

At first glance you’d think that replacing costly class action lawsuits would be beneficial, but as always, the devil’s in the details. In fact, a couple of questions come to mind: Who would participate in the arbitration panels? Where would the arbitrations take place? Would the decisions and opinions be private or would they be made public to provide precedential value? Who in the world would oversee the process and pay for it?

You can bet that the little guy won’t like the answers to those questions. The real motivation behind this proposal is to allow Corporate America to “divide and conquer” each shareholder lawsuit. It’s also an attempt to scare away smaller investors with claims of less than $50,000. After all, would you pay an attorney to argue a case where the likelihood of winning is less than 50 percent and even then, you’ll probably get a few pennies on the dollar?

It might seem a little strange for this argument to be coming from me, a securities arbitration specialist, but I think that without significant reform to the securities arbitration process, this proposal is anti-investor.


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