By Reynolds Holding
NEW YORK, Jan 7 (Reuters Breakingviews) - Private lawyers
could add oomph to the Securities and Exchange Commission. While
the U.S. regulator has scored some splashy settlements from Wall
Street banks, shareholder lawsuits may do better. Other
government agencies find ways to co-opt private-sector legal
talent. Maybe the SEC should try it.
Though the likes of Goldman Sachs have forked over
big bucks in recent years, overall the watchdog's settlements
have declined in median value by nearly half - from $1.5 million
in 2011 to $800,000 in the first half of 2012, according to NERA
Economic Consulting. The SEC has also lost some high-profile
trials, including on a rare occasion when it sued an employee of
a major bank.
Shareholder class-action settlements, meanwhile, exceeded
$11 million in median value last year, almost 50 percent more
than in 2011, NERA says. Yet such cases often elicit criticism
as nuisance suits that rarely deter wrongdoing because the
companies and their insurers - not executives - foot the bills.
At least the SEC can force individuals to pay and bar them from
running public companies.
Group lawsuits filed by investors, however, may actually
prove the stronger deterrent. They prompt more and bigger
settlements from public companies - and the exit of more senior
executives - than SEC investigations, researchers from New York
University and University of Michigan found. Markets also react
more negatively to these suits.
There are caveats. The study compares cases involving either
the SEC or shareholders but not both, and since the watchdog
rarely sues alone, the approach might produce anomalies. And
while looking at SEC investigations rather than only filed
lawsuits makes technical sense, it's a controversial method.
Even so, the results should inspire the cash-strapped
regulator to consider using private lawyers. The Federal Housing
Finance Agency, for example, has enlisted a major firm to sue
banks in the nation's largest mortgage-backed securities suit.
The extra firepower also comes at a bargain price: attorneys get
paid only from what they recover.
The strategy could encourage a flood of additional
litigation, but that's sort of the point. With access to top
legal eagles, the SEC might do a better job for investors.
- U.S. shareholder class action lawsuits may be more
effective than investigations by the Securities and Exchange
Commission at deterring securities fraud, new research shows.
- A study by Stephen Choi and Adam Pritchard, law professors
at New York University and the University of Michigan,
respectively, found that the private lawsuits prompt more and
bigger settlements from public companies, and more exits by top
executives, than SEC probes do. The study also determined that
investors and securities markets react more negatively to class
actions than to the watchdog's investigations.
- Study: http://link.reuters.com/kyk94t
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
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