NCPA - National Center for Policy Analysis

Legal Barriers Work Against Defrauded Investors

October 10, 2002

Investors who think they have been swindled and enter class action suits to try to recoup some of their losses collect, on average, only six cents for every dollar lost.

Why is the recovery rate so low? Experts say the legal deck is stacked against them.

Here are some of the hurdles confronting them:

  • People who sue their brokers for getting them into rotten stocks must engage in a compulsory arbitration process that the experts say is stacked against the investors.
  • Beginning in 1987, the U.S. Supreme Court started issuing a string of wide-ranging rulings that have stymied shareholders -- including a sweeping exemption from liability for people and companies that "aid and abet" securities fraud, such as auditors, lawyers and bankers who assist in illegal schemes.
  • The Private Securities Litigation Reform Act of 1995 put new limits on corporate liability -- and requires judges to rule on motions to dismiss a case before plaintiffs' attorneys get access to internal company documents.
  • Far from being on the side of investors, plaintiffs' lawyers are much more concerned about their fees, observers say.

As for state and federal authorities, their main goal is deterrence through punishing the bad guys.

Source: Dan Carney, "Why the Little Guy Can't Win," Business Week, October 14, 2002


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