Picking up on the story about the curious trading profits earned by US Senators, about which I posted earlier, Kevin Drum opines:
Maybe somebody should bring a class action suit against the entire senate. And quickly, before they pass some kind of tort reform bill that makes it impossible....
I'm sure Kevin is just having a little fun with those of us who support tort and class action reform (in fact, my post on this story was just above a post on tort reform. Hmmm. I wonder....). Yet, who am I to miss an opportunity to plug one of my books?
In my Securities Law: Insider Trading, on which Oliver Stone based his movie Wall Street,* I explained that "private party litigation against inside traders is rare—at least compared to other types of securities fraud—and is usually parasitic on SEC enforcement actions." Hence, class action reform would have little, if any, impact on insider trading enforcement.** Why make a big deal out of this point, beisdes trying to grub up a few more book sales? Because opponents of class action and tort reform often tell us that the sky will fall if reform ever passes - doctors will start leaving more watches inside patients, companies will make less safe products, and so on. Yet, nobody seriously proposes entirely eliminating either tort or class action litigation, just reforming them. My point here, however, is that even if tort and class action litigation were eliminated, much enforcement activity would remain unaffected.
*Not really.
**I should note that while class actions against alleged inside traders are rare, one often sees references to insider trading activity in securities fraud class actions. In 1995, Congress adopted the Private Securities Litigation Reform Act (PSLRA) to curtail what Congress believed was a widespread problem of meritless securities fraud class actions. One of the PSLRA’s provisions established a new (and arguably higher) pleading standard with respect to the scienter element of Rule 10b-5, requiring that a complaint detail facts giving rise to a “strong inference” of scienter. Post-PSLRA, plaintiffs’ securities lawyers began routinely seeking to satisfy the scienter pleading standard by alleging that insiders sold shares in suspicious amounts and/or at suspicious times. Insider sales supposedly provide inferential evidence that senior management knew that earnings forecasts would not be met and sold to avoid the price drop that follows from announcements of lower than expected earnings. In addition, insider selling activity can be used as evidence that the nonpublic information in question was material. See Basic Inc. v. Levinson, 485 U.S. 224, 240 n.18 (1988) (stating that “trading and profit making by insiders can serve as an indication of materiality”).