Has the SEC Shifted Its Views?
Over the years, the SEC has repeatedly stated that its mission is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” In this context, the agency has repeatedly told Congress and the courts that private securities litigation is a necessary adjunct to its enforcement program. The SEC recently repeated this theme in the opening paragraph of the government’s amicus brief filed in the Tellabs, Inc. v. Makor Issues & Rights, Ltd. appeal before the U.S. Supreme Court. In the brief, the government stated that “[m]meritorious private actions are an essential supplement to criminal prosecutions and civil enforcement actions brought, respectively, by DOJ and the SEC.”
Yet the argument in the Tellabs brief seems to move away from the SEC’s long held position. There the government argues against a “reasonable inference of state of mind,” which is the pleading standard advanced by the Seventh Circuit Court of Appeals. Rather, the government adopts the defendant’s position, advocating for a stricter “high likelihood” standard. If the Supreme Court accepts the government’s argument, it would make it more difficult for plaintiffs to survive dispositive motions, such as a motion to dismiss. It is curious that the SEC seems to be siding with defendants, not the investors it has long claimed are an “essential supplement” to its enforcement program.
Likewise in January 2007, Conrad Hewitt, SEC Chief Accountant, advocated for limiting liability for accountants and recommended that the profession lobby Congress for such protections. If adopted this position could limit the ability of plaintiffs to recover in private securities litigation. Again, this seems to undermine the SEC’s long stated position.
Finally, The Wall Street Journal, in an April 16, 2007 article by Kara Scannel reported that the SEC “is exploring a new policy that could permit companies to resolve complaints by aggrieved shareholders through arbitration, limiting shareholders’ ability to sue in court.” If adopted such a proposal could limit the ability of plaintiffs to recover in private securities litigation. Again, this seems inconsistent with the long held views of the agency.
All of this raises fundamental questions about the views of the SEC. No doubt the agency continues to reiterate its traditional positions about shareholders and private litigation. At the same time, as the adage aptly notes, actions often speak louder than words. In this context the question becomes: Is the SEC shifting away from its strong alliance with shareholders? If so, is this in response to the agency’s critics? Or perhaps a response to claims that the U.S. markets are less competitive because of the threat of costly litigation. Does this change reflect the often reported split among the Commissioners on various issues?