I'm a conservative and a supporter of a free-market economy, and I'm supporting Proposition 211.
I'm interested in the initiative because it relates directly to securities fraud, something I'm familiar with. I was an investigator for the California Department of Corporations for 28 years, the last 13 as their chief investigator. The department is the state regulatory agency with authority over securities offerings in California.
It's important for the public to understand what led to this initiative being placed on the ballot. In the early 1990s, the U.S. and California supreme courts handed down several decisions restricting the rights of individuals to recover damages from those who committed securities fraud. In 1995, Congress delivered the coup de grace by requiring a much higher degree of proof before small investors could bring a class-action suit for fraud. President Clinton vetoed the bill, but Congress overrode his veto. This bill effectively shut down investor suits except for the most egregious offenses.
The No on 211 campaign claims that there is ample protection for investors without this initiative. The truth is that government securities regulation is weaker than it has been for many years. The Department of Corporations has half the number of investigators that it did 30 years ago. The Securities and Exchange Commission, in my experience, has been too understaffed to be effective.
The sad truth is that most investors will have to rely on private actions to get any redress. I have sat in the living rooms of elderly people who lost their life savings to securities fraud. They have no money left with which to hire an attorney to bring a lawsuit, so a lawyer on contigency fee basis is their last resort. The No on 211 campaign complains that the lawyers will get the bulk of the money while the investors will receive only a few cents on the dollar. Contingency lawyers do make a lot of money, but in the cases I've seen, the fee is usually one-third or less, which is the standard.
Critics of the proposition also complain that there's no limit on the amount of the fee an attorney can charge. Come on, guys, where's this free marketplace that you keep talking about?
Former SEC Chairman David Ruder has said that less than 10% of cases involving investment misconduct actually are brought by the government. In fact, the SEC's enforcement director, William McLucas, has testified before Congress that investment fraud suits are "essential" to the maintenance of investor protection.
The No on 211 ads suggest that a vote for Proposition 211 would unleash a flood of frivolous lawsuits. The state is being flooded by investment fraud artists, not frivolous investment fraud lawsuits.
If these cases are so frivolous, then why are these companies settling them? To avoid the cost of litigation? Contingency lawyers are paid only when they win, either through settlement or a judgment. If these cases were frivolous, then the plaintiffs would be awarded nothing, and the lawyers would make nothing. In fact, if the court determines a suit to be frivolous, it has the option of ordering the lawyers who filed the case to pay the defendant corporation's legal fees.
Neither federal nor California law currently makes such a strict sanction mandatory for frivolous suits. Proposition 211 would correct that.