Today’s Wall Street Journal featured a letter to the editor from AAJ President Gary M. Paul illustrating the full story about the Carlyle Group’s attempt to use forced arbitration as an abusive tactic to limit the rights’ of investors. This letter was in response to an op-ed which criticized the Securities and Exchange Commission’s (SEC) recent rejection of forced arbitration clauses within IPO request, despite its decades-long stance against the inclusion of these clauses in governing documents.
Investor Rights, Class Actions, Arbitration and Courts
Hal Scott and Leslie N. Silverman only tell one side of the story about forced arbitration. Arbitration can be an effective method of resolving disputes when both parties voluntarily agree to arbitrate a dispute after it arises. But when companies force arbitration on investors in order to limit investors' legal rights and take away their ability to join together as a class, arbitration becomes an abusive weapon.
The forced arbitration clause in the Carlyle Group's proposed IPO did just that. It banned all class proceedings and eliminated investors' ability to hold the company publicly accountable in a court of law. Investors instead would be forced into an individual, secret arbitration process in Delaware. This would apply even in cases of massive fraud such as occurred at Enron and WorldCom.
The class process is vital to enforcing rights under securities laws. Most investors don't have the resources to pursue individual claims. By forcing investors into an individual arbitration process and removing all public scrutiny, Carlyle essentially would have granted itself immunity when it violated securities law.
Such a move has never been approved by Congress, the courts or the SEC. In Dodd-Frank, Congress explicitly gave the SEC power to restrict or ban forced arbitration. Legislation currently in the Senate and House would amend the Federal Arbitration Act of 1925 to ensure arbitration is truly voluntary for consumers, employees and investors. In 1990 the SEC blocked an IPO containing a forced arbitration clause.
By maintaining its decades-long stance against the inclusion of forced arbitration in governing documents, the SEC acted according to its mission to protect and advocate for the rights of investors.
Gary M. Paul
American Association for Justice
Arbitration can be an effective method of resolving disputes when both parties voluntarily agree to arbitrate a dispute after it arises. AAJ continues to support Congressional passage of the Arbitration Fairness Act (S. 987 /H.R. 1873) in order to protect consumers from abusive forced arbitration clauses.