Reforming Securities Litigation Reform: Restructuring the Relationship Between Public and Private Enforcement of Rule 10B-5

Abstract

Commentators have long debated how to reform the controversial Rule 1Ob-5 class action without pausing to ask whether the game is worth the candle. Is private enforcement of Rule lOb-5 worth preserving, or might we be better off with exclusive public enforcement? This fundamental but neglected question demands attention today more than ever. An academic consensus has emerged that the typical Rule 1Ob-5 class action cannot be defended on compensatory grounds. That leaves the oft-cited, but undertheorized, rationale that private enforcement is a "necessary supplement" to the securities fraud deterrence efforts of the SEC. When this justification is critically examined, however, it proves to be highly debatable. Law and economics scholarship teaches that "bounty hunter" enforcement of an overbroad law, like Rule 10b-5, may lead to overdeterrence and stymie governmental efforts to set effective enforcement policy (even assuming away "strike suits" and the agency costs that attend class action litigation); if private enforcement is nevertheless desirable-a contestable proposition-it is because a world without it might result in even greater deviations from optimal deterrence, due to SEC budgetary constraints, inefficiency, and/or capture. By carefully explicating the relative advantages and disadvantages of private Rule 1Ob-5 enforcement versus exclusive public enforcement, this Article reveals a new and better way to remedy the shortcomings of the Rule lOb-5 class action. It proposes that policymakers adopt an "oversight approach" to securities litigation reform by, for example, granting the SEC the ability to screen which Rule 1 Ob-5 class actions may be filed, and against whom. By muting the overdeterrence threat of private litigation and placing the SEC back at the helm of Rule 1 Ob-5 enforcement policy, this approach would mitigate the primary disadvantages of private enforcement. Moreover, by preserving a private check on SEC inefficiency and regulatory capture, and allowing the SEC to continue to supplement its budget with private enforcement resources, it would do so without eliminating the primary advantages of the current system. This approach stands in contrast to prior securities litigation reforms, which have responded to the verdeterrence threat posed by Rule 10b-5 class actions by rigidly narrowing the scope of private liability