Federal Securities Law is stacked in favor of the securities industry, making meaningful civil litigation almost impossible. When coupled with the decided lack of federal criminal action, it means the industry has little fear of recrimination for transgressions.

The industry is very influential with Congress, and, as a result, legislation is very pro- industry and legislation that is originally written to curb industry abuses becomes so watered down that the intended purpose isn't served.

Virtually every other kind of civil litigation can be filed based upon the plaintiffs' “information and belief” that a fraud has been committed. There must be reliable information that supports the allegations being made, but it does not have to be evidence on a level that would support a judgment. Assuming the information-and- belief complaint is properly crafted, the court initially assumes the allegations to be truthfully made and allows the plaintiff to move forward with discovery; the necessary evidence can be then uncovered with subpoenas and depositions. Based upon the evidence uncovered and presented, the court makes a ruling. Securities law is virtually the only area of the law that does not follow this practice. The fact that the SEC, DTC, the exchanges and the broker dealers operate in secrecy means the victim companies cannot get any information regarding the identity and magnitude of the counterfeiting or manipulation of their stock. Hence, federal securities lawsuits are frequently dismissed before discovery begins.

Another feature of federal-securities litigation: When the defendants file a motion to dismiss as their answer to the complaint, all discovery is halted. Without the benefit of discovery and the resultant evidence, the motion to dismiss is granted and the suit is over before it starts.

The federal racketeering statute (RICO) is often applied to civil litigation. It involves a “criminal enterprise” committing certain illegal acts (predicate acts) multiple times. The criminal enterprise can be an individual, company or group thereof. It is designed to prosecute groups who engage in repeated patterns of criminal behavior. Civil RICO awards are triple damages plus legal fees. It applies to almost all types of fraud except federal securities fraud. The cabal of shorts who collusively attack multiple victim companies utilizing the same illegal tactics is a text-book example of a RICO “criminal enterprise” engaged in multiple predicate acts. The securities industry managed to exempt themselves from civil RICO litigation during the Clinton administration.

The statue of limitations for federal-securities litigation is relatively short, typically two years from knowledge or five years from the committing of the fraudulent act. Common law fraud typically ranges from five to ten years. The secrecy of the industry and its regulatory apparatus compounds the problem of the relatively short statute of limitations.

States have their own securities laws that generally offer a more level playing field for investors and victim companies. The difficulty for investors suing Wall Street in state court is that the suit is limited to 49 individual plaintiffs. More plaintiffs cause the suit to be a class action, and it is removed to federal court, where it is governed by federal securities law. In the late nineties enterprising lawyers, who wanted to remain in state court, got around this by filing many suits in the same jurisdiction, each with 49 different plaintiffs but otherwise the same.

This abuse was brought to the forefront by certain notorious class action law firms, notably Milberg Weiss, during the Worldcom/Enron era. The Bush administration responded by passing legislation to curb frivolous class-action litigation. The legislation, championed by Christopher Cox when he was in Congress, is loosely written and has not yet been tested in court enough to fully understand its limitations. But, right now, it appears that if the same defendants are named for securities fraud in different state courts by different plaintiffs represented by different lawyers, there is the risk that the court may combine the suits into one class-action suit and kick it up to federal court, where successful prosecution of the case becomes exceedingly difficult. If the courts adopt this most expansive interpretation of this poorly-drafted law, the result will be that the securities industry has effectively blunted any meaningful exposure in state court.

The convergence of seemingly unrelated federal legislation that doesn't necessarily appear to target the securities industry has resulted in a litigation maze that almost always ends up in a blind alley. Hence, litigation at the federal level against the securities industry is very expensive, fraught with pitfalls, and time-consuming, consequently it does not get done nearly enough.