Some Practical Questions Concerning the Effect of the Proposed Federal Securities Code on Civil Litigation
A major impetus for the launching of the Federal Securities Code project in 1969 was the view, widely held by businessmen and their lawyers, that it was far too easy for investors to bring class action suits under the federal securities laws, seeking multi-million dollar judgments against business corporations, directors, accountants, and lawyers.' The business community's concern about possible exposure to large judgments in securities litigation was heightened by the news that plaintiffs had obtained a judgment in a class action brought against the issuer and several "outside director"defendants in Escott v. Bar Chris Construction Corp., and by several United States Supreme Court decisions that appeared to approve of "implied remedies" for violations of criminal statutes and Securities Exchange Commission (SEC) Rule 10b-53 and to eliminate any need for each class member to prove "reliance" and "in fact causation."' Relying on the doctrine expressio unius est exclusio alterius, some critics suggested that the courts' recognition of a private right of action for violation of SEC Rule 10b-5 (and other statutes) was inconsistent with the expressly created civil liability provisions (and express limitations on the damages recoverable and the time for filing suit) contained in sections 11, 12, 13, and 15 of the 1933 Act and sections 16(b), 18, and 20 of the 1934 Act.- Professor Louis Loss, who has acted as Reporter for the Federal Securities Code project, expressed the view that civil liability has become a"jungle," and that SEC Rule 10b-5 has "dwarfed, upstaged, out-shone, and made wide end runs around, the express civil liability provisions."'
Two of the most important provisions of the proposed Code,therefore, are section 1708, which imposes a ceiling on recoveries unless knowledge' is proven, and section 1711, which creates new procedures for consolidation of securities litigation, notice to potential plaintiffs, and pro ration and distribution of any recovery to those investors who are damaged by the defendant's wrongful act. The proposed ceiling on recoveries and the proposed procedures for distributing such recoveries raise a number of practical problems. This Article will explore those problems, attempt to determine whether sections 1708 and 1711 are workable, and propose possible alternatives.