Anti-Trust Are Investors\' Legal Remedies Enough? During

Anti-Trust

Are investors' legal remedies enough?

During the 1990s, a wave of legislation substantially deregulated the financial industry, effectively limiting the ability of investors to seek legal remedies in the wake of corporate fraud, and freeing corporations to take greater risks with 'other people's money.' The Private Securities Litigation Reform Act of 1995 (PSLRA) overturned the protections once provided by the 1934 Securities Exchange Act (Nations 2012). Then-President Clinton vetoed PSLRA, and as predicted, since its passage, "many citizens seeking redress for losses as a result of negligent or intentional misrepresentation, fraud, breach of fiduciary duty, or other misconduct in the purchase, sale, or offer for purchase or sale of securities have found their federal rights substantially reduced and have been forced to seek redress under state rather than federal law" (Nations 2012). PSLRA allowed corporations greater legal protection if they inserted a disclaimer that projected future profits were uncertain, increased investor's burden of proof in lawsuits against corporations and capped damages "recoverable in cases alleging a material misstatement or omission" (Nations 2012).

Investors must instead seek restitution based upon state laws, which vary widely. Some methods of recovering assets include negligent misrepresentation or common law fraud in which the defendant (the corporate CEO) deliberately disseminated known falsehoods or made claims of special knowledge about facts that would transpire in the future that failed to materialize (Nations 2012). However, given the use of disclaimers, it can be difficult to prove either negligent misrepresentation or common law fraud by a CEO. Another common method since the 1990s for investors is to sue based upon neglect of fiduciary duties, "the duties imposed by law on fiduciary relationships render those who owe fiduciary duties to investors viable targets in corporate-misconduct cases. Recent high-profile corporate-fraud cases, which have been accompanied by America's largest bankruptcies, have spawned a search for defendants other than the now-bankrupt securities sellers or corporations at the center of these cases. Potential defendants include corporate officers and directors, trustees, accountants, attorneys, brokers and brokerage houses, underwriters, investment bankers, appraisers, and market makers" (Nations 2012). However, because of the vague notion of what constitutes fiduciary duties, once again investors remain at a disadvantage.

Q2. Government regulation

One possible method of curtailing the type of rampant speculation that characterized the banking industry in recent years is to reinstate the 1933 Glass-Steagall Act "which barred commercial banks from underwriting or investing in stocks -- in effect, from owning investment banks" (Hiltzik 2012).Glass-Steagall was repealed in 1999, and the fact this was the year that so many of the practices began in the 1990s that were thought to have led to the 2008 credit crisis have caused many to demand the reinstitution of Glass-Steagall as a way of preventing further abuses. However, critics of the financial industry state that more stringent regulations are needed "with a laser focus on the activities that threaten the financial system in the modern era" (Hiltzik 2012).

First and foremost, along the lines of Glass-Steagall, banks that rely upon deposits and investment banks that speculate must be separated. Traditional banks could rely upon being 'bailed out' by the federal government, while speculative investment banking institutions would have to derive their capital "entirely from equity and debt" (Hiltzik 2012). However, "the biggest threat comes from financial firms' increased reliance on unregulated short-term borrowing, including fancy derivatives and money-market instruments that are vulnerable to panicky runs" as occurred in 2008 (Hiltzik 2012). Short-term capital, unlike deposits, are not regulated or insured by the FCC. Thus, "by redefining banks as any institutions reliant on short-term capital and significantly tightening their regulation.... Bear Stearns and Lehman Bros., non-banks whose failures arguably launched the financial crisis" would still be subject to greater oversight than at present (Hiltzik 2012).

Q3. Franchise

A franchisee, without the permission of the core franchisor, cannot buy products from another entity. A franchisee, unlike an independent business, is buying the trademark and reputation of the parent company. In many instances, franchisees receive products that are carefully pre-measured and pre-bagged, to ensure standardized preparation and consistency between various institutions in the franchise empire. When a customer buys a service or a product from a franchise, he or she is entitled to expect a certain level of service 'experience.' Buying cheaper cleaning products elsewhere may not produce the same effects as the company products, regardless of whether the franchisee perceives them to be 'better.'