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CEI's John Berlau and Professor J.W. Verret are critical of the forthcoming General Motors IPO because the prospectus warns that the government will assert sovereign immunity to claims brought under the securities laws.

This is the wrong way to look at it.

Recall that the claim of supporters of expansive securities litigation is that such securities litigation promotes faith in the marketplace. Coincidentally, this claim about faith is faith-based, as there is no empirical evidence that the marginal benefits of civil securities litigation (over and above existing criminal liability for intentional fraud) outweigh the costs to shareholders from paying lawyers for all the false negatives and extortionate settlements that shift wealth from one group of shareholders to another with a 25% carrying fee.

But when push comes to shove, the government, in deciding what is the best legal regime to maximize wealth from an initial public offering, chooses to assert sovereign immunity to avoid the expense of potential securities litigation. Nothing stops the government from waiving sovereign immunity (or, if the executive branch does not have the power, asking the Democratically-controlled Congress to do so) if it thought that the availability of civil litigation would increase the government's return on this IPO.

The question now becomes: why not allow other corporate entities to opt out of the expensive federal securities regulation? Let shareholders vote on the proposal at the same time as board of directors elections. Investor choice will dictate the result: shareholders who believe that they're better off in a world where lawyers get to waste executives' time with meritless lawsuits can invest in companies that announce that they're not opting out. The marketplace can decide which legal regime is better, and the academics will have nothing to argue about.

As a proponent of securities law reform, I'm willing to put up or shut up on this issue: I think investors will prefer a world where corporations take the same stance that the US government is taking in the General Motors IPO, and if the empirical evidence from this experiment proves me wrong, I'll change my mind and stop advocating for a change in the laws. The question is why supporters of the status quo aren't willing to empirically test whether shareholders would prefer the status quo.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.