A Study of the Investor Protection System: ocusing on the Securities Class Action

With the rapid growth of financial business, securities markets not only serve the need for publicly-held corporation to raise capital but also provide invesotrs an alternative way to use capital. Since the securities are intangible property, how to prevent fraud and protect investors becomes an important issue for countries all over the world. Among all the supervisory methods, full-disclosure appears to be the most efficient way to prevent fraud. Securities fraud claims are especially suitable for class-action proceedings in that the costs of bringing securities fraud litigation are almost always greater than the losses to individual investors. Furthermore, the proof of transaction causation and loss causation and the assesment of damages are much more difficult than any other kind of law suits. The U.S.-style class action is a unique American procedural device. It allows plaintiffs to sue not only for injury them sustaine but on behalf of other persons similarly situated for injury done to them. It serves the interests of economy by not having to try the same issues again in separate cases. Also, it serves the interests of consistency and finality by avoiding the possibilities of inconsistent outcomes in separate trials of similar cases and resolving all claims in a single case that is binding on all class members. The U.S.-style class action is once considered the most powerful mechanism to enforce federal securities laws. However, the danger of vexatious litigation may also jeopardize the soundness of securities markets. In 1995, the U.S. Congress passed the Private Securites Litigation Reform Act （PSLRA）to address the concern for frivolous suits and the agency problem of plaintiff’s attorneys. Nevertheless, the scholars are still concerned about whether the class action is a good solution for securities fraud. Recent corporate scandals in Europe have affected individual investors on a large scale with similar injuries. This has led to a recent shift in the role of enforcement in several EU member states, from soley state and public consumer group enforcement mechanism to the inclusion of private enforcement. Consequently, there is a trend that more and more EU member states start to adopt the U.S.-style class action. There are other kinds of unique approach of private enforcement. Some countries use their traditional civil procedure to enforce securities fraud claims, such as Germany. The German Capital Investors Model Proceeding is said to be the express rejection of the adoption of U.S.-style class action. Still some other countries use the “nonprofit organization” to enforce securities law claims, such as South Korea and Taiwan. In Taiwan, the corporate scandals in 1998 revealed the demand for better investor protection and related law-enforcement system. Because the participants of the securities markets were mostly unsophisticated individual investors and the barrier to litigation often impeded them from entering lawsuits, the Securities and Futures Commission (SFC) established an Investor Services Center (ISC) under the Securities and Futures Institute to coordinate claims against public companies on behalf individual investors. Due to the court costs, the security-posting and the lack of discovery proceeding, there was still desparate need to establish the class action device in Taiwan. In 2002, the congress passed the Securities and Futures Investors Protection Act (hereinafter “SFIPA”) to establish our own securities class action device. The most unique feature of the securities class action in Taiwan is that it is not driven by attorneys but by the “Securities and Futures Investors Protection Center” (hereinafter “SFIPA”). According to the SFIPA, the SFIPC may bring an action or submit a matter to arbitration in its own name with respect to a single securities or futures matter injurious to a majority of securities investors or futures traders, after having been so empowered by not less than 20 securities investors or futures traders. The concept of this regulation is borrowed from the Consumer Protection Act, which authorizes the authority to represent class members in the court and seek compensation arising from defendants’ product liability. To date, the SFIPC has brought 50 securities class action on behalf of more than 64,000 investors, seeking more than NT$24 billion in civil damages. The SFIPC has won 9 final judgments, including securities fraud, false financial statement, false prospectus statement and insider trading. In order to strengthen investors protection, the draft of the modification of the SFIPA addresses the need for further exemption of court costs and the authority for the SFIPC to open the shareholder derivative suit and the judicial procedure to remove directors and supervisors. This thesis will first introduce the securities class action in Taiwan in chapter 2, and compare the model of the securities class action in Taiwan with other jurisdictions in chapter 3. After analyzing the main features of securities class action in different jurisdictions, this thesis will further examine that whether the securities class action in Taiwan does give investors easier access to litigation and discuss the pros and cons of the draft of modification of the SFIPC in chapter 4. Finally, this thesis will examine the overall investor protection system in chapter 5. Chapter 6 will point out the necessities of the securities class action in Taiwan and the importance of the SFIPC as the conclusion.