Introduction

Securities regulation began as a matter of state law more than twenty years before Congress enacted federal securities regulation.[1] Only with Congress' enactment of the Securities Act of 1933, adopted at a time of national economic collapse, did federal regulation begin to any great extent.[2] When Congress enacted the legislation, it was careful not to preempt state blue-sky laws, creating a dual regulatory scheme that was symbiotic in nature.[3] The statutes coexisted in harmony until 1996, when Congress enacted the National Securities Markets Improvement Act ("NSMIA"), which preempted state blue-sky laws and reversed over sixty years of concurrent federal and state regulation.[4] In the late 1990's and early 2000's, the U.S. capital markets weakened as a result of numerous corporate scandals due, in part, to inadequate regulatory oversight.[5] In response, some state legislatures and courts have asserted new forms of remedies for securities related transactions under their existing consumer protection statutes. These laws were enacted in the mid-1960's to protect consumers from deceptive trade practices.[6] "States have generally modeled their law on the Federal Trade Commission Act, or they have adopted in some form, the Uniform Consumer Sales Practice Act, or the Uniform Deceptive Trade Practice Act."[7] In fact, all fifty states have enacted at least one statute with broad applicability to most consumer transactions, aimed at preventing consumer deception and abuse in the marketplace.[8]

In recent years, cases have arisen that have expanded the coverage of these statutes to include investment and securities related transactions.[9] While the majority of brokerage houses require customer account agreements that subject accountholders to mandatory arbitration clauses in which the accountholder waives procedural and substantive rights,[10] plaintiffs in certain jurisdictions have been able to successfully use consumer protection statutes to maintain a cause of action in the courts for securities related transactions, thus providing injured account holders with an additional and sometimes needed remedy to fill a gap left by existing law. This article will address in Part I the historical background of state blue-sky and federal securities laws. Part II will address arbitration and its applicability to consumer and securities related disputes. Part III will address the evolution of consumer protection statutes and their application in jurisdictions where plaintiffs have argued for the expansion of such statutes to include securities related transactions.

1. Federal Securities and Blue-Sky Laws

1.1 State Blue Sky Laws

In 1911, the first blue-sky law was adopted in Kansas, in significant part through the efforts of the state's banking Commissioner, J.N. Dolley.[11] The statute required registration of securities and brokers.[12] Prior to selling any security in Kansas, the issuer had to file a detailed application with the banking commissioner, and no sales could be made in the absence of the commissioner's approval.[13] The statute gave the commissioner broad discretion, as he could reject an offering if he concluded that the issuer "did not intend to do a fair and honest business or does not promise a fair return on the stocks, bonds or other securities offered for sale."[14] This broad authority became commonly known as "merit review." Dolley, in his capacity of commissioner, was not hesitant to exercise his authority, as he reportedly approved less than 7% of applications presented to him in the first year of the statute's operation.[15] Within two years, eleven states had adopted laws similar to the Kansas statute.[16] However, other states adopted less stringent statutes that required pre-clearance of the proposed offerings but limited the administrators' authority to reject them.[17] Typically, the administrator had to conclude that the offering was fraudulent or met other specified criteria in order to deny permission.[18] Other states, including important centers of the securities industry such as New York and New Jersey, adopted statutes that prohibited fraud but did not require pre-clearance of an offering.[19] The blue-sky laws generally put the greatest burdens on high risk/high return securities.[20] Today, every state has enacted a securities act; however, the scope and terms of each vary.[21]

State blue-sky laws regulated securities distributions and tender offers, as well as broker-dealer activities.[22] State securities laws typically provide a private right of action for investors injured as a result of a violation of the law.[23] State securities litigation is not limited to blue-sky issues, as actions for breach of contract, fraud, and breach of fiduciary duty remain a matter of state law rather than one of federal securities law. [24]

1.2 Federal Securities Law

The heightened fraud and speculation that preceded the stock market crash of 1929 and the ensuing depression gave the 1932 Congress and "New Deal" administration, headed by Franklin Roosevelt, the political power to begin instituting restrictions on what became the most regulated industry in the United States.[25] In a letter to Congress recommending the supervision of traffic in securities in interstate commerce, Roosevelt stated that the "purpose of the legislation was to protect the public with the least possible interference to honest business [and this] is but one step in our broad purpose of protecting investors." [26] Congress enacted the first of the major Federal securities statutes in 1933, namely the Securities Act of 1933. [27] When Roosevelt signed the Act into law, he announced that "securities law was to be changed from caveat emptor to caveat vendor. And as such, the Securities Act was the first federal consumer protection statute." [28] The 1933 Act was, and still is, directed mainly at the offering of securities. [29] Subject to certain exemptions, the 1933 Act requires the registration of all securities at the time the offering is being made available to the public.[30] Unlike some of the state securities laws which are based on merit regulation, the 1933 Act is disclosure based, and was premised on Justice Brandeis' notion that "the availability of information [should] allow the market to evaluate investments, but would not and should not, try to keep investors from making bad bargains."[31] The 1933 Act also provides a private remedy for investors who are injured by violations of the Act. [32] However, the 1933 Act is limited as it covers only distributions (both primary and secondary) of securities, whereas, the Securities Exchange Act 1934 addresses all types of securities transactions and extended federal regulation over a wider range of participants and transactions.[33] The 1934 Act regulates all aspects of publicly traded securities.[34] It covers buyers as well as sellers, and imposes disclosure, reporting and other requirements on publicly-held corporations.[35] The Act also deals with stock manipulation, insider trading, manipulative or deceptive devices in connection with the purchase and sale of a security, misstatements in documents filed with the Securities and Exchange Commission, and a myriad of other actions affecting purchasers and sellers.[36] Persons who believe they have been injured by a violation of either the 1933 or 1934 Act can bring a civil action for damages. A number of sections of the Acts provide for express private rights of action.[37] However, commentators have stated that the "most significant civil liability exists under various "implied" rights of action under provisions prohibiting certain activities."[38]

1.3 Jurisdictional Issues

Unlike the federal securities laws, a major question under most blue-sky law is jurisdictional provision. [39] Generally the statutes are directed at the locus where the securities are offered for sale, regardless of the issuer's state of incorporation, state of organization, or principal place of business.[40] Courts have suggested that either the situs of the offer or acceptance is sufficient to trigger a state's jurisdiction over the sale and that an offer to sell within a state, even though not accepted, is also sufficient. So long as there has been an offer made within the state's borders, there is sufficient "contact" to justify the use of the long arm statute. Typically, under the Commerce Clause of the U.S. Constitution federal courts have routinely struck down state statutes that have imposed an undue burden on interstate commerce, while simultaneously allowing state securities laws (which arguably have burdened interstate commerce) to remain unhampered.[41]

1.4 Congressional Recognition of Dual Securities Regulation

When Congress created the system of dual regulation by enacting federal securities legislation, it deliberately preserved protections afforded to investors by state securities laws by adding savings clauses to its securities statutes.[42] Additionally, Congress exempted from its scheme various types of securities transactions and related transactions, leaving regulation primarily to the states.[43] When Congress adopted the 1933 Act, forty-nine states had enacted blue-sky laws under their assumed responsibility to protect their citizens from wide ranging fraud and abuse at the hands of unregulated promoters, issuers and broker- dealers. [44] These laws provided significantly more protection to investors than the private state law remedy based on deceit.[45] However, unscrupulous promoters developed ways to elude the reach of process through the use of interstate facilities, leaving states unable to acquire jurisdiction over some companies.[46] Similarly, defrauded investors were faced with the difficulties attendant in any effort to obtain redress from sellers of securities operating in other states.[47] As a result, state securities administrators joined in the call for federal legislation to complement their efforts at the state level, expressing "the need of federal assistance in their campaign against the deluge of fraudulent securities that had been flooding the country."[48] It was against this backdrop that the 1933 Act emerged, "underscoring not only the symbiotic duality of state and federal securities laws, but also the interstitial nature of congressional power exercised under the commerce clause of the constitution."[49] Congress, in passing the 1933 and 1934 Acts, was careful to preserve, not preempt, the state blue-sky laws, which not only predated the federal legislation, but were generally broader in scope. [50] In enacting the legislation, the bills contained a savings clause which provided for control of securities at the state level: "Nothing in this chapter shall effect the jurisdiction of the securities commission (or any agency or office performing like functions) of any state or territory of the United States, or the District of Columbia, over any securities or any person." [51]

The savings clause as adopted established a dual system of securities regulation, formulating a regulatory scheme at the federal level while preserving the role for the states in the development of their own regulatory schemes.[52] In the ensuing years, Congress amended the statute but not did tamper with the language of the savings clause.[53] In preserving the role of the states, "Congress unequivocally accommodated the local and national interests bearing on the balance of state and federal power."[54] Congress further demonstrated its lack of intent to preempt state securities laws by specifically exempting types of securities and securities transactions.[55] These exemptions included local government securities, insurance policies and annuities contracts, and intrastate offerings. In addition to the savings clause contained in the 1933 Act, Congress added a similar clause the 1934 Act, stating that "… [the] Act was intended to protect blue-sky laws as they related to trade in the trading markets in securities [and] the rights and remedies provided by state law are expressly cumulative." [56] Congress continued to embrace the dual system of securities regulation when it passed the Small Business Investment Incentive Act of 1980. The Act sought to reduce the burdens federal securities regulation imposed on the capital formation process in order to address the significant reduction in the flow of capital to small businesses that occurred during the 1970's..[57] The statute required, among other things, cooperation between the SEC and any association of state securities officials in sharing information regarding state registration or exemptions of securities, developing uniform forms and procedures, and developing a small issuer exemption.[58] Moreover, the language of the statute further evidenced Congress' intent not to preempt state blue-sky laws: "Nothing in this subchapter shall be construed as authorizing the preemption of state law."[59]

During the late 1990's, state blue-sky laws were effectively preempted by deregulation .[60] This was accomplished first by the National Securities Markets Improvements Act of 1996 ("NSMIA") and then by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). The NSMIA preempted state law in many areas of security regulation, particularly affecting the registration and reporting requirements applicable to securities transactions.[61] Congress justified the preemption provisions of the NSMIA by arguing that the system of dual federal and state regulation was unnecessarily redundant, costly, and ineffective.[62] The SLUSA was even more deregulatory and had an even more radical preemptive effect.[63] It was adopted as a reaction to attempts to evade the obstacles to federal securities class actions erected by the Private Securities Litigation Reform Act of 1995 ("PLSRA") by using state court actions.[64] The PLSRA did not change the provisions of the law covering securities anti-fraud actions, but made plaintiff class action suits "more difficult by, among other things, reducing control of plaintiff's counsel over class action litigation; imposing stricter pleading standards, and providing a safe harbor for forward looking information." [65] These reforms were aimed at reducing the volume of abusive litigation perceived to be taking place in federal courts.[66] In response to this reform, some plaintiff's attorneys began bringing class actions in state court, particularly in California.[67] Being vulnerable to such litigation, high tech companies lobbied for federal preemption on the grounds that the PLSRA was being undermined. Congress obliged by engaging in selective preemption by precluding state courts from the power to adjudicate securities fraud class actions involving nationally or NASDAQ listed securities.[68]

1.5 Weakening of the U. S. Capital Markets

By July 2002, Enron and numerous other corporate scandals had delivered an immense blow to investor confidence and the "integrity of the securities and other markets that make American capital work."[69] Reminiscent of the bursting of the "South Sea Bubble,"[70] the American public had become a victim of "robbery and jobbery."[71] Among the more significant failures were: Worldcom, which announced that it had overstated its Earnings Before Interest, Depreciation, and Amortization (EBITDA) by $3.8 billion in the previous five quarters; Adelphia Communications, which filed for protection under chapter 11 three months after revealing that it had guaranteed loans of $2.3 billion to members of the Rigas family, Adelphia's controlling shareholders; Tyco, whose market capitalization had fallen by over $100 billion, driven by the indictment of its former chief executive officer on the charge of sales tax evasion and allegations about the misuse of corporate funds; and Global Crossings, which fell into bankruptcy following allegations that the company's revenues were inflated due to swaps without economic substance.[72] The aftermath of these scandals not only resulted in widespread asset devaluation, but also called into question the adequacy of the federal securities laws that were designed to ensure that public companies provide investors with full and accurate disclosure of their true financial conditions.[73] Congress responded by passing the Sarbanes-Oxley Act.[74]

1.6 The Resurgence of State Regulators

On May 21, 2002, New York State Attorney General Elliot Spitzer announced an agreement by Merrill Lynch to enact significant reforms to insulate securities research analysts from its investment banking arm and alter the methods and criteria by which they are compensated.[75] A North American Securities Administrators Association ("NASAA") task force including New York, California and New Jersey led the investigation leading to the settlement in which Merrill agreed to pay a fine of $48 million to New York State Department of Law, $50 million to the remaining 49 states, the District of Columbia and Puerto Rico, and $2 million to NASAA.[76] The case was based on the broad antifraud provision of the Martin Act (New York's blue-sky law), which "prohibits any device, scheme or artifice to defraud or obtain money by means of any false pretense, representation or promise, fictitious or pretend purchase or sale, any concealment, suppression, fraud, false pretense or promise in connection with the sale of securities or offering investment advice." [77]

In the Attorney General's view, in contrast with federal securities laws, "no purchase or sale of stock is required, nor are intent, reliance or damages required elements of the violation."[78] The action was criticized by the U.S. House Financial Services committee as an attempt to "undermine the national securities regulatory regime and was capable of balkanizing the securities industry." [79] In justifying his actions, Mr. Spitzer stated that "the SEC was not doing enough."[80]

2. Arbitration

Judicial attitudes toward arbitration as a dispute resolution mechanism have shifted radically over time.[81] At its origin, arbitration was "an unwanted stepchild in the courts," and agreements to arbitrate a dispute were unenforceable, as courts viewed such attempts as depriving them of their natural jurisdiction. [82] In 1925, Congress codified the Federal Arbitration Act ("FAA") to counter the long standing common-law hostility toward arbitration, as courts wereparticularly reluctant to enforce agreements to arbitrate future claims.[83] The FAA provides, in part, that "an agreement to arbitrate an existing or future claim shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."[84]

As discussed in Part I herein, in 1933 and 1934, in reaction to the stock market crash of 1929, Congress enacted the Securities Act of 1933 and the Exchange Act of 1934 to protect investors and establish safeguards in the securities markets.[85] Both acts provided for a judicial forum for resolving disputes resulting from fraudulent practices in connection with sale and issuance of a security and also forbade waiver of any of their provisions including, but not limited to, the judicial forum.[86] The coexistence of the securities and arbitration acts created a conflict, as the FAA mandates that arbitration agreements are to be upheld and the securities acts forbid waiver of any of their provisions, including the judicial forum. This created a controversy as to the Congressional intent with respect to pre-dispute agreements to arbitrate securities claims.[87]

In 1953, the conflict was temporarily resolved by the Supreme Court in Wilko v. Swan.[88] In Wilko, an investor brought an action under section 12(2) of the 1933 Act for alleged misrepresentation and omission in connection with his stock purchase.[89] The brokerage firm moved to compel arbitration pursuant to the predispute agreement that the investor had signed.[90] The Supreme Court held the predispute arbitration agreement invalid based on the nonwaiver provisions of the 1933 Act and reasoned that arbitration was not as effective as litigation, primarily due to lack of judicial instruction on the law or judicial review of errors in interpretation, and because no records or written opinions were required.[91] As Wilko's claim was brought under section 12(2) of the 1933 Act, the holding was limited to actions under the 1933 Act.

However, following Wilko's lead, lower courts and administrative agencies presumed that arbitration agreements were void for alleged violations of section 5 and 17 of the 1933 Act and section 10(b) of the 1934 Act.[92] While there are substantive differences between the aforementioned causes of action, most courts reasoned that the nonwaiver provisions and the policies of investor protection underlying both the acts are so similar that, if arbitration was deemed inadequate to resolve 1933 Act claims, it clearly could not be adequate to resolve 1934 Act claims.[93]

Over the ensuing 20 years, various exceptions were carved out of the Wilko doctrine.[94] In 1970, the Fifth Circuit Court of Appeals held that if an investor made an agreement to arbitrate a claim after the dispute arose, such agreement was enforceable.[95] Another exception was created by the 1975 amendments to the securities laws in which section 28 of the 1934 Act was amended to allow compulsory arbitration of claims between securities professionals.[96] While courts had previously compelled arbitration between both member and non-member firms, these decisions were based on the theory that compelling inter-exchange arbitration did not prejudice the investing public and provided an expedient dispute and disciplinary mechanism. [97]

However, it was not until the 1980's that the Supreme Court, in a series of cases, positioned itself in favor of arbitration.[98] In 1983, in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., the Supreme Court signaled its growing acceptance of the arbitration process and recognized a federal policy favoring arbitration.[99] In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., the Court held that "by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by statute; it only submits to their resolution in an arbitral, rather than a judicial forum. It trades the procedures and opportunity for review of the courtroom for the simplicity, informality and expedition of arbitration."[100] In Dean Witter Reynolds, Inc. v. Byrd, the Court finally addressed the scope of predispute arbitration agreements in a case involving securities. The issue in Byrd was whether courts could try arbitrable state claims with what were then nonarbitrable claims.[101]

In 1987, in Shearson/American Express v. McMahon[102] the Supreme Court reversed the status quo against arbitration of claims under the 1934 Act and held that investors who had signed predispute agreements could be compelled to arbitrate their claims under section 10b of the 1934 Act (and SEC Rule 10b-5 promulgated thereunder). The McMahon court also upheld arbitration of claims under RICO but did not explicitly overrule Wilko, leaving the lower courts split on the arbitrability of claims under the 1933 Act.

In 1989, in Rodriguez de Quijas v. Shearson/American Express, Inc.[103] the Court, in a 5-4 decision, finally overruled Wilko explicitly and upheld the validity of the pre-dispute arbitration agreements under both the Securities Act of 1933 and the Securities Exchange Act of 1934.

In response to demise of the Wilko doctrine, the Massachusetts legislature announced a new rule that provided that, upon opening an account, customers must be given the option of not signing the arbitration clause.[104] In reaction, in Securities Industry Ass'n. v. Connolly, the First Circuit Court of Appeals held that the FAA preempted Massachusetts from adopting regulations requiring arbitration clauses in predispute arbitration agreements between broker dealers and their customers to be conspicuous and subject to full written disclosure concerning their legal effect.[105] While an across the board ban on arbitration agreements might arguably be preempted by the broad federal policy favoring arbitration of securities disputes, commentators have asserted that mandating that customers be given freedom of choice should be viewed as a valid exercise of state regulation.[106] Notwithstanding the argument that giving customers a choice did not conflict with federal law, the First Circuit Court of Appeals invalidated the Massachusetts rule.[107] In rendering its decision, the court noted that the Massachusetts legislation not only prohibitedpredispute arbitration agreements as a nonnegotiable condition of opening an account but also required this clause and its effects to be brought conspicuously to the customer's attention.[108] Taking all of the conditions together, the court held that the state law was contrary to the federal plan and clear pro-arbitration mandate of the FAA.[109]

Subsequent to the Supreme Court's holdings, the use of pre-dispute arbitration agreements has routinely appeared in brokerage account agreements used in establishing an account with a broker-dealer, and virtually all broker-customer disputes are arbitrated, typically in NASD arbitration forums.[110] In the securities industry, arbitration is used almost exclusively to resolve disputes between individual investors and broker-dealer firms.[111] Brokerage accounts agreements typically require that disputes between the customer and broker be resolved through arbitration.[112] Often the firms require that self-regulatory organizations ("SRO") administer the arbitration forum.[113] Broker-dealer firms that register with the SEC are required to become members of the SRO and are required to comply with all SEC rules and all rules adopted by the National Association of Securities Dealers ("NASD").[114] The NASD Dispute Resolution Inc. ("NASD-DR") is the largest SRO, handling over 90% of all securities related disputes. Procedurally, a claim is first filed with the SRO.[115] One or three arbitrators will resolve the dispute, depending on the amount in controversy. The panel is composed of a majority of persons from outside the securities industry unless otherwise requested by the claimant.[116] Generally, the panel's decision is binding on the parties and is only reviewable under limited, statutorily enumerated circumstances.[117]

As Dean Joel Seligman correctly concluded, consent in securities arbitration is a "legal fiction" and "mandatory arbitration" is a more accurate characterization.[118] Professor Richard E. Speidel observed that "most contracts to arbitrate in the securities industry have the characteristics of adhesion contracts."[119] These characteristics include: (1) non-unique and repeated terms appear in standard forms; (2) the standard terms are prepared primarily for the benefit of the drafter; (3) the standard terms are likely to be unexamined and not easily understood at the time of the agreement; and (4) the drafter is in a position to insist that the other party "take it or leave it" without bargaining.[120]

There is widespread acknowledgement that predispute arbitration clauses in customer-brokerage firm agreements are, for all intents and purposes, standard, mandatory and non-negotiable. As the North American Securities Administrators Association, Inc. ("NASAA") stated, with respect to a then pending change in rules concerning disclosure of predispute arbitration clauses:

The NASD discussion of the proposed rule notes that investors' participation in SRO sponsored arbitration may be involuntary given that customers must sign predispute arbitration agreements in order to open accounts. These agreements are drafted by the firms and place the customer at a disadvantage.[121]

In November 2004, the SEC adopted certain changes to NASD Rule 3110(f) Governing Predispute Arbitration Agreements with Customers.[122] NASD Rule 3110(f) requires that predispute arbitration agreements contain highlighted disclosure about differences between arbitration and litigation, including notice that by agreeing to arbitrate their disputes, customers may be waiving certain rights that would be available in court. Further, NASD Rule 3110(f) provides that its members must highlight the agreement and provide a copy of the agreement to the customer, which the customer acknowledges in writing. As the SEC stated in its 2004 Release:

The Commission notes that despite the disclosure requirements under the current rule, NASD has determined that there are continuing concerns about whether customers who become parties to predispute arbitration agreements adequately understand the terms of the agreement. NASD has concluded that it is necessary to require its members to provide more disclosure about arbitration to customers who sign predispute arbitration agreements, and that the use of certain provisions that limit rights and remedies should be restricted. Accordingly, NASD submitted the proposed amendments to NASD Rule 3110(f) to address these concerns.[123]

Despite these welcome and needed changes, the reality is that customer-consumers are still required to arbitrate their disputes. The key differences between arbitration and litigation remain. Customers have a Hobson's "choice" of agreeing to arbitration in an industry sponsored forum, primarily the NASD, or forgoing opening a brokerage account. In other words, although there is improved disclosure of the requirement to arbitrate, there remains the unilateral requirement to arbitrate customer-broker disputes. Perhaps consumers will better understand their dilemma, but the dilemma remains. There has been concern in the consumer protection arena that arbitration, when required by an industry, is required because it puts industry at an advantage. Courts and state legislatures should find a way to allow consumer-investors an alternative to compulsory NASD arbitration, just as they have invalidated mandatory predispute arbitration clauses in other consumer-related transactions.

Notwithstanding their resemblance to contracts of adhesion, such agreements, "particularly in the securities industry, [are] enforceable under section 2 of the FAA. According to the courts, the absence of equal bargaining power or the opportunity to bargain does not necessarily signal unfair surprise or oppression to the weaker party or unfair advantage to the stronger party. So long as both parties agree in writing to arbitrate all disputes in an unbiased or impartial arbitration process, the contract is valid and enforceable under the FAA."[124]

2.1 The FAA and Federal Preemption

A week after McMahon was decided, the Supreme Court decided Perry v. Thomas[125] which dealt with the issue of whether state or federal law governs the enforceability of arbitration clauses. The question before the Court in Perry was whether a compensation dispute between a broker and his former employer should be arbitrated as per the agreement of the parties, or litigated as required under a provision of the California Labor Code which provided that mandatory arbitration with regard to wage collection actions was unenforceable. The Supreme Court held that under the Supremacy Clause, the FAA preempted the California Labor Code and remanded the case.

The Perry decision wasn't a simple one, however. In a footnote, the Supreme Court distinguished state laws concerning arbitration agreements from those concerned with the general enforceability of contracts being applied in the context of arbitration. Thus, to the extent state law rules governing enforceability of contracts, such as those relating to unconscionability, are applicable to all contracts, they do not violate the FAA when applied to arbitration contracts.[126] On the other hand, to the extent state laws create special rules for interpreting or enforcing arbitration agreements, such rules are invalid under the FAA. The Court then decided Volt Information Sciences v. Board of Trustees of Leland Stanford Junior University[127] and held that a contractual choice-of-law provision would be upheld even if the effect was to stay arbitration, despite the argument that such a result was preempted by the FAA. The Court in Volt found that since the FAA contains no express preemption provision, it does not reflect a Congressional intent to occupy the entire field of arbitration. [128]

The FAA applies to arbitration agreements "involving commerce" which is defined as commerce among the several states. Because of the interstate nature of financial transactions, most securities and bank-consumer arbitration contracts undoubtedly fall within this definition.[129] Commentators have suggested that the Supreme Court has left unclear the power of state legislators to prohibit the arbitration of disputes governed by the FAA.[130]

In 1995, in Allied-Bruce Terminix Companies, Inc. v Dobson[131] the Supreme Court enforced an arbitration clause in a contract to remove termites from a private home in Alabama. It held that such a contract was one "involving commerce" within the meaning of Section 1 of the FAA, and hence the FAA preempted Alabama law invalidating predispute arbitration clauses. However, the Court noted that courts must enforce arbitration agreements "save upon such grounds as exist at law or in equity for the revocation of any contract."[132] Thus, as the Supreme Court explained in 1996, "generally applicable contract defenses, such as fraud, duress or unconscionability, may be applied to invalidate arbitration agreements without contravening [FAA] §2." [133] Ironically, this language, seemingly protective of consumer rights, appears in Doctor'sAssociates v. Casarotto[134] in which the Supreme Court invalidated a provision of the Montana Uniform Arbitration Act requiring prominent notice to persons signing standard contracts containing arbitration clauses.

In a thoughtful article criticizing the Supreme Court's expansion of federal preemption under the FAA, Professors Paul Carrington and Paul Haagen state, "Although Terminix and Casarotto leave very little room for the exercise of state sovereignty to protect weaker parties or to arm private attorneys general to enforce state law and policy, states might consider other possible legislative responses." [135] They conclude that:

As architecture, the arbitration law made by the [Supreme] Court is a shantytown. It fails to shelter those who most need shelter. And those it is intended to shelter are ill-housed. Under the law written by the Court, birds of prey will sup on workers, consumers, shippers, passengers, and franchisees; the protective police power of the federal government and especially of the state governments is weakened; and at least some and perhaps many commercial arbitrations will be made more costly while courts determine whether arbitrators have been faithful to certain federal laws. Better law would rest firmly on recognition that arbitration and forum selection clauses in contracts of adhesion are sometimes a method for stripping people of their rights.[136]

"Courts continue to struggle with whether arbitration is a comparable forum to litigation to protect consumers' rights, and some courts have attempted to delineate new exceptions to the presumption in favor of arbitration in order to address [these] business practices"[137] Congress never intended that arbitration should be used in merchant/consumer contracts.[138] The legislative history on this point is clear: members of Congress were specifically concerned that arbitration clauses might be used to thwart consumers by means of adhesive contracts.[139] For this reason, "courts should be reluctant to favor arbitration clauses inconsumer contracts and more willing to conclude that these clauses are unconscionable, whether or not consumers prove they do not have the money to pursue their claims in court."[140]

In Arnold v. United Companies Lending, the Supreme Court of West Virginia held that an arbitration agreement contained in a consumer loan contract subject to the Consumer Credit and Protection Act ("CCPA") was unconscionable and thus void and unenforceable against elderly, unsophisticated borrowers that were not represented by counsel during a consumer loan transaction.[141] Where an arbitration agreement entered into as part of a consumer loan transaction subject to (CCPA) contains a substantial waiver of borrowers' rights including access to courts, while preserving lenders rights to a judicial forum, the agreement is unconscionable and void and unenforceable as a matter of law. [142]

In Jevne v. Superior Court of Los Angeles, in a case of first impression, the Court of Appeal, Second District, California held that the Judicial Council of California acted within its authority in drafting its ethics standards for neutral arbitrators. And while California's ethics standards were not preempted by the FAA, such standards were preempted by the Securities Exchange Act of 1934.[143]

In Jevne, the plaintiffs brought an action against a brokerage firm asserting causes of action for negligence, breach of fiduciary duties, and conversion. Their action was ordered to arbitration under NASD rules. The plaintiffs moved to set aside the order when NASD ceased appointing arbitrators in California due to conflicts with the newly enacted California Ethics standards for neutral arbitrators. In holding that the California ethics standards were not preempted by the FAA, the court stated that "state laws that are not anti-arbitration or antagonistic are not automatically preempted by the FAA, even though that law relates only to arbitration agreements." [144] The court also noted that the United States Supreme Court has specifically recognized that California's procedure and rules governing arbitration are manifestly designed to encourage resort to the arbitral process and do not conflict with any policy embodied in the FAA.[145] However, in holding that the California ethics standards were preempted by the Securities and Exchange Act of 1934, the court stated that "where a state regulates in an area, such as securities arbitration, with a history of significant federal presence, the presumption against federal preemption does not apply."[146] Subsequent to the California Court of Appeal's decision, the California Supreme Court recently granted petition for review.[147]

The arguments raised by commentators concerning the FAA and consumer protection should be applicable to brokerage customers. Although some commentators have found that what is, in effect, mandatory arbitration for brokerage customers is fair,[148] others disagree.[149] In June of 2000, a General Accounting Offfice (GAO) report revealed that that in 1998 an estimated 61% of awards were either not paid at all or were partially paid.[150] Other commentators suggest that the success rates against brokerage firms, after removal of the "Bad Boy Firms" do not appear to reflect any reputational bias or disadvantage.[151] However, this assertion is analogous to conclusion that obesity would not be an national epidemic once the "severely overweight" people are excluded from the equation. At the least, brokerage customers should have a real choice of dispute resolution fora, i.e., the courts, arbitration, or mediation.

While the courts and the FAA have fostered a strong policy favoring arbitration in connection with securities related claims, the landscape of the investing public has dramatically changed over the last twenty years. This seriously calls into question the suitability of the virtual exclusivity of industry-run, mandatory arbitration forum for the present-day investor. Over the last twenty years, U.S. households have been increasingly relying on mutual funds to finance retirement, housing and children's education.[152] Additionally, the total assets in equity markets now exceed those in bank accounts and nearly 50% of all American households own some stock, directly or indirectly, compared to only 6% in 1980.[153] This is truly a historical shift, as there is a new class of investor in this country that numbers 125 million people of which 38% are non-professional workers.[154] Unlike the typical investor of the late 1970's, the contemporary investor is probably unfamiliar with the intricacies of U.S. equity markets, let alone the ramifications attendant with relinquishing their substantive and procedural rights as required by most client agreement forms. For the aforementioned reasons, individual investors should be afforded the same protections available to consumers in non-securities related claims as present-day investors and consumers are one and the same .

3 History of State Consumer Protection Statutes

States have attempted to assert investor rights in their efforts to extend consumer protection laws to matters involving securities. In this section, we begin by reviewing the federal and model acts which have formed the template for consumer protection law at the state level. We then describe how some states have attempted to influence and assert investor rights using existing consumer protection statutes.

3.1 Influences on the States' Consumer Protection Law

3.1.1 Federal Trade Commission Act (FTC Act)

In the nineteenth century, the only remedy available to consumers misled by unfair or deceptive trade practices was common law fraud or deceit, which were not effective remedies due to difficult proof problems.[155] As a result, caveat emptor reigned supreme during the late nineteenth century. [156] In 1914, the Federal Trade Commission (FTC) was created, not as a consumer protection agency, but to protect businesses from unfair methods of competition.[157] In 1938, the federal government amended the Federal Trade Commission Act ("FTC Act"), giving the agency the power to "regulate unfair or deceptive acts or practices in or affecting commerce," thus giving injured consumers the same protection that the original Act gave injured businesses.[158] "The application of the consumer unfairness jurisdiction was limited until the 1960's when the agency, in response to sharp criticisms of its inaction in the consumer arena, became much more aggressive in its consumer protection enforcement activities."[159]

On March 15, 1962, President John F. Kennedy delivered his landmark message On Protecting Consumer Interest.[160] His speech outlined four basic consumer rights: "(1) the right to safety, including the right to be protected against marketing of goods which are hazardous to human life; (2) the right to be informed, including the right to be protected against fraudulent, deceitful or misleading information, advertising, labeling and other such practices and the right to be given the facts necessary to make informed choices; (3) the right to choose among a variety of products at competitive prices; and (4) the right to be heard, including the right of consumer interests to receive full and sympathetic consideration in the formulation of government policy."[161] In concluding his message, Kennedy stated "that for there to be a fuller realization of these consumer rights, there was a need, in certain areas, for new legislation and a need for existing government programs to be strengthened and improved."[162] During the years following this message, consumer advocates, state legislatures, and law enforcement officials have added a fifth consumer "right," the right of a consumer to recover from a seller who induced a consumer to enter into a transaction based upon a "violation" of one of the consumer's rights. [163]

While the FTC Act is often viewed as limiting the doctrine of caveat emptor,[164] the Act only provides for FTC enforcement and not state or private enforcement.[165] Thus, the state consumer protection statutes, by incorporating the FTC Act jurisprudence concerning deception and unfairness, combined with a private remedy, provide for widespread redress of marketplace abuses and misconduct.[166]

3.1.2 Uniform Deceptive Trade Practice Act (UDTPA)

Uniform state laws are developed in a national effort to systematically approach problems that are best left to the states.[167] As a result, although there may be a uniform or model law present, states are free to adopt it in whole, in part, or not at all. [168] The UDTPA was originally drafted by the Legislative Research Center of the University of Michigan in 1964, and in 1966, was approved by the National Conference of Commissioners on Uniform State Laws and the American Bar Association.[169] The Act provides eleven specifically defined deceptive trade practices including: "Trademark and trade name infringement; passing off goods as those of another; bait and switch; disparagement; misrepresentation of standards, origins or quality of goods; misleading price comparisons; and a catchall provision which covers 'conduct which similarly creates a likelihood of confusion or of misunderstanding."[170] While the UDTPA relieves a consumer from having to prove actual confusion, reliance, damage, or the intent to deceive, it only provides for injunctive relief against future violations.[171] Thus as originally proposed, the UDTPA was substantially different than the majority of state statutes found today. As a result, some states that have adopted the UDTPA have expanded its scope to include a right to recover damages.[172]

3.1.3 Uniform Consumer Sales Practice Act (UCSPA)

In 1971, the Uniform Consumer Sales Practice Act (UCSPA) was approved, as amended by the National Conference of Commissioners on Uniform State Laws and the American Bar Association.[173] The stated purposes of the Act were to "provide sellers with more predictable standards for their conduct and to protect consumers against deceptive trade and unconscionable sales practices."[174] The UCSPA was an attempt to "modernize consumer sales practices, to require fairness in sales practices, to make state laws on consumer sales practices uniform and to conform to FTC policies." [175] The Act prohibits deceptive and unconscionable trade practices and provides for eleven non-exclusive listings, some of which overlap with the UDTPA.[176] Unlike the UDTPA, the UCSPA provides for the creation of an enforcement agency with typical administrative power, i.e., "the power to hold hearings, adopt rules, and sue for injunctive relief and damages for consumers in the form of restitution, as well as similar private remedies for violation of the [act]."[177]

3.2 Application of State Consumer Protection Statutes to Securities Related Transactions

3.2.1 California

In 1970, the California legislature adopted the Consumer Legal Remedies Act ("CLRA"). [178] By outlawing certain enumerated deceptive acts, the CLRA provides injured consumers protection from unfair trade practices.[179] While the CLRA provides remedies such as damages and injunctive relief, it is expressly limited to the sale of consumer goods and services.[180] Neither the express language of the CLRA nor the legislative history have explained the meaning of these terms.[181] However, commentators have suggested that, while the legislative history does not specifically address whether securities were to be covered under the CLRA, the history does reveal the legislative climate in which the CLRA was passed. The legislative history of the act reveals that it was passed in response to heightened consumer awareness, the corresponding development of consumers as an interest group, and the need to protect unsophisticated and low-income consumers.[182] Unlike the California blue-sky and federal securities laws, the CLRA provides for attorney's fees and punitive damages.[183] Although courts have addressed the application of the statute to securities related claims, to date, the coverage of the statute has been extended to include some such claims, on a case by case basis.

In Abada v. Charles Schwab,[184] the plaintiff brought a class action suit in state court to recover for misrepresentations allegedly made in connection with the defendant's online trading system. The United States District Court, Southern District of California held that state law consumer protection claims that were not preempted by federal securities law applied to the plaintiff's allegation that he lost money due to misleading advertisement by the defendant.[185]

The district court also held that "the substance of the plaintiff's claim, i.e. the broker's alleged conduct is not the type of allegation associated with securities fraud, as such conduct had nothing to do with the trading of any particular security and any misrepresentation made by the defendant did not affect the value of any security but merely involved the relationship between the defendant and its customers."[186] In rendering its opinion, the court went on to say that the purpose of the 1933 and 1934 Acts, and specifically 10b-5, was and remains to protect investors against manipulation of stock prices; to promote fair, equitable practices; and to insure fairness in securities transactions."[187]

However, one commentator has maintained that because of the plain language of the CLRA,[188] investment securities are beyond the scope the Act, as they are not a "good" or "service."[189] However, this has not been directly addressed by the California courts.

3.2.2 Florida

Florida has an "Unfair and Deceptive Trade Practices Act" "(FUDTPA), known as the "Little FTC Act," which protects the consuming public and legitimate business enterprises from those who engage in, among other things, unfair methods of competition or practices in the conduct of any trade or commerce.[190] Under the Act, a consumer may seek declaratory judgments in consumer transactions where there is a question of law. [191] Additionally, consumers damaged by a deceptive trade or practice may maintain an action for actual damages plus attorney fees and costs in which the prevailing party shall be entitled to such fees.[192] However, such fees will be assessed where the Act is found to be inapplicable to a particular defendant.[193] Unlike other jurisdictions, the Act does not apply to persons and certain institutions regulated by other state or federal agencies, e.g., Florida Public Commission, the Department of Insurance, or the Florida Department of Banking and Finance, or federally regulated banks or savings and loan associations.[194]

In 2000, the United States District Court, Southern District of Florida ruled on whether the FUDTPA applied to claims arising out of the sale of securities.[195] In Crowell v. Morgan Stanley, plaintiff alleged that the defendant attempted to persuade customers in low risk securities to switch to higher risk securities while failing to disclose the increased risks customers were exposing themselves to by doing so. .[196] In the district court's analysis of this case of first impression, the court looked to the FTC Act in determining that the Act has consistently been interpreted to preclude coverage of securities claims in the overwhelming majority of state and federal courts addressing this issue and noted the absence of any federal court decision holding that securities are subject to the FTC Act. [197] Additionally, the court held that the FTC has never undertaken a case in connection with the purchase and sale of a security, that numerous other federal courts have declined to apply consumer protection statutes to securities fraud claims, and that the Securities and Exchange Commission rather than FTC should be responsible of the regulation of securities transactions.[198] However, unlike the securities related cases discussed herein, Crowell asserted claims that are typical under state and federal securities law such as fraud in connection with the purchase and sale of a security.[199] Moreover, the FDPTA specifically does not apply to institutions regulated by other state agencies such as licensed broker-dealers.

3.2.3 Massachusetts

The Regulation of Business and Consumer Protection Act was adopted by Massachusetts in 1967.[200] At that time, there was no private right of action and the sole enforcement authority was vested in the State Attorney General, who was guided by Federal Trade Commission Act jurisprudence.[201] In 1969, a private right of action was adopted for "any person who purchases or leases goods or services primarily for personal … purposes and suffers any loss of money."[202] The statute provides for recovery of actual damages or twenty-five dollars, whichever is greater, or up to three but not less than two times such amount if the court finds that the act was a willful or knowing violation of the section.[203] Unlike Massachusetts' blue-sky law, the statute requires that a written demand letter be made thirty days as a prerequisite to commencing a private consumer action.[204] The written demand must identify the claimant, relief sought, and a description of the unfair or deceptive act or deceptive practice relied upon. [205] The demand letter serves two main purposes. [206] First, it encourages settlement and negotiation by notifying prospective defendants that a claim is being made under consumer protection statute and what relief is being sought.[207] Second, it operates as a control on the amount of damages the plaintiff can ultimately recover if he proves his case, as there is a mechanism by which the defendant can make a tender of settlement which, if rejected and subsequently deemed reasonable by a court, will limit the plaintiff's damages to the relief tendered .[208] In contrast to the state blue-sky and federal securities law, this mechanism provides an expedient, cost-efficient result to the injured consumers.

In 1982, the Supreme Judicial Court of Massachusetts held that that consumers need not submit to arbitration as a precondition to asserting their rights under the state's consumer protection statute. [209] In Hannon v. Gunite Aquatic Pools Inc., the plaintiff brought an action against a swimming pool contractor alleging, among other things, misrepresentation and "commercial bribery." The contractor counterclaimed for the balance due under the contract and that plaintiff submit all matters to arbitration pursuant to the contract by and between the parties.[210] The court held that arbitration was "neither a common law or statutory remedy which a consumer was not required to initiate, pursue, or exhaust prior to maintaining an action under the statute and noted that many agreements to arbitrate were not enforceable prior to the enactment of its consumer protection statute."[211] Hannon also afforded consumers seeking a remedy under the statute the right to a judicial forum even if they had executed an agreement containing an arbitration provision.[212]Additionally, in 1987, the definitions of "trade" and "commerce" were explicitly expanded to include securities and commodities.[213] Following the amendment, "trade" and "commerce" were defined to include the "advertising … offering for sale … or distribution of any security."[214] In addition to covering securities related claims, the coverage of the statute has been expanded hold accountants liable for preparation of certified financial statements as discussed herein. [215]

In 2003, the Appeals Court of Massachusetts held that an account holder maintained a cause of action under the consumer protection statute prohibiting unfair and deceptive acts.[216] In Barron v. Magellan, an accountholder brought an action against a brokerage house for failing to maintain adequate records and erroneously concluding that the accountholder had abandoned the account. In rendering its decision, the court held that the purchasing, administering, and maintaining of shares in the account were activities that "arise in the conduct of any trade" as defined by the statute.[217] Additionally, the court held that although the legislature had extended the scope of allowable private actions by consumers to matters involving securities, it had also limited the scope of recovery in such cases to actual damages.[218]

In Reisman v. KPMG Peat Marwick, the United States District Court in Massachusetts held that shareholders had an actionable claim under Massachusetts' consumer protection law against independent auditors who allegedly included false financial statements of a target corporation, even though auditors claimed they were not involved in any sale or purchase of a security as required by the statute.[219] However, the plaintiffs in Reisman did not allege that the defendant's conduct was related to the sale or purchase of a security, but relied on the definition of "trade" and "commerce" which encompasses the "distribution of any services … affecting the people of Massachusetts, so long as the services were rendered for consideration." In ruling for the plaintiff, the court stated that by providing accounting services for compensation, the defendant was engaged in a "trade or commerce" for purposes of the statute.[220]

3.2.4 New York

In order to protect the public and to provide a private right of action for injuries resulting from consumer fraud, the New York Legislature adopted section 349 of McKinney's General Business Laws which, among other things, prohibits deceptive trade practices in the conduct of any business, trade or commerce in the furnishing of any service.[221] The legislative purpose in enacting the statute was to follow in the steps of the Federal Trade Commission with respect to the interpretation of deceptive acts and practices outlawed by the FTC Act.[222] The law is violated when an act or practice is false or deceptive as determined, not by a reasonable person standard, but by a standard which includes unwary and unthinking consumers who buy on impulse motivated by appearances and general impressions.[223] The New York Administrative Code provides that the portion of the code prohibiting unfair trade practices is to be construed so as to supplement the rules, regulations, and decisions both of the FTC and of courts interpreting certain provisions of the FTC Act. [224] In 1980, New York amended its consumer protection statute to include a private right of action for consumers injured by fraud.[225] Under the statute, a private litigant who brings an action may be entitled to a recovery consisting of actual damages or a statutory maximum, whichever is greater.[226] The court may, in its discretion, increase the award of damages to an amount not to exceed three times the actual damages up to a greater statutory maximum, if the court finds that the defendant willfully violated the statute.[227] The statute also provides that the court may award to a prevailing plaintiff, in addition to the other relief provided in this section, costs and reasonable attorney fees. [228] While one New York court has held there to be no blanket exception for securities related matters, others have declined to extend the coverage of the statute.

In 2001, the Supreme Court of New York Appellate Division fourth Department held that the "consumer protection statute which prohibits deceptive acts or practices does not contain a blanket exception for securities transactions."[229] In Scalp & Blade v. Advest, the plaintiff brought an action against the defendant for investing in various speculative, risky, and otherwise unsuitable investments.[230] The court held that the lower court erred in granting dismissal of the plaintiff's claim, alleging that the defendants violated New York's consumer protection statute, citing the statute's explicit prohibition of "[d] eceptive acts or trade practices in the furnishing of any service." [231] In rendering its decision, the court applied the Court of Appeals interpretation of the act, which held the act as applying to virtually all economic activity.[232] Based on the foregoing, the court further held that there was no basis for invoking a blanket exception for securities or for limiting the statute's applicability to the sale of goods. [233]

In Dean Witter Limited Partnership Litigation, also in 2001, the plaintiffs, attempting to bring a claim under New York's Consumer protection law, alleged that the defendants verbally represented the suitability of limited partnership interest investments in a way which was in direct conflict with language contained in the offering materials.[234] The Supreme Court, Appellate Division First Department affirmed the dismissal of the deceptive business practices claim stating that federally regulated securities transactions fall outside of the coverage of New York's consumer protection statute. [235]

In 2002, the Supreme Court of New York held that consumer protection did not apply to claims of alleged fraud in connection with claims that a broker engaged in deceptive trade practices with respect to its liquidation of an investors account to satisfy margin deficiencies.[236] In Feesha v. TD Waterhouse, the court dismissed the plaintiff's consumer protection claim, holding that the statute did not apply as the client's agreement cannot be deemed deceptive due to its silence on the issue of liquidation [237] and held that since the securities industry is highly regulated and that securities instruments, brokerage accounts and services ancillary to the purchase of securities have been held to be outside the scope of New York's consumer protection statute.[238] In rendering its opinion, the court delineated that in order to maintain a cause of action under New York's Consumer protection statute, a plaintiff must allege: "(1) that the challenged act or practice was consumer-oriented; (2) that it was misleading in a material way; and (3) that plaintiff suffered injury as a result of the deceptive act.[239] "However, the gravamen of the plaintiff's claim was that the client agreement was materially misleading because it failed to state that the defendant can liquidate the account "at any time without notice" and that the defendant was clearly required to give such notice.[240] In dismissing the plaintiff's claim, the court held that "a contract cannot be deceptive based on its silence while at the same time specify the activity in which it is allegedly silent."[241] Thus, the scope of the New York Consumer protection laws, as applied to securities related transactions, is not clear.

3.2.5 North Carolina

The North Carolina legislature adopted unfair trade practices legislation modeled after the FTC Act.[242] The Act was adopted as an amendment to its pre-existing antitrust law section. The added provision provides that "unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful" and also stated its purpose of maintaining ethical standards of dealing between persons engaged in business and persons engaged in the general public. [243] The private remedy section, allowing for treble damages and previously available to persons, firms or corporations whose business was broken up, destroyed or injured, was broadened by an amendment that now includes "any person [who] shall be injured by a violation of this chapter."[244] However, courts have declined to recognize claims where there would be an intrusion on an existing regulatory scheme.[245]

In Skinner v. E.F. Hutton, the North Carolina Supreme Court held that securities transactions are beyond the scope of the North Carolina General Statutes.[246] In Skinner, the plaintiffs alleged that the defendants strongly encouraged the plaintiffs to purchase certain securities based on the defendants' knowledge of "inside information" of a recent takeover bid.[247] In rendering its holding, the court stated that in the absence of any state court holding that securities transactions are subject to the act and of any federal court decisions stating that securities transactions are subject to section 5 of the FTC Act, "we do not believe that the legislature would have intended the section 75-1 with its treble damages provision, to apply to securities transactions," which were already subject to the North Carolina Securities Act as well as the Securities Act of 1933 and the Securities Exchange Act of 1934.[248] In 2003, the Court of Appeals upheld the Skinner decision, declining to enlarge the scope of North Carolina's UDTPA to transactions between presenting brokers, clearing brokers and their clients.[249] The court held that North Carolina's UDTPA "does not govern all wrongs" and applied the rationale that there was another adequate regulatory scheme in which the plaintiff could seek redress.[250]

3.2.6 Pennsylvania

The Unfair Trade Practices and Consumer Protection Law (UTPCL) was enacted by the Pennsylvania legislature in 1968. The act was modeled after the FTC Act.[251] The original Act prohibited "unfair methods of competition and unfair and deceptive practices in the conduct of any trade or commerce" and provided a list of twelve specific unfair or deceptive practices.[252] In 1976, the Pennsylvania legislature amended the UTPCL to add a private cause of action to "any person who purchases or leases goods or services primarily for personal, family or household purposes and thereby suffers ascertainable loss of money or property." [253] This amendment was intended to be limited to consumer transactions that might escape remedy that are not subject to public enforcement by the State Attorney General's Office.[254] The statute provides for a remedy of actual damages or $100, whichever is greater. The statute also empowers the courts to award, at their discretion, up to three times the actual damages sustained and to provide such additional relief as they deem necessary and proper, including reasonable fees and costs.[255]

In 1999, the United States District Court for the Eastern District of Pennsylvania held, in a case of first impression, that a claim against an indenture trustee on corporate debt certificates did not fall within the scope of the UTPCL [256] In Baker v. Summit Bank, the purchasers of debt securities sued the indentured trustee under the UTPCL, alleging that the trustee knew or should have known that the debt would never have been repaid.[257] The plaintiffs relied on the catchall provision of the statute, which provided that "… engaging in any other fraudulent or deceptive conduct which creates a likelihood of confusion or of misunderstanding, to fit within the definition of "goods" or "services" [258] In rendering its decision, the court relied on Algrant v. Evergreen Valley Nurseries,[259] which held that the sale of securities did not constitute a good or service as defined by the statute. [260], [261] In relying on Algrant, the court also held that allowing the plaintiffs to obtain remedies under the Securities Act and the UTCPA would be "inconsistent with coherent legislative intent," as the plaintiffs had adequate remedies available to them under the Trust Indenture Act and the Pennsylvania Securities Act.[262]

In Algrant, the plaintiffs were investors in a limited partnership that financed the purchase of a nursery with a thirteen million dollar private offering.[263] The essence of the complaint was that the value of the stock was inflated by the defendants. In affirming the district court's decision, the appellate court "held that securities are not 'goods' in the normal sense and for their sale to be actionable as 'services' the fraud must be in the transaction not the securities themselves."[264] However, the Algrant court also cited two cases in which (i) the UTCPA applied to the sale of securities, (ii) investment transactions were not excepted from the ambit of the statute, and (iii) stockbrokers were not excluded.[265] In McCullough v. Shearson Lehman Brothers, Inc. and William Martin, the plaintiffs brought an action against the defendants for violations of the Securities Act of 1934 and various regulations as well as RICO violations, common law fraud, and violations of Pennsylvania's consumer protection statute. In McCullough, the plaintiffs asserted that they were fraudulently induced to purchase securities based on erroneous insider information purportedly acquired by Martin.[266] In rendering its decision, the United States District Court, Western District of Pennsylvania held that the Pennsylvania statute "applies to unfair and deceptive acts or practices conduct of any trade … and applies to goods or services primarily for personal use."[267] The court further held that while the investment field is not specifically mentioned, "we must interpret this act liberally to cover generally all unfair and deceptive acts or practices in the conduct of trade or commerce" And if the legislature intended to exclude the stockbrokers it would have expressly done so.[268]

In Advest v. Kirschner, the plaintiffs brought an action against their broker for breach of contract violation of Pennsylvania's consumer protection statute. [269]

In Advest, the defendant allegedly guaranteed the sale of the plaintiff's securities at a specified price and subsequently liquidated the account without ever executing the trade.[270] The defendant returned to the plaintiffs the value of the account prior to the sale but refused to deliver the profits allegedly promised by the defendants. [271] In holding that Pennsylvania's consumer protection statute was applicable, the district court held that " [the statute's] broad remedial aim [combined] with the Supreme Court of Pennsylvania's liberal reading should not be read constrictively."[272]

Conclusion

After almost one-hundred years, some states are returning to tailoring a "homegrown" remedy designed to protect their consumers. Consumer protection statutes, following the spirit of the original state blue-sky laws, are being broadly interpreted by some states to protect the present-day consumer/investor in a time where federal and state securities laws and a judicial trend favoring mandatory arbitration have served the individual investor neither effectively nor efficiently. Consumer protection statutes, in addition to providing the individual investor with an additional cost effective remedy not necessarily provided under state and federal securities laws, should also be considered by plaintiffs' counsel as a possible strategic alternative to mandatory arbitration when litigating securities related claims. Plus, ça change, plus c'est la même chose.[273]