AAJ: SEC Should Reject Carlyle’s Attack on Investor Rights

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For Immediate Release: February 2, 2012

Contact: Michelle Widmann
American Association for Justice
AAJ Press Room

AAJ: SEC Should Reject Carlyle’s Attack on Investor Rights

SEC Should Continue Longstanding Practice of Preventing Companies from Including Forced Arbitration in IPOs

Washington, DC—The American Association for Justice (AAJ) today called on the U.S. Securities and Exchange Commission (SEC) to reject The Carlyle Group’s attempt to gut investors’ legal rights as part of their initial public offering.  The private equity buyout firm revised its registration statement earlier this month, adding a forced arbitration clause that would strip investors of their ability to hold Carlyle publicly accountable for fraud, misconduct, or negligence in a court of law.

“Carlyle’s blatant attempt to skirt accountability runs counter to the SEC’s mission of protecting and advocating for the rights of investors,” said AAJ President Gary M. Paul.  “The SEC should maintain its decades-long stance against the inclusion of forced arbitration and reject Carlyle’s predatory maneuver to circumvent well-established securities laws and force investors into a rigged and biased process.”

The SEC has the authority to deny Carlyle’s use of forced arbitration in its proposed IPO; for example, the SEC blocked a 1990 IPO by a Philadelphia savings and loan company that attempted to include such a clause in its corporate charter.


Additionally, lawmakers, academics, and former SEC officials have all spoken out against Carlyle’s attempt to gut investors’ rights.  Even Carlyle senior adviser and former SEC Chairman Arthur Levitt told Bloomberg that forced arbitration “clearly” denies investors’ rights and that “companies that consider going down this road take a perceptual risk which, in terms of an IPO, is probably not a risk worth taking.”


SEC approval of forced arbitration within Carlyle’s IPO would open the door for other companies to evade securities law by inserting similar clauses into their governing documents.


“The SEC must protect Americans from corporate abuse and misconduct by standing up for investors and saying enough is enough – companies that commit fraud will be held accountable,” said Mr. Paul.  “Wall Street bailouts, Enron, and WorldCom provide plenty of evidence that the SEC should not allow any company to grant itself immunity.”




  • Under Carlyle’s forced arbitration clause, all claims must be brought in individual, secretive forced arbitration in Delaware. 
  • The clause bans any form of class proceeding.
  • By virtue of purchasing a Carlyle stock alone, investors will have automatically agreed to waive their legal rights

What the Experts Say

  • “It is quite possible that the Carlyle Group, the private equity firm that is preparing to go public, is proposing the most shareholder-unfriendly corporate governance structure in modern history. … The thing that pushes Carlyle’s corporate governance structure over the edge is the arbitration requirements.  ... The effect of these three provisions is to essentially eliminate any ability of shareholders to sue the board for even the most egregious acts. This includes federal securities law claims as well as any state law claims.” –Steven M. Davidoff, law professor at Ohio State University and “New York Times Deal Professor”

  • “The SEC should reject this effort to circumvent shareholder rights because it will be an extraordinary and enduring precedent.  It will open the door to arbitration clauses in all IPOs, and thereby eviscerate shareholder rights.” –U.S. Senator Richard Blumenthal (D-Conn.)

  • “You give up your rights immediately under this construct.” –U.S. Representative Gary Ackerman (D-N.Y.)

  • “The majority of the enforcement of the U.S. securities laws is not done by the SEC but by attorneys for investors.  This Carlyle proposal destroys that enforcement mechanism, much to the detriment of 100 million Americans.” –Lynn Turner, the SEC’s chief accountant from July 1998 to August 2001

  • “If Carlyle can get away with this, you are going to have a bunch of CEOs telling their tax accountants, ‘Price out what it would cost me.’” –Stephen Bainbridge, a corporate and securities law professor at the UCLA School of Law

  • “Companies that consider going down this road take a perceptual risk which, in terms of an IPO, is probably not a risk worth taking.” –Arthur Levitt, Carlyle senior adviser and former SEC Chairman

  • “This reflects a company and management team that fears accountability to the very people.  You have to ask what they are hiding or what are they preparing to hide?” –Gregory Smith, Council of Institutional Investors board member

  • “In its recent proposed initial public offering (IPO), Carlyle will have no requirements for an independent board, virtually no voting rights for owners, and no ability for owners to sue. … with no real shareholder rights in place, there is no accountability by Carlyle to those who buy their units/shares.  What if every corporation adopted such a stance? … Carlyle's IPO raises a fundamental question about our future: we know capitalism was never perfect -- but are we really ready for the end of capitalism as we once knew it, when it worked?” – Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance

  • “What we are talking about is legally uncharted territory.  I would be surprised if the courts allow any company to entirely foreclose shareholder rights to sue under federal securities laws.” –Donald Langevoort, Georgetown University law professor and former SEC official

  • “If you really could enforce it, you would see every publicly traded company having that, and you don’t.” –Kevin LaCroix, Executive Vice President at OakBridge Insurance Services LLC

  • “Carlyle would be highly sensitive to this question because they have looked at it over and over again in the context of whether to take private companies public.  There are powerful reasons to do what Carlyle is trying to do.” –Hal Scott, Harvard Law School professor and Director of the  Committee on Capital Markets Regulation

  • “It will be a difficult precedent to contain if the SEC permits this.” –John Coffee, Columbia Law School professor

  • “If you are on the moneyed side, you would like to put an arbitration clause in every contract.  It’s a far more limited opportunity for the plaintiff.” –James Hill, Benesch LLP

  • On the SEC’s reaction to the previous attempt to include a forced arbitration clause in an IPO: “The commission went ballistic.  They refused to let the offering go public.” –Carl Schneider, former partner at Philadelphia law firm Wolf, Block, Schorr & Solis-Cohen

  • "Although sympathetic to the principal concerns espoused by the shareholder proposal, Gannett believes the implementation of the proposal would cause it to violate the federal securities laws.  Rather than having the company’s proxy statement serve as a test case for investor sentiment on the issue, the appropriate course of action is for the issue to be debated and decided by Congress.” –Dec. 27 letter to the SEC from Gannett, the McLean, Virginia-based publisher of USA Today, and Pfizer, the New York drug manufacturer
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