SEC War on ‘Frivolous’ Litigation Upends Wall Street Cop’s Role

SEC Chairman Paul Atkins’ bid to curb “frivolous” shareholder complaints signals a new level of hostility toward investors and lawyers typically viewed as the Wall Street cop’s allies, and the effort has struggled to get off the ground as companies are slow to adopt mandatory arbitration clauses for shareholders.

Championed as a way to boost IPO activity, Atkins’ push to funnel claims away from courts and into private arbitration marks a departure from how the 90-year-old Securities and Exchange Commission views its role as a regulator, shareholder lawyers and an investor advocate said.

“Atkins really stepped out of bounds here with regard to what you would expect from an SEC with investor protection and the preservation of fair, orderly, and efficient markets as their priority,” said Corey Frayer, director of investor protection at the Consumer Federation of America. “‘Frivolous litigation’ is a decades-old euphemism for denying working Americans their day in court.”

Atkins has said he wants to “make IPOs great again” by reducing disclosure requirements, “de-politicizing” shareholder meetings, and permitting companies going public to include mandatory arbitration provisions in registration filings.

But just one company has taken advantage of the new policy allowing for mandatory arbitration provisions since Atkins unveiled it in September: energy firm Zion Oil & Gas Inc., which says it uses scripture to guide its search for oil deposits as part of a “biblical treasure hunt.”

The sole early adopter’s unconventional business model suggests that established issuers are hesitant to adopt the clauses for their own shareholders.

The SEC didn’t respond to a request for comment.

‘Solutions in Search of a Problem’

The SEC, now run solely by a GOP chairman and commissioners, unveiled its new stance on mandatory arbitration as a “clarifying” policy statement without noting any consideration of public input.

The agency under the second Trump administration has frequently telegraphed its priorities through roundtable discussions instead of going through formal rulemaking.

With the arbitration policy, Atkins is taking aim at shareholder litigation despite another safeguard in place to raise the bar for pleading securities fraud class action suits, the 1995 Private Securities Litigation Reform Act.

“Most things that have come out of this SEC, they are solutions in search of a problem,” said Laura Posner, a partner in the securities litigation and investor protection practice at Cohen Milstein Sellers & Toll PLLC. “One of the things that the PSLRA, when it was passed 30 years ago, was actually quite effective at doing was ensuring that frivolous litigation does not move forward past the motion to dismiss stage.”

Encouraging IPO activity with a permissive stance on arbitration is likely to be an uphill battle for the SEC, given that federal courts have historically provided defendant companies frequent opportunities to resolve litigation rather than face a jury.

Over the past decade, more than $41 billion has been paid out in securities class action settlements, reaching a historic single-year high of $4 billion in 2023, according to Cornerstone Research. The first half of 2025 saw settlements totaling $1.8 billion, according to National Economic Research Associates data.

“Those cases that get beyond the motion to dismiss, get into discovery, and most often resolve in settlement rather than trial, they’re not frivolous,” said Lauren Ormsbee, a partner at Labaton Keller Sucharow LLP who prosecutes securities fraud on behalf of institutional investors. “Arbitration is not a panacea to litigation costs.”

Enforcement Partnership

The SEC’s embrace of mandatory arbitration, though unlikely to sway many blue-chip issuers in the near term, signals a broadly adversarial posture towards the investors and lawyers responsible for bringing securities cases against companies post-IPO.

“Historically, the SEC and private enforcement bar are aligned in curbing corporate wrongdoing and keeping companies honest,” Ormsbee said.

Former SEC leaders across the political spectrum routinely praised the partnership.

“Private cases, so long as they are well grounded, are an important enforcement mechanism supplementing the SEC in the policing of our markets,” former commissioners—including ex-Chairman William H. Donaldson, a George W. Bush appointee—wrote in a 2007 amicus brief submitted to the US Supreme Court. “Most often, the larger the frauds, the greater investors must rely on private cases to recover their losses.”

The SEC under Atkins, however, has taken a decidedly narrower view of the role both the agency and the public play in enforcement.

Company Caution

Some industry watchers say arbitration can save companies money by offering a predictable and streamlined process.

“It comes down to the ability to save cost and have more privacy with the matter,” said Emily Chapman, a legal AI architect at DragonGC—a platform for in-house counsel at publicly traded companies—and a former SEC senior attorney. “It can be viewed that all you’re doing with a class action lawsuit is taking focus away from the reason why the investors originally invested in the company.”

Others argue that defending cases as individual arbitration actions would place a considerable burden on companies that choose to go that route, presenting logistical concerns that would otherwise be minimized in a consolidated class action, as well as a potentially larger price tag.

“I don’t think it’s going to save you any money,” Posner said. “Institutional investors will still bring their claim in arbitration, and they’re not going to settle for 10, 15, 20 cents on the dollar. When they bring individual actions, they will be demanding higher percentages of their damages.”

For now, it seems that public companies or those seeking to go public are exercising caution around mandatory arbitration and instead opting to tackle shareholder class actions in court.

“We’ve been talking not only to corporate counsel, but also to issuers directly, to D&O insurers, to underwriters and accountants,” Posner said. “Pretty uniformly, at least from those who are sophisticated, they are advising and being very careful in their recommendations to clients about not proceeding down this road.”