This article criticizes Congress' decision in favor of subordination. Part I traces the historical development of the subordination doctrine and examines the events leading to its codification in the Bankruptcy Reform Act of 1978. Part II considers both traditional and new arguments supporting the doctrine and concludes that these rationales do not justify subordination of a shareholder's otherwise valid claim for loss in investment value attributable to the fraud. Part III then considers how to allocate the total fraud-caused loss in the investment value of the firm between its debt and equity claimants. It concludes that a rule of parity - that is, permitting securities law claimants to participate on a par with other unsecured creditor claimants - produces allocations that are better for public policy and fairer than the allocations produced by the subordination doctrine. This conclusion is qualified, however, by the requirement that the measure of the securities law claims entitled to parity should be limited to the amount of fraud-caused loss.
