Securities Litigation Fact Sheet

• Negotiated “settlements often benefit former shareholders at the expense of current ones.  In effect, they can amount to little more than a transfer payment with enormously high transaction costs in the form of a large contingency fee award.  Current damage calculation models also tend to provide damages well in excess of the net economic harm of any wrongful activity because they fail to consider the gains to investors that sell during the class period.” (Did the Private Securities Litigation Reform Act Work?, Michael Perino, 2003 U. Ill. L. Rev. 913, 921 (2003))  

• “By all accounts, nearly all the money paid out as compensation in the form of judgments and settlements comes, one way or another, from investors themselves. Little if any of the sum is contributed by those who were the primary authors of the fraud; a recent study puts the figure at less than half of one percent.” (Capping Damages for Open-Market Securities Fraud, Donald C. Langevoort, 38 Ariz. L.Rev. 639, 648 (1996))

• Settlements from securities class actions totaled $25.4 billion for 755 cases settled between December 1995 and August 2005. (The Economic Reality of Securities Class Action Litigation, A.V. Thakor with Navigant Consulting, 2005)By contrast, in 1994 – the year before Congress enacted the PSLRA – total settlements from all securities class action lawsuits were $899 million. (Securities Class Action Settlements: An Empirical Analysis, M. Bajaj, S.C. Mazumdar & A. Sarin, 2000)

Securities Class Action Damages

• “Estimates of [plaintiffs’] aggregate damages require estimates of the number of shares that were purchased during the class period at an allegedly inflated price and subsequently held or sold at a price after the alleged fraud is discovered. But there is no scientifically valid way of estimating the number of these shares.  Instead of using untested models that often result in highly inflated aggregate damages, damages should be thought of in terms of per-share inflation, with investors required to come forward to prove their claims.” (Private Insecurities, Kenneth M. Lehn, The Wall Street Journal, Feb. 15, 2006)

• “…current damage models tend to substantially overstate the net economic harm from securities fraud.  As a result, they may overcompensate attorneys and thereby encourage too many filings.” (Did the Private Securities Litigation Reform Act Work?, Michael Perino, 2003 U. Ill. L. Rev. 913, 973 (2003)) 

• “The aggregate potential recovery [in open-market securities fraud cases] in all likelihood exceeds the net societal harm of the fraud, which may be relatively small” and that the “direct net harm to investors as a group may well be zero.” (Capping Damages for Open-Market Securities Fraud, Donald C. Langevoort, 38 Ariz. L.Rev. 639, 646 (1996))

SEC Fair Funds

The SEC Fair Funds program was authorized under the Sarbanes-Oxley Act to help compensate investors injured by acts of securities fraud by dispersing ill-gotten gains and penalties collected from offenders.  However, “there is now no relationship between the Fair Funds process and the litigation system:  each proceeds on separate tracks.  Obviously, investors should not be able to collect twice – if they obtain compensation from the Commission’s process, they should not be able to seek compensation in the litigation system.” (Securities Class Action Litigation: How is the System Working Ten Years After Enactment of the Private Securities Litigation Reform Act? U.S. Chamber Institute for Legal Reform, 2006)

Motions to Dismiss

• “ . . . [T]he ruling on the motion to dismiss is critical to the outcome of the case.  And, while plaintiffs can appeal a decision granting a motion to dismiss, defendants have no such right.  An erroneous denial of a motion to dismiss cannot be corrected – and, as a practical matter, will produce a settlement.” (Securities Class Action Litigation: How is the System Working Ten Years After Enactment of the Private Securities Litigation Reform Act? U.S. Chamber Institute for Legal Reform, 2006)

• “Plaintiffs’ attorneys will clearly have significantly less incentive to file nonmeritorious suits if they face a greater downside risk when an action is dismissed. The obvious way to create such a downside risk is to impose a more substantial sanctions risk if a motion to dismiss is granted.” (Did the Private Securities Litigation Reform Act Work?, Michael Perino, 2003 U. Ill. L. Rev. 913, 971 (2003))

Liability of Outside Directors

Plaintiffs’ lawyers are expanding outside directors’ liability in securities lawsuits by invoking the “group pleading” doctrine, a strategy by which they seek to hold the entire board responsible for all corporate public statements without proving the intent of individual directors to do harm.  This expanded liability is “deterring qualified individuals from serving as outside directors . . . notwithstanding their desire to use their experience to guide corporate management as representatives of investors.” (Securities Class Action Litigation: How is the System Working Ten Years After Enactment of the Private Securities Litigation Reform Act? U.S. Chamber Institute for Legal Reform, 2006)

Economic Studies

• Large institutional investors generally break even from their investments in stocks impacted by fraud allegations because financial losses resulting from ill-timed purchases of inflated shares of one stock are, over time, largely or completely offset by financial gains generated from well-timed sales of inflated shares of a different stock.  In 40 percent of the cases (out of 2,394 institutional investors eligible to participate in securities class action litigation) large institutional investors actually receive a net benefit when settlement proceeds are taken into account. (The Economic Reality of Securities Class Action Litigation, Anjan V. Thakor with Navigant Consulting, 2005)

• The mere filing of a securities class action lawsuit on average results in a 3.5 percent drop in the defendant company’s equity value.  In the context of firms examined in The Economic Reality of Securities Litigation, this implies that at least $24.7 billion in shareholder wealth was wiped out just due to litigation. (The Unintended Consequences of Securities Litigation, Anjan V. Thakor, 2005)