Securities Litigation Reform
Private securities class actions are lawsuits filed on behalf of shareholders against publicly–traded companies that allegedly defrauded their investors. Supporters of these cases claim they are necessary to compensate shareholders and deter wrongdoing by corporations. However, the primary beneficiaries of securities class actions are plaintiffs’ lawyers – not investors. At the same time, these cases threaten the health of the U.S. economy – imposing huge costs on American businesses, investors and employees while hurting the global competiveness of U.S. securities markets. read more...
There is enormous pressure on companies to settle securities class actions because of the burden imposed on management, the cost of going to trial, and the risk of a runaway verdict. This dynamic typically results in major settlements even if the underlying claims have questionable merit. And even if a claim is legitimate, a settlement effectively results in one group of innocent shareholders (those who own shares at the time of the settlement) paying another group of innocent shareholders. The individuals responsible for any wrongdoing rarely make a significant contribution. In addition, recoveries usually amount to just pennies on the dollar of alleged loss, while plaintiffs’ lawyers walk away with major fees. Those whom the securities class action system is supposed to protect – small, individual retail investors—are the ones who, in fact, benefit the least.
The current system is also plagued by abuse. In fact, several leading securities plaintiffs’ lawyers were sent to prison for offering bribes and kickbacks to potential plaintiffs. The integrity of the securities class action system is further undermined by a legal “pay–to–play” culture of corruption in which lawyers make political contributions to the politicians charged with deciding who will represent large public pension funds as lead plaintiffs in these suits – and thus who will collect the largest share of attorneys’ fees from future settlements.
The securities litigation system also hurts the global competitiveness of U.S. securities markets. In a 2007 survey comparing New York and London as global financial centers, corporate executives rated quality of legal system as one of the top two factors in determining a country’s economic competitiveness. And when asked to compare the U.K. and U.S. legal systems, 85 percent of the executives surveyed preferred the U.K. They specifically cited the U.S. system’s high costs and perceived lack of predictability and fairness as problems.
Recently, plaintiffs' lawyers have pioneered a new tactic – suing companies involved in a merger or acquisition in state courts. Nearly every merger or acquisition that involves a public company and is valued over $100 million – 93% of all such transactions between 2011 and 2014 – becomes the subject of litigation within weeks of its announcement. Furthermore, each merger typically faces multiple lawsuits. This lucrative form of litigation occurs because the parties to the merger want to close their deal quickly – thus allowing plaintiffs’ lawyers to hold the merger hostage through the use of multiple lawsuits. The vast majority of these suits settle quickly and like other types of securities litigation, typically provide little or no benefit for shareholders. But the settlements do result in large fees to the plaintiffs' lawyers who filed the lawsuits.
To curb securities litigation abuses, Congress should consider commonsense reforms like the Securities Litigation Attorney Accountability and Transparency Act (SLAATA). This measure would expose relationships between securities class action attorneys and plaintiffs, target “pay–to–pay” conflicts between plaintiffs’ attorneys and state pension fund officials, and introduce a competitive bidding process for selecting lead plaintiffs’ attorneys in securities class actions. In addition, Congress and state legislatures should consider measures to limit forum shopping and other abuses related to mergers and acquisitions litigation.