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 by imposing huge costs on American businesses, investors, and employees, while hurting the global competiveness of U.S. securities markets and serve as a barrier to private companies considering whether to become public. read more...

There is enormous pressure on companies to settle securities class actions because of the burden they impose on management, the cost of going to trial, and the risk of a runaway verdict. This dynamic typically results in major settlements even when the underlying claims are of questionable merit. 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 wrongdoing rarely make a significant contribution. In addition, recoveries usually amount to just pennies on the dollar of alleged losses, while plaintiffs’ lawyers walk away with marge contingency 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. Companies actively question whether they want to access the U.S. securities markets and expose themselves to the exceptional liability our system imposes. Furthermore, the risk of liability is something too great for companies to move from being privately held to public.  

Plaintiffs' lawyers also sue companies involved in a merger or acquisition in state courts. 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 clear majority of these suits settle quickly and, like other types of securities litigation, typically provide little or no benefit to shareholders. But the settlements do result in large fees to the plaintiffs' lawyers who filed the lawsuits. While the courts, including those in Delaware (where many publicaly traded companies are incorporated), are beginning to look unfavorably on this type of litigation, it is still an open question whether this type of spurious litigation is going to be put to a stop. 

To curb securities litigation abuses, Congress should consider commonsense reforms that would expose relationships between securities class action attorneys and plaintiffs, target “pay–to–play” 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.

Research

The ILR Research Review - Spring 2015

May 18, 2015 | This edition of the ILR Research Review offers valuable insights from the latest of ILR's research on enforcement slush funds, Canadian class actions, emerging litigation trends and theories from the plaintiffs' bar, and recent state tort law rulings.

Lawsuit Ecosystem II: New Trends, Targets and Players

December 04, 2014 | This report, authored by a distinguished group of practitioners, explores the evolving lawsuit "ecosystem." It considers how plaintiffs' lawyers generate litigation and significant developments that will spur more lawsuits or rein in excessive liability.

All Results for Securities Litigation Reform

In the News Today - March 16, 2017

March 16, 2017 | News and Blog

U.S. courts approved the highest number of securities class action settlements since 2010. Continuing the growth observed in the prior year, there were 85 approved settlements in 2016, five more than in 2015. Both years are a substantial increase over the annual numbers from 2011 through 2014. Additionally, the $6 billion of approved settlements in 2016 was nearly double the total settlement value in 2015. Read More »

In the News Today - March 9, 2017

March 09, 2017 | News and Blog

The U.S. House of Representatives will vote on four legal reform bills (two of which have been combined) over the next two days. Today, the House will vote on the Fairness in Class Action Litigation and the Furthering Asbestos Claim Transparency (FACT) Act, which have been merged, as well as the Innocent Party Protection Act of 2017. Tomorrow, the house will vote on the Lawsuit Abuse Reduction Act of 2017. Read More »

In the News Today - February 21, 2017

February 21, 2017 | News and Blog

The Florida Supreme Court's penchant for overturning the legislature's legal reforms was cited as a big reason for Florida's paltry 44th lawsuit climate in 2015. Well, the court has done it again - opting (in a 4-2 ruling) to overturn the Florida legislature's 2013 law that adopted the strict "Daubert" expert evidence standards in the state's courts. Read More »

In the News Today - February 14, 2017

February 14, 2017 | News and Blog

Plaintiffs increased their filing of new federal class action securities cases by 44% in 2016 as compared to 2015. Additionally, 56 percent of all filings in 2016 took place in the Ninth and Second Circuits Read More »

Securities Suit Filings: Record Levels in 2016, Pace Has Accelerated in 2017

January 31, 2017 | News and Blog

As of the end of last week, there were 41 federal court securities class action lawsuit filings, showing clear signs that the heightened pace of securities suit filing that we saw in 2016 is likely to continue, if not accelerate, in 2017. Read More »

In the News Today -- July 18, 2016

July 18, 2016 | News and Blog

Citing the "outsized influence of the trial lawyer's agenda in Albany," Adam Morey, government affairs manager for the Lawsuit Reform Alliance of New York, cites the state's 21st ranking in ILR's 2015 Lawsuit Climate Survey study in calling for passage of legal reforms in the state. Read More »

In the News Today - July 14, 2016

July 14, 2016 | News and Blog

Under pressure from groups, including ILR, to reform its in-house administrative proceedings, the U.S. Securities and Exchange Commission approved changes that would give defendants up to ten months to prepare for hearings and depositions in certain matters. Read More »

Securities Class-Action Settlements Surge in 2015

April 04, 2016 | News and Blog

Cornerstone Research issued its latest annual report showing the number and average size of securities class-action settlements increased in 2015 by more than $3 billion as compared to 2014. Read More »

In the News Today - August 17, 2015

August 17, 2015 | News and Blog

In a case that stems from the New York Department of Financial Services' (NYDFS) push to force one of Promontory Financial Group's client banks to waive attorney-client privilege, Promontory is now challenging the NYDFS' move to "block the consulting firm from advising New York-based banks in some cases." (Wall Street Journal) Read More »

Delaware as Nation's Corporation HQ Threatened by New Anti-Fee-Shifting Legislation

June 11, 2015 | News and Blog

Former SEC Commissioner Paul Atkins writes that Delaware risks "eroding its vaunted position" as the "undisputed champion of where companies choose to call home" if its legislature passes a bill preventing corporations from adopting fee-shifting bylaws. Read More »

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