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.




The ILR Research Review - Volume 2

May 18, 2015 | The ILR Research Review offers valuable insights from our preeminent experts and specialists on key topics addressed in the latest of ILR's research reports.

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 - August 17, 2015

August 17, 2015 | Insights

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 | Insights

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 »

In The News Today - June 10, 2015

June 10, 2015 | Insights

"A federal judge's ruling against the Securities and Exchange Commission for using its own judges in an insider-trading case might be looked at in hindsight as the beginning of the end of an alternative system of justice that took root in the New Deal but has raised serious constitutional questions ever since," writes Daniel Fisher. Read More »

The ILR Research Review - Volume 2

May 18, 2015 | Research

The ILR Research Review offers valuable insights from our preeminent experts and specialists on key topics addressed in the latest of ILR's research reports. Read More »

SEC Moving Cases from U.S. District Courts to In-House Courts

May 07, 2015 | Insights

Today's Wall Street Journal features a story on the Securities and Exchange Commission (SEC) shifting its enforcement actions from independent U.S. District Courts to internal administrative tribunals. Read More »

In the News Today - April 13, 2015

April 13, 2015 | Insights

In an upcoming Columbia Law Review article, two professors show how the current method of awarding fees in securities class actions-which are generally determined based on settlement outcomes and the leanings of certain courts, rather than at the onset of a case-is deeply flawed to the benefit of plaintiffs' lawyers. (Reuters) Read More »

In the News Today - April 7, 2015

April 07, 2015 | Insights

Looking to heighten their enforcement profile, federal agencies such as the Securities and Exchange Commission (SEC) and the Federal Energy Regulatory Commission (FERC) are tapping former Justice Department prosecutors to lead their enforcement units, and in the case of FERC, to lead the entire agency. (Wall Street Journal) Read More »

In The News Today - February 23, 2015

February 23, 2015 | Insights

West Virginia Senate President Bill Cole is betting that tort reforms will lead to economic growth in Southern W. Va. Read More »

In The News Today - January 13, 2015

January 13, 2015 | Insights

The U.S. Supreme Court on Monday declined to hear an appeal filed by several banks, including Royal Bank of Scotland and Wells Fargo & Co., over a lawsuit filed by the National Credit Union Administration over the banks' sale of mortgage-backed securities to several "now-failed" credit unions. Read More »

'Battle Lines' Drawn Over Delaware Fee-Shifting Fight

January 12, 2015 | Insights

Pensions & Investments' Hazel Bradford writes that "battle lines" have been drawn over a 2014 Delaware court ruling "that lets companies shift legal fees to investors bringing lawsuits." Read More »

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