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 - February 12, 2018

February 12, 2018 | News and Blog

"The Anthem Class-Action Con"; NY Judge Rejects 'Utterly Useless' Deal In Merger Lawsuit; The Sum of All Securities Litigation Filing Trends Read More »

In the News Today - February 6, 2018

February 06, 2018 | News and Blog

Del. Walmart Ruling Might Bring New Derivative Strategies Read More »

Report: Securities Lawsuits Filed at "Record Pace" in 2017

January 29, 2018 | News and Blog

A NERA Economic Consulting report found "an explosion" of securities of securities lawsuits, which were filed at a "record pace" in 2017, reports D&O Diary. Read More »

In the News Today - January 26, 2018

January 26, 2018 | News and Blog

Foreign Companies Face Perils Of U.S. Litigiousness And Erratic DoJ/SEC Enforcement; California high court ruling in Novartis liability case differs from existing law, experts say Read More »

2nd Circ. Offers Clarity on Shareholder Class Actions

January 17, 2018 | News and Blog

The Second Circuit ruled yesterday that a judge applied the wrong standard of proof when certifying a shareholder class action, which could help clarify the standard needed to "rebut allegations that a company's misstatements directly impacted its stock price," writes Law360. Read More »

Top 10 Legal Reform Research Topics of 2017

January 11, 2018 | News and Blog

Review ILR's wide-ranging top ten legal reform research topics from 2017 and gain insights for 2018. Read More »

In the News Today - January 3, 2018

January 03, 2018 | News and Blog

Litigation Funding: 5 Things to Watch for in 2018; Pershing, Valeant Agree To $290M Deal Ending Allergan Suits Read More »

Securities Litigation Hits All-Time High

January 02, 2018 | News and Blog

There were more securities class action lawsuits last year than in any year since 2001, and the litigation rate of securities lawsuits was at an all-time high, reports D&O Diary. Read More »

U.S.-Style "Follow-On" Securities Lawsuits on the Rise Internationally

December 08, 2017 | News and Blog

Following governmental regulatory or enforcement action with civil securities lawsuits is a well-established practice in the U.S. The Australian suit against Crown Resorts indicates the practice might be on the rise outside the U.S. as well, writes Kevin LaCroix of D&O Diary. Read More »

In the News Today - December 6, 2017

December 06, 2017 | News and Blog

UM endowment to invest in Y Combinator, litigation fund; Profs Fight For Clarity On Class Cert. In Securities Suits Read More »

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