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.

Suggested Resources

  • Containing the Contagion: Proposals to Reform the Broken Securities Class Action System

    Containing the Contagion: Proposals to Reform the Broken Securities Class Action System

    February 25, 2019

    Record-high numbers of securities class action filings are swamping the protections that Congress created in 1995. In fact, the likelihood that a public company will be sued has never been greater, and the bulk of these lawsuits show the classic signs of litigation abuse. However, solutions are at hand. This research proposes regulatory and legislative action to contain the securities litigation contagion. Read More

  • Risk and Reward: The Securities Fraud Class Action Lottery

    Risk and Reward: The Securities Fraud Class Action Lottery

    February 25, 2019

    Securities fraud class action lawyers are playing the "litigation lottery," filing often meritless cases against big companies on the off-chance of a big settlement. This research looks at all securities fraud class actions filed between 2005 and 2016 to reveal the true incentives that motivate plaintiffs' lawyers to roll the dice on these lawsuits, despite their high dismissal rate. Read More

All Results for Securities Litigation Reform

  1. ILR Research Review - Spring 2019

    March 21, 2019 | Research

    The rising pace of private securities class actions could present a threat to the health of U.S. capital markets, while the ongoing wave of municipality lawsuits stands in the way of global settlements and undermines the authority of lawmakers and state attorneys general. White papers covered in this edition of the ILR Research Review detail the causes and current state of these litigation trends, along with a full suite of solutions to address them.... Read More

  2. In the News Today - March 20, 2019

    March 20, 2019 | News

    Businesses Call for Oversight of Proxy Firms; "The Post-Cyan Spike In State Securities Act Filings"... Read More

  3. Securities Class Actions Are on The Rise; Here's How to Contain Them

    March 07, 2019 | Blogs

    Securities class action filings skyrocketed in 2018 to 420 cases-doubling the average of the prior 20 years. A new report from the U.S. Chamber Institute for Legal Reform (ILR) shows how the trial bar fuels this trend, recruiting "professional plaintiffs" to bring cases, earning excessive fees, and submitting repeat "frequent filer" claims that are commonly dismissed, imposing huge costs on companies. ... Read More

  4. In the News Today - March 7 , 2019

    March 07, 2019 | News

    2nd Circuit Tosses "Creative" Securities Suit Against Cigna; Pa. Supreme Court Warns Against Questionable Evidence in Asbestos Cases... Read More

  5. In the News Today - March 6, 2019

    March 06, 2019 | News

    Guest Post: Risk and Reward: The Securities Fraud Class Action Lottery... Read More

  6. Guest Post: Risk and Reward: The Securities Fraud Class Action Lottery

    March 05, 2019 | Blogs

    This white paper, available here, looks at the business of securities fraud class actions. Specifically, it explores the risk and rewards for plaintiffs' lawyers who specialize in these cases based on data from virtually all securities fraud class actions filed in federal court between 2005 and 2016-over 1,700 cases.... Read More

  7. In the News Today - February 27, 2019

    February 27, 2019 | News

    Securities Lawyer Calls for Consistent Standards in Event-Driven Litigation; Pet Food Recall Spurs Seven Class Actions in Four States in Three Weeks... Read More

  8. Securities Litigation "Back With a Vengeance," ILR's Harold Kim Says

    February 27, 2019 | News

    U.S Chamber Institute for Legal Reform (ILR) Chief Operating Officer Harold Kim told Corporate Counsel that a key takeaway from ILR's "Securities Litigation Contagion" event yesterday is that securities litigation is "back with a vengeance" after the reforms of the 1990s.... Read More

  9. Securities Litigation Contagion Event Video

    February 26, 2019 | Video | Watch

  10. New ILR Research Offers Solutions to the "Broken" Securities Litigation System

    February 26, 2019 | News

    A new research paper prepared by Mayer Brown LLP Partner Andrew Pincus and released by the U.S. Chamber Institute for Legal Reform (ILR) offers "proposals to reform the broken securities class action system."... Read More