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

Research
  • A Rising Threat: The New Class Action Racket That Harms Investors and the Economy

    A Rising Threat: The New Class Action Racket That Harms Investors and the Economy

    October 24, 2018

    Abusive securities class action lawsuits are imposing huge costs on investors without providing any benefit, and the only winners are the lawyers, who take home millions of dollars in fees. This research documents how the plaintiffs' bar has adapted to the litigation reforms of the ‘90s to launch a new wave of securities class actions-one that is already reaching record heights. Read More

  • Lawsuit Ecosystem II: New Trends, Targets and Players

    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. Read More

All Results for Securities Litigation Reform

  1. "Securities Class Action Filings Show No Signs Of Abating"

    February 12, 2019 | News

    Three partners with the Skadden Arps law firm said in a Law360 expert analysis piece that they "anticipate the ever-increasing number of securities filings to continue into 2019."... Read More

  2. Rare Securities Verdict Results in Split Decision

    February 07, 2019 | News

    A California jury's verdict this week was an "extremely rare" occasion for securities class action lawsuits and the first since 2014, Kevin LaCroix reports in D&O Diary. ... Read More

  3. In the News Today - February 4, 2019

    February 04, 2019 | News

    The Granston Memo, One Year Later; Are New Data Rules Fueling Securities Litigation in Europe?... Read More

  4. In the News Today - February 1, 2019

    February 01, 2019 | News

    Three Firms Have Been Driving The Securities Litigation Boom; New York City Asbestos Court Cites Higher Evidentiary Standard In Dismissal... Read More

  5. What's New in Securities Class Action Lawsuits and Litigation Reform

    January 25, 2019 | News

    ... Read More

  6. In the News Today - January 23, 2019

    January 23, 2019 | News

    Arkansas Pension Fund At Center of State Street Debacle to Review Law Firms... Read More

  7. Columbia Law Professor: Public Company's Chances of Being Sued at 12-Year High

    January 23, 2019 | News

    Columbia Law professor John Coffee Jr. said in the New York Law Journal the chances that a publicly traded company is hit with a securities class action lawsuit is at its highest since 2006 and more than triple the average litigation rate from 1996 to 2016.... Read More

  8. Data Breach-Related Lawsuit Settlement May Have Major Consequences

    January 22, 2019 | News

    Kevin LaCroix of D&O Diary said the $29 million settlement of a Yahoo data breach-related derivative lawsuit may "have important implications for future data breach-related derivative litigation."... Read More

  9. In The News Today - January 8, 2019

    January 08, 2019 | News

    Top Securities News of 2018... Read More

  10. In the News Today - January 7, 2019

    January 07, 2019 | News

    "Fighting a Tort Plague;" U.S. Supreme Court to Hear Case on M&A Lawsuit Standards... Read More