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

  • 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. Frequent Filers: The Problems of Shareholder Lawsuits and the Path to Reform

    February 27, 2014 | Research

    This paper analyzes certain state pension funds in securities class actions and examines the correlation between the hiring of outside plaintiffs' lawyers and campaign contributions to the political officials in charge of the pension funds.... Read More

  2. The State of Securities Class Actions

    February 27, 2014 | News and Blog

    The Supreme Court is preparing to hear a far-reaching securities case that will determine the future of the "fraud on the market" theory.... Read More

  3. In the News Today - February 27, 2014

    February 27, 2014 | News and Blog

    The Supreme Court ruled that investors in a Ponzi scheme can sue third parties, including law firms and insurance brokers, finding that the securities aren't covered by the SLUSA.... Read More

  4. Personal Grudge Adds Another Layer of Intrigue to SCOTUS Case

    February 21, 2014 | News and Blog

    Paul Barrett brings to light the secret history behind a blockbuster securities case set to go before the Supreme Court next month.... Read More

  5. In the News Today - February 10, 2014

    February 10, 2014 | News and Blog

    Tennessee lawmakers can protect consumers by passing lawsuit lending regulations that are pending in both houses, writes Thurbert Baker in the Tennessean.... Read More

  6. New U.S. Chamber Research Shows Costs of Securities Class Action Lawsuits Outweigh Benefits to Investors

    February 05, 2014 | Press Release

    ILR released a new white paper which demonstrates the "irrationality and ineffectiveness" of securities class actions, and concludes that the costs that they impose on investors outweigh any benefits.... Read More

  7. What's Wrong with Securities Class Action Lawsuits?

    February 05, 2014 | Research

    The Halliburton v. Erica P. John Fund case now before the Supreme Court involves the validity of the "fraud on the market" principle, which relieves a plaintiff of the obligation to prove reliance on a false statement - a legally required element of securities fraud - by creating a presumption of reliance based on economic theories regarding the assumed efficiency of securities markets.... Read More

  8. In the News Today - February 4, 2014

    February 04, 2014 | News and Blog

    A pharmaceutical lawyer says that the FDA and DOJ could step up enforcement of off-label drug claims that companies make in press releases and media appearances.... Read More

  9. In the News Today - February 3, 2014

    February 03, 2014 | News and Blog

    The Louisiana Supreme Court overturned a $258 million verdict against Janssen Pharmaceutical.... Read More

  10. In the News Today - January 30, 2014

    January 30, 2014 | News and Blog

    The Louisiana Supreme Court has overturned a nearly $258 million verdict in state Attorney General Buddy Caldwell's lawsuit brought under the state's version of the federal False Claims Act over the prescription drug Risperdal.... Read More