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. 2018 Saw "Heightened" Pace of Securities Filings

    January 07, 2019 | News

    Kevin LaCroix of D&O Diary said that securities lawsuit filings "remained well above historical patterns" in 2018 and were "significantly inflated by the number of federal court merger objection lawsuit filings."... Read More

  2. In the News Today - December 14, 2018

    December 14, 2018 | News

    "The Biggest Securities Decisions Of 2018"... Read More

  3. Unlikely Allies: Trial Lawyers and Conservative Treasurers

    December 10, 2018 | News

    A Legal Newsline report in Forbes details the unusual alliance between class action trial lawyers and free market state treasurers.... Read More

  4. In the News Today - December 4, 2018

    December 04, 2018 | News

    Lawsuits Cost New Yorkers More than Any Other State; "Justices Seem Likely to Reinforce U.S. Securities-Fraud Laws"... Read More

  5. Event-Driven Securities Lawsuits an "Important Part" of Filing Surge

    December 04, 2018 | News

    D&O Diary's Kevin LaCroix said "event-driven securities lawsuits," like the one filed against Marriott over its recent data breach, "represent an important part of the elevated levels of securities suit filings going back into 2016." ... Read More

  6. In the News Today - November 28, 2018

    November 28, 2018 | News

    Do Wildfire-Related Lawsuits Show the Future of Securities Litigation... Read More

  7. ILR Research Review - Fall 2018

    November 20, 2018 | Research

    ILR's Fall 2018 research cycle was about two things: spotting new, destructive legal trends before they become unstoppable, and highlighting concrete progress in addressing long-standing litigation challenges. The 2018 Fall Research Review reveals the exploding costs of the U.S. tort system, and examines developments in securities litigation, forum shopping, False Claims Act policy reform, and the European Commission's project to implement class actions.... Read More

  8. In the News Today - November 16, 2018

    November 16, 2018 | News

    A New Trend That May Add "Significant Cost and Complexity to the World of M&A Litigation"... Read More

  9. In the News Today - November 9, 2018

    November 09, 2018 | News

    Another Attempt to Impeach West Virginia Supreme Court Justices May Be Coming; "An Opportunity To Slow The Rise Of Securities Class Actions"... Read More

  10. In the News Today - November 2, 2018

    November 02, 2018 | News

    "Do Opt-Out Settlements of $217.5 Million Foreshadow the Future of Securities Litigation?"... Read More