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


All Results for Securities Litigation Reform

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

    October 24, 2018 | Research

    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

  2. Despite Proposed Agreement, Debacle Over Labaton Fees Still Not Over

    October 16, 2018 | News

    Though Labaton Sucharow attorneys came to a tentative agreement with a court-appointed Special Master last week, a federal judge yesterday said issues still remain regarding the $75 million fee request in the State Street case, Law360 reports.... Read More

  3. Labaton Firm To Refund "Dubious" Finders' Fee

    October 11, 2018 | News

    The Labaton Sucharow law firm will pay back $4.8 million in fees it collected in a proposed settlement stemming from the now-infamous $300 million State Street lawsuit for the "dubious" finders' fee it paid to a lawyer who did no legal work on the case, the New York Times reports.... Read More

  4. In the News Today - October 10, 2018

    October 10, 2018 | News

    Data Breach-Related Securities Lawsuits on the Rise; Texas Counties To Release Private Lawyer Billing Records for Free; Class Action Settlement "Appears Inaccurate on its Face"... Read More

  5. In the News Today - October 5, 2018

    October 05, 2018 | News

    "Meritless" Lawsuits Target "Highly Innovative Businesses," Report Finds; Firm Owned By Now-Disbarred Class Action Lawyer to Pay $23.5 Million to Former Clients; Do you know "What's Trending" on the litigation front?... Read More

  6. In the News Today - October 4, 2018

    October 04, 2018 | News

    Report: MDL Cases Have Tripled In Last 25 Years; SEC Enforcement Co-Director Says Year-End Stats Are "Counter-Productive"... Read More

  7. Judge Wants To "Police Potential Abuse of the Judicial Process" When It Comes to Attorneys' Fees

    September 28, 2018 | News

    A U.S. District Judge in Illinois said he will "exercise its inherent powers to police potential abuse of the judicial process" in questioning why the plaintiffs' attorneys in a securities class action should be awarded $300,000 in fees, the Cook County Record reports.... Read More

  8. Special Master, Labaton Reach Tentative Settlement in Controversial Securities Lawsuit

    September 20, 2018 | News

    The special master appointed to investigate claims of double billing by Labaton Sucharow in the scandal-plagued $300 million State Street Corporation securities lawsuit has reached a tentative settlement with the firm, Law360 reports.... Read More

  9. "Has the Song Remained the Same" On Securities Litigation?

    September 19, 2018 | News

    In an "Insight Alert," attorneys from King & Spalding look into recent developments in securities litigation defense and suggest a new strategy may be emerging.... Read More

  10. In the News Today - September 5, 2018

    September 05, 2018 | News

    Florida Insurance Officer Warns of Assignment of Benefits Scams; Is Data Privacy the "Next Australian Securities Litigation Frontier?"... Read More