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.
Containing the Contagion: Proposals to Reform the Broken Securities Class Action System gives practical solutions to this crisis for Congress including:
- Closing the loophole that allows state courts to hear certain securities class actions;
- Enacting an "Investors' Bill of Rights" that would ban plaintiffs' lawyers from exercising control over these lawsuits by requiring disclosure of relationships between the lawyers and the plaintiffs;
- Amending the Private Securities Litigation Reform Act of 1995 to adjust for plaintiffs' lawyer workarounds that have emerged in the last 25 years.
The paper also calls on the SEC to identify and weigh in on meritless securities lawsuits, and encourages stricter oversight by the courts.
Along with the new study, ILR also presented new public opinion research that revealed both investors and voters believe securities class action lawsuits are a poor tool for holding companies accountable, and strongly support reforming the system. The findings also show that the public overwhelmingly believes that securities class actions mostly enrich trial lawyers.
These lawsuits are spreading rapidly, adding to the increasingly heavy burden for publicly traded companies and contributing to the reduction of these vital instruments for investment by public pensions and individuals.
Congress, the SEC and the courts should all have a role to play in fixing this problem. Because left unchecked, the growing wave of securities class action lawsuits threatens a core piece of our engine for economic growth.