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.

Research

The ILR Research Review - Spring 2015

May 18, 2015 | This edition of the ILR Research Review offers valuable insights from the latest of ILR's research on enforcement slush funds, Canadian class actions, emerging litigation trends and theories from the plaintiffs' bar, and recent state tort law rulings.

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.

All Results for Securities Litigation Reform

In the News Today - October 17, 2017

October 17, 2017 | News and Blog

Millions joined a lawsuit against ‘free cruise' spam callers. Then came the bad news; Securities Litigation Spending To Increase In 2018 Read More »

In the News Today - October 10, 2017

October 10, 2017 | News and Blog

Are shareholders the real losers from class actions?; New Report Shows Class Actions Hurt Consumers. But We Already Knew That. Read More »

Coalition Asks SCOTUS to Take Securities Class Action Jurisdiction From State Courts

September 07, 2017 | News and Blog

A number of industry groups, including the U.S. Chamber of Commerce, law professors and public companies have filed amicus briefs to the U.S. Supreme Court urging it to find that state courts do not have jurisdiction over class actions regarding securities offerings, according to Law360. Read More »

New Data Shows Securities Class Action Filings Continue to Grow

August 22, 2017 | News and Blog

The first six months of 2017 saw record securities class action filings in federal courts. A total of 131 were filed in the first half of the year, writes the Wall Street Journal using data from Cornerstone Research. Read More »

In the News Today - July 26, 2017

July 26, 2017 | News and Blog

A record number of would-be class securities fraud suits were filed in the first half of 2017. With 226 cases filed, the number of new lawsuits is a 49 percent spike from the second half of 2016. Read More »

Supreme Court Upholds Time Limit for Securities Class Actions

June 27, 2017 | News and Blog

Yesterday, in California Employees' Retirement System v. ANZ Securities the U.S. Supreme Court ruled 5-4 that the filing of a class action does not stop the clock on the three-year statute of repose for claims under the Securities Act. Read More »

Securities Class Action Lawsuits: More Common and More Lucrative

May 25, 2017 | News and Blog

A new report last month from Cornerstone Research found that shareholder class action settlements jumped to 85 in 2016, which is the highest number since 2010. Additionally, for the first time in a decade, there were multiple securities class action settlements over $1 billion. Read More »

Securities Class Action Settlements "Substantially Higher" in 2016 Than Previous Years

April 19, 2017 | News and Blog

Harvard Law School's Forum on Corporate Governance and Financial Regulation found that "the number of [securities class action] settlements approved in 2016 increased by 85, which is substantially higher than the levels in previous years." Read More »

In the News Today - April 3, 2017

April 03, 2017 | News and Blog

Federal Court Judge Jonathan Beach approved a $40 million dollar settlement and accepted it was reasonable for the funders to get a 30 percent cut of net settlement proceeds, but "was quick to point out that it might not be the going rate more generally." Read More »

In the News Today - March 16, 2017

March 16, 2017 | News and Blog

U.S. courts approved the highest number of securities class action settlements since 2010. Continuing the growth observed in the prior year, there were 85 approved settlements in 2016, five more than in 2015. Both years are a substantial increase over the annual numbers from 2011 through 2014. Additionally, the $6 billion of approved settlements in 2016 was nearly double the total settlement value in 2015. Read More »

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