There Are Plaintiffs and . . . There Are Plaintiffs: An Empirical Analysis of Securities Class Action Settlements

Summary

---

Reform of the securities class action is once again the subject of national debate. The impetus for this debate is the reports of three different groups -- the Committee on Capital Market Regulation, the Commission on the Regulation of US Capital Markets in the 21st Century, and McKinsey & Co. Major reform of the securities class action occurred with the Private Securities Litigation Reform Act of 1995 (PSLRA). Among the PSLRA's contributions is the introduction of procedures by which the court chooses a lead plaintiff for the class. One of the forces propelling the PLSRA's enactment was the charge that the merits did not matter in the settlement of securities class actions. This charge was leveled in a widely celebrated article that examined six settlements that fell in a tight band of twenty to 27.35% of the allowable recovery. This claim is not only debunked here but flatly rejected by other studies that find that settlements range widely and that the strength of the complaint matters -- likely a lot.

See the full content of this document

Extract

---

There Are Plaintiffs and . . . There Are Plaintiffs: An Empirical Analysis of Securities Class Action Settlements

Reform of the securities class action is once again the subject of national debate. The impetus for this debate is the reports of three different groups-the Committee on Capital Market Regulation,1 the Commission on the Regulation of U.S. Capital Markets in the 21st Century,2 and McKinsey & Company.3 Each of the reports focuses on a single theme: how the contemporary regulatory culture places U.S. capital markets at a competitive disadvantage to foreign markets. While the reports target multiple regulatory forces in their calls for reform, each report singles out securities class actions as one of the prime villains that place U.S. capital markets at a competitive disadvantage. The reports' recommendations range from insignificant changes to drastic curtailments of private class actions. Surprisingly, these current-day cries echo calls for reform heeded by Congress in the not-too-distant past.

Major reform of the securities class action occurred with the Private Securities Litigation Reform Act of 1995 ("PSLRA").4 Among the PSLRA's contributions is the introduction of procedures by which the court chooses a lead plaintiff for the class.5 The statute commands that the petitioner with the largest financial loss suffered as a consequence of the defendant's alleged misrepresentation is presumed to be the most adequate plaintiff. Thus, the "lead plaintiff provision supplants the traditional "first to file" rule for selecting the suit's plaintiff with a mechanism that seeks to harness the plaintiffs economic self-interest for the suit's prosecution. Also, by eliminating the race to file first, the lead plaintiff provision seeks to avoid "hair trigger" filings by overly eager plaintiffs' counsel, which Congress believed too frequently gave rise to weak causes of action surviving the defendant's motion to dismiss.6 The PSLRA also introduced for securities class actions a heightened pleading requirement,7 as well as a bar to the plaintiff from obtaining any discovery prior to the district court disposing of the defendants' motions to dismiss.8 By introducing the requirement that allegations involving fraud not only must be pled with particularity, but also that the pled facts must establish a "strong inference" of fra...

See the full content of this document

---