March 10, 2014

The Securities Class Action Lords

By Lisa A. Rickard
President, U.S. Chamber Institute for Legal Reform

Lost in last week’s flurry of activity surrounding the Halliburton argument before the Supreme Court was a key question: who is bringing these suits and why? Just as the economic research proves investors don’t benefit, our new research on the securities class action system shows that a small group of plaintiffs’ lawyers and key government officials are the lords of this litigation.

A new study, Frequent Filers: The Problems of Shareholder Lawsuits and the Path to Reform, documents a repeat pattern among the players who bring the suits, including campaign contributions, “free” pension fund portfolio “monitoring,” and contingency fee litigation.

Major pension funds, usually state-controlled, are in an unholy alliance with the plaintiffs’ bar, which often makes campaign contributions to political gatekeepers of these funds, typically attorneys general or state treasurers. In return, the attorneys get access to sue for millions, with large payouts from the settlement or verdict in attorney’s fees.

As Frequent Filers details, only a few law firms file the bulk of the claims. However, these firms are the leading contributors among class action firms to politicians who control the state’s pension fund. In exchange, the law firms “monitor” for “free” these funds and identify lawsuits, which they then bring. This pay-to-play practice clearly crosses ethical lines, while creating myriad problems, and needs to be stopped.

State-level cases are dominated either by plaintiffs who file numerous shareholder disputes, sometimes up to 50, or individuals who are close family members of the plaintiffs’ attorney. One attorney has filed suits on behalf of at least eight family members, including two of his grandchildren who were younger than five years old at the time those suits were filed. As a result, these named plaintiffs, who are representing the interests of the class, provide little to no oversight of the litigation.

Existing legal rules do little to stop professional plaintiffs from filing lawsuit after lawsuit. Frequent Filers proposes several solutions to this inequity that would be important steps to ensuring the lead plaintiffs’ interests are aligned with their fellow shareholders.

While the future course of securities litigation rests on the determination of Halliburton, exposing these lords of litigation and cleaning up the rules for how these cases are brought is essential.

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