Publications (10)0 Total impact
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Article: Does the Plaintiff Matter? an Empirical Analysis of Lead Plaintiffs in Securities Class Actions
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ABSTRACT: The PSLRA's lead plaintiff provision was adopted in order to encourage large shareholders with claims in a securities fraud class action to step forward to become the class' representative. Congress' expectation was that these investors would actively monitor the conduct of a securities fraud class action so as to reduce the litigation agency costs that may arise when class counsel's interests diverge from those of the shareholder class. Proponents of the provision claimed that there would be substantial benefits from having institutional investors serve as lead plaintiffs. Now, ten years later, the claim that the lead plaintiff is a more effective monitor of class counsel in securities fraud class actions continues to be intuitively appealing, but remains unproven. In this paper, we inquire empirically whether the lead plaintiff provision has performed as projected. We break the lead plaintiffs into five categories: public pension funds; other institutional investors; single individual lead plaintiffs; aggregate groups of individual lead plaintiffs and groups containing both individuals and entities. Our data shows that courts fairly consistently favor financial institutions over other types of investors when there is a contest among them to be appointed lead plaintiff. We find that the public pension funds have much larger dollar claims than any of the other groups, and have the largest, or close to the largest, claims of any investors in the case in which they appear as lead plaintiffs. We then analyze a sample of 388 securities fraud class action settlements to further investigate the effect of the lead plaintiff provision. Our first hypothesis is that PSLRA and the lead plaintiff provision have increased the dollar amount of settlements in securities fraud class actions. Our results show that after controlling for estimated losses, market capitalization of defendant firms, the length of class period and the presence of parallel SEC actions, the dollar amount of post-PSLRA settlements are not statistically significantly different from those in the pre-PSLRA cases in our sample. We also find that the ratio of settlement amounts to estimated provable losses - which is the most important indicator of whether investors are being compensated for their damages - was statistically significantly lower in the post-PSLRA period. In other words, the lead plaintiff provision and the PSLRA may have made investors worse off. We next analyze the determinants of institutional investors' decision to become lead plaintiffs in the cases in our sample. Using a logit regression analysis, we find that institutions are more likely to become lead plaintiffs in cases involving larger provable losses, with longer class periods, with larger defendant firms, and when there is a parallel SEC enforcement action. Importantly, we find that the presence of an institutional lead plaintiff improves the securities fraud settlement, even holding constant estimated provable losses, firm market capitalization, the length of class period, and the presence of an SEC enforcement action. Third, we examine whether recoveries are significantly different among settlements when a single (non-institutional) plaintiff represents the class compared with the lead plaintiff being either an aggregation of individuals or a group comprised of individuals and a non-institutional entity. We find that the single individual lead plaintiff does best in the smallest cases, and performs worst in the larger cases. Groups perform relatively better than individuals in larger cases. Finally, we investigate press reports that institutions are aggressively lobbied by plaintiffs' law firms to appear as lead plaintiffs in "pay to play" schemes, with political contributions being made in exchange for institutional investors' agreement to become a lead plaintiff and select a preferred law firm as class counsel.Vanderbilt University Law School, Law & Economics Research Paper Series. 08/2005; -
Article: SEC Enforcement Actions for Financial Fraud and Private Litigation: An Empirical Inquiry
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ABSTRACT: This paper examines the overlap between SEC securities enforcement actions and private securities fraud class actions. We begin with an overview of data concerning all SEC enforcement actions from 1997 to 2002. We find that the volume of SEC enforcement proceedings is relatively modest. We next examine the scope of the recently enacted "Fair Fund" provision that authorizes the SEC to designate civil penalties it recovers from defendants to benefit defrauded private investors. We conclude that this provision offers only limited potential relief for private investors. We complete this part of the paper with an analysis of the serious resource limitations faced by the SEC. The second portion of the paper contains an empirical analysis of the determinants of SEC enforcement actions and the overlap of private fraud suits and SEC enforcement proceedings. In bi-variate analysis, we find that: private suits with parallel SEC actions settle for significantly more than private suits without such proceedings; SEC enforcement actions target significantly smaller companies than private actions alone; private cases with parallel SEC actions take substantially less time to settle than other private cases; and private cases with parallel SEC actions have significantly longer class periods than other private actions. Finally, we create a model for estimating damages to compare settlement ratios in cases with parallel SEC actions to those in private actions. We find that one-fourth of all the private class action settlements occurring in suits that yield less than 10% of provable losses are settled for less than .02 percent of provable losses, but that there are no private actions with parallel SEC suits with such small settlements. In the final part of the paper, we conduct a multivariate regression analysis of the determinants of when SEC enforcement actions are filed. We find that the most highly significant determinant of SEC actions is financial distress. Estimated losses do not appear to be a statistically significant factor in the SEC's decision to file these suits.Vanderbilt University Law School, Law & Economics Research Paper Series. 08/2003; -
Article: Does the Plaintiff Matter?: An Empirical Analysis of Lead Plaintiffs in Securities Class Actions
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ABSTRACT: With the enactment of the Private Securities Litigation Reform Act of 1995 (PSLR) the U.S. Congress introduced sweeping substantive and procedural reforms for securities class actions. A central provision of the Act is the lead plaintiff provision, which creates a rebuttable presumption that the investor with the largest financial interest in a securities fraud class action should be appointed the lead plaintiff for the suit. The lead plaintiff provision was adopted to encourage a class member with a large financial stake to become the class representative. Congress expected that such a plaintiff would actively monitor the conduct of a securities fraud class action so as to reduce the litigation agency costs that may arise when class counsel's interests diverge from those of the shareholder class. Now, more than ten years after the enactment of the lead plaintiff provision, the claim that the lead plaintiff, and particularly the lead plaintiff that is an institutional investor, is a more effective monitor of class counsel in securities fraud class actions continues to be intuitively appealing, but remains unproven. In this study, Professors Cox and Thomas inquire anecdotally and empirically whether the lead plaintiff provision has performed as projected. The anecdotal evidence they uncover is mixed: in some instances demonstrating the virtues of the lead plaintiff provision, while in others showing that the provision has encountered difficulties, including hesitance among institutional lead plaintiffs to take on the burden of serving as lead plaintiff (though recently more institutional investors are taking on the role of lead plaintiff) and allegations of "pay-to-play" schemes between plaintiffs' law firms and potential lead plaintiffs. Professors Cox and Thomas then conduct a series of statistical analyses of the lead plaintiff provision's costs and benefits. Surprisingly, their results indicate that the ratio of settlement amounts to estimated provable losses in securities class actions---the most important indicator of whether investors have been compensated for their damages---has been lower since the passage of the PSLRA and that settlement size has not increased since the passage of PSLRA. However, they also find that the presence of an institutional investor increases the dollar amount of settlements in those cases in which they appear, suggesting that the current trend for institutional investors to be lead plaintiffs in securities class actions will positively affect average settlement size in such actions in the future. Their analysis also sheds new light on the relative impacts other types of lead plaintiffs, such as individuals versus an aggregation of individuals, have on the outcome of settlements. They conclude with a discussion of the policy implications of their findings.Faculty Scholarship. -
Article: Leaving Money On the Table: Do Institutional Investors Fail to File Claims in Securities Class Actions?
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ABSTRACT: Abstract not availableFaculty Scholarship. -
Article: Public and Private Enforcement of the Securities Laws: Have Things Changed Since Enron?
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ABSTRACT: Abstract not availableFaculty Scholarship. -
Article: Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions To Participate in Securities Class Action Settlements
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ABSTRACT: In a pilot study we published two years ago, we reported that nearly two-thirds of the institutional investors with financial losses in 53 settled securities class actions fail to submit claims. As a consequence of this failure substantial sums they were entitled to receive were given to others. This article presents the results of a much more extensive investigation of the frequency with which financial institutions submit claims in settled securities class actions. We combine an empirical study of a much larger set of settlements with the results of a survey of institutional investors about their claims filing practices. Consistent with our earlier study, we find that less than 30% of institutional investors with provable losses perfect their claims in these settlements. We then explore the possible explanations for this widespread failure. We suggest a wide range of potential problems from mechanical failures in the notification and recordkeeping processes to more subtle issues such as portfolio managers' beliefs that only investment activities produce significant returns for their clients.Faculty Scholarship. -
Article: There Are Plaintiffs and ... There Are Plaintiffs: An Empirical Analysis of Securities Class Action Settlements
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ABSTRACT: In this paper, we examine the impact of the PSLRA and more particularly the impact the type of lead plaintiff on the size of settlements in securities fraud class actions. We thus provide insight into whether the type of plaintiff that heads the class action impacts the overall outcome of the case. Furthermore, we explore possible indicia that may explain why some suits settle for extremely small sums - small relative to the "provable losses" suffered by the class, small relative to the asset size of the defendant-company, and small relative to other settlements in our sample. This evidence bears heavily on the debate over "strike suits." Part I of this paper sets forth the contemporary debate surrounding the need for further reforms of securities class actions. In this section, we set forth the insights advanced in three prominent reports focused on the competitiveness of U.S. capital markets. In Part II we first provide descriptive statistics of our extensive data set, and then use multivariate regression analysis to explore the underlying relationships. In Part III, we closely examine small settlements for clues to whether they reflect evidence of strike suits. We conclude in Part IV with a set of policy recommendations based on our analysis of the data.Faculty Scholarship. -
Article: Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms
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ABSTRACT: The ongoing Great Recession has triggered numerous proposals to improve the regulation of financial markets and, most importantly, the regulation of organizations such as credit rating agencies, underwriters, hedge funds, and banks, whose behavior is believed to have caused the credit crisis that spawned the economic collapse. Not surprisingly, some of the reform efforts seek to strengthen the use of private litigation. Private suits have long been championed as a necessary mechanism not only to compensate investors for harms they suffer from financial frauds but also to enhance deterrence of wrongdoing. However, in recent years there has been a chorus calling for reform, singing a distinctly deregulatory tune and calling for serious restraints on private litigation as a vehicle for protecting investors. In this revisionist story, securities class action suits were cast as the villain that placed U.S. capital markets at a serious competitive disadvantage without producing any net benefits for institutional investors, whose trading makes them not only dominant participants in securities markets but also important beneficiaries of successful securities class action settlements. It is interesting to note, though, how quickly a crisis can change the discourse of public debate on the value of private litigation. Now it seems likely that reform will occur. While we are hopeful that the recession will ultimately abate, a significant question nonetheless remains: which of these two views of securities class actions should guide the formation of public policy with respect to the role of private litigation in the greater constellation of financial market regulatory mechanisms? In this Article, we provide evidence addressing this very issue.Faculty Scholarship. -
Article: Mapping the American Shareholder Litigation Experience: A Survey of Empirical Studies of the Enforcement of the U.S. Securities Law
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ABSTRACT: In this paper, we provide an overview of the most significant empirical research that has been conducted in recent years on the public and private enforcement of the federal securities laws. The existing studies of the U.S. enforcement system provide a rich tapestry for assessing the value of enforcement, both private and public, as well as market penalties for fraudulent financial reporting practices. The relevance of the U.S. experience is made broader by the introduction through the PSLRA in late 1995 of new procedures for the conduct of private suits and the numerous efforts to evaluate the effects of those provisions. We believe that the evidence reviewed here shows that the PSLRA's provisions have largely achieved their intended purposes. For example, many more private suits are headed by an institutional lead plaintiff, such plaintiffs appear to fulfill the desired role of monitoring the suit's prosecution and their presence is associated with suits yielding better settlements and lower attorneys' fees awards. SEC enforcement efforts, while significant, have tended to focus on weaker targets, suggesting that the big fish get away. Equally importantly, markets impose their own discipline on companies whose managers release false financial reports and, in turn, firms discipline the managers who are responsible for false misleading reporting, perhaps because of the presence of, or potential for, private enforcement actions.Faculty Scholarship. -
Article: Do Differences in Pleading Standards Cause Forum Shopping in Securities Class Actions?: Doctrinal and Empirical Analyses
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ABSTRACT: Abstract not availableFaculty Scholarship.
