Securities Lawsuit System in Need of Repair, U.S. Chamber Says

NEW YORK, N.Y.—Private securities class action lawsuits present a serious threat to the health of U.S. businesses, the prosperity of American families and the strength of our nation’s global competitiveness, according to a new analysis released today by the U.S. Chamber Institute for Legal Reform (ILR).

“America’s securities class action system is broken, both in its design and application,” ILR president Lisa A. Rickard told attendees at a forum hosted by the Manhattan Institute, noting that the current system of lawsuits essentially entails one group of innocent investors suing another group of innocent investors.  She pointed out that aggrieved investors often receive only pennies on the dollar, while huge sums of money are chewed up in legal costs. 

 “Driven by the multibillion dollar plaintiffs’ lawyer industry, the system exacts enormous costs on our economy while betraying the individual investors it is designed to assist,” said Rickard. She noted that securities class action litigation caused the destruction of nearly $25 billion of shareholder wealth between 1995 and 2005, according to a study released earlier by ILR. 

Using the downfall of securities giant Milberg Weiss LLP as an example, the report indicated that the systemic failures have been exacerbated by trial lawyers who abuse the class action mechanism for profit.  According to ILR’s report, the integrity of the system has been further undermined by a “pay to play” culture, in which plaintiffs’ law firms ensure their status as lead counsel by contributing to the political campaigns of officials who control the large public pension funds that bring these lawsuits. 

Rickard called on Congress to investigate the culture of greed and corruption prevalent in the securities trial bar saying, “While the U.S. House and Senate leadership has been eager to conduct oversight hearings into the perceived abuses of other industries, Congress has been silent on this issue. Common sense reform measures should, and must, be enacted by Congress to repair the broken securities class action system if we are to keep our nation on a prosperous and competitive course.”

ILR’s new, comprehensive analysis of securities litigation in America shows that the costs of the system, already in the billions of dollars each year, are rapidly climbing.  Representing about one-half of all federal class actions in the U.S., new securities class action filings increased by 58% from 2006 to 2007.  The average estimated monetary losses in suits also doubled over the same period. 

The analysis also notes that the current securities class action lawsuit system forces businesses to mitigate potential damages by settling lawsuits rather than risk going to trial, generating approximately $51.8 billion in settlements over the past decade. 

Among a number of potential legislative changes suggested in the report, ILR proposes:

• Enacting the “Securities Litigation Attorney Accountability and Transparency Act,” (S.3033, H.R. 5463) introduced by Senator John Cornyn (R-TX) and Congressman Jeb Hensarling (R-TX).  The Act would cast sunlight onto the relationships between attorneys and plaintiffs, eliminate pay-to-play conflicts and other suspicious connections between attorneys and elected officials, introduce a competitive bidding process for the selection of lead counsel, and call for further investigation into the hourly fees paid to plaintiffs’ attorneys in securities class action litigation.
• Ensuring coordination between public and private enforcement in order to promote efficient compensation and prevent wasteful, duplicative recovery by shareholders.
• Providing defendants equal access to appeal denials of motions to dismiss a suit in order to reduce the intense pressure to settle meritless suits following the denial of such dispositive motions.
• Curbing abuse of civil discovery, the costs of which fall disproportionately on defendant companies and create enormous pressure to settle, by shifting the cost of discovery from defendants to plaintiffs when discovery requests are unjustified. 

ILR’s report, “Securities Class Action Litigation: The Problem, Its Impact, and The Path to Reform,” is available at www.InstituteforLegalReform.com.

ILR seeks to promote civil justice reform through legislative, political, judicial, and educational activities at the national, state, and local levels. The U.S. Chamber of Commerce is the world's largest business federation, representing more than 3 million businesses and organizations of every size, sector, and region.