The South Shall Write Law Review Articles Again

Professors James D. Cox (Duke) and Randall S. Thomas (Vanderbilt) are at it again.

After co-authoring two seminal articles on the failure of institutional investors to file claim forms in securities cases (see my earlier post here), they have posted a draft of their latest paper, An Empirical Analysis Of Institutional Investors' Impact as Lead Plaintiffs in Securities Fraud Class Actions, here.

Prof. Cox and Thomas write that they were shocked to 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, after the passage of PSLRA investors appear to be worse off because they are recovering a lower percentage of their losses in the cases in our sample. (emphasis added)

Their conclusion:

One possible interpretation of this finding is that Congress should repeal PSLRA in its entirety if it wishes to help defrauded investors. (emphasis added)

A few more interesting tidbits from the draft paper:

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. (emphasis added)

Given that the class periods were often shorter in the pre-Sarbanes-Oxley days (with the shorter statutes of limitations and repose) and that the SEC recently has been aggressively pursuing fraud cases I'm not sure that the controlled-for conclusion actually produces an apples to apples comparison that has much non-academic meaning.

They went on to write:

[W]e 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. In other words, institutional investors are selecting the biggest cases in which to appear as lead plaintiffs. (emphasis added)

I think that they go on to capture most of the logic behind this - namely that there is little incentive and potentially high (relative) costs for institutions to participate actively in smaller cases. There is another reason that they did not give - many institutions prohibit their investment advisors from trading in stocks that trade below a certain threshold dollar amount or from holding too large a percentage of the outstanding equity of a single company. Thus many institutions have no holdings in the "smaller cases" involving lower priced stocks, and thus are not eligible to file a lead plaintiff motion.

Prof. Cox and Thomas further found:

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. This result suggests that the trend toward more institutional investor lead plaintiffs should have a positive effect on settlement size in securities fraud cases. (emphasis added)

And lastly:

we find no recorded case where a bank, mutual fund or insurance company has served as a lead plaintiff in a securities class action.

This last one, I predictably take issue with. In my prior posts, here, here, and here, I collected more than a dozen instances of mutual funds moving for appointment as lead plaintiffs.