Securities Litigation and Its Lawyers, Perfect Together

Professors Stephen J. Choi (New York University School of Law) and Robert B. Thompson (Vanderbilt University School of Law) have authored a paper Securities Litigation and Its Lawyers: Changes During the First Decade After PSLRA that contains a fairly interesting analysis of the post-PSLRA behavior of class action firms and their institutional investor clients.

Dividing the decade since the PSLRA went into effect, the article bisects the intervening years into two periods:

the immediate several years right after the enactment of the PSLRA, where law firm behavior likely reflected the need to find a plaintiff or group of plaintiff with the largest financial stake, likely outside the group of institutional investors who initially remained on the sidelines (the "initial" post-PSLRA period)

and

the years after the initial several years (2000 and beyond) where plaintiff law firm behavior reflected the need to respond to institutional investors as they came to play a greater role as lead plaintiffs (the "mature" post-PSLRA period).

In the former period, the authors found that so-called "top plaintiff law firms" (as determined by settlement values obtained in a sampling of pre- and post-PSLRA cases) were more likely to join together with lower ranked law firms compared with the pre-PSLRA period.

Their hypothesis:

First, the need to create a large group of lead plaintiffs (at least where institutional investors do not act as lead plaintiffs) may lead law firms to join with lower ranked law firms that bring specific lead plaintiffs to the group . . . Second, severe limits on discovery prior to the hearing on the motion to dismiss in the post-PSLRA period increased the importance of diversification as a motive in joining with other law firms. To the extent diversification simply requires other firms willing to help pay the costs of pursuing any particular litigation, we predict that an increased diversification motivation will lead to less discriminate pairing among plaintiffs law firms.

There is much more in this draft article, but it will have to wait for another day.

One last note, though. The article states:

There has been a substantial increase in participation of public pension firms, a group that includes well-known public employees' funds such as Calpers, NYCERS and funds related to various unions. At the same time, there has not been any substantial involvement by private investors, such as mutual funds, banks, and insurance companies.

This is the same fallacy that I have been on a quixotic quest to banish from the kingdom, as detailed in prior posts here, here, and here.

Listen up academia - Mutual funds can and do serve as lead plaintiffs in private securities litigation. You've been warned.

As an aside, Choi and Thompson provide a cogent analysis of one of the potential disincentives for private institutional investors to serve as lead plaintiffs, noting:

In a world where investment manager performance is regularly measured by relative returns, the possibility of competing managers' free riding on your efforts, or the comparative option of your free riding on other investors operates as a disincentive to participate as a lead investor.

Food for thought.

Apologies for the title to former New Jersey Governor Tom Kean.