Thursday, October 19, 2006

Institutional Activism through Litigation

Prof. Michael A. Perino (St. John's University School of Law) has penned a new paper, Institutional Activism through Litigation: An Empirical Analysis of Public Pension Fund Participation in Securities Class Actions, available from SSRN here .

Prof. Perino attempts to analyze:
whether there is any correlation between cases with public pension fund lead plaintiffs and settlement outcomes, attorney effort, or fee requests or awards.
His conclusions:
  • cases with public pension participation are positively correlated with settlement amounts (measured both in absolute terms and as a proportion of investors' overall market losses), even when controlling for institutional self-selection of larger, more high profile cases.
  • cases with public pension fund acting as lead plaintiffs are positively correlated with two "proxies for attorney effort," the number of docket entries in the case and the ratio of settlement to docket entries.
  • Attorneys' fee requests and fee awards are lower in cases with public pension lead plaintiffs, either because public pensions are sophisticated repeat players or as a result of attorney competition to represent these institutions.
The paper's conclusion:
that public pension funds do act as effective monitors of class counsel.
I don't have much to quibble with in the paper, but one thing stuck out to me as worthy of discussion.

First, Prof. Perino suggests that:
Under the PSLRA, plaintiffs' lawyers increasingly have incentives to develop longstanding relationships with institutions willing to become active in class litigation because doing so should increase the number of lucrative lead counsel opportunities
I agree, but that is one-half of the "problem" that led to the enactment of the PSLRA in the first place. As discussed later in the paper:
long-term relationships frequently existed between attorneys and individuals (dubbed, "professional plaintiffs"), who agreed to buy stock in likely litigation targets and to serve as representative plaintiffs in any ensuing action in exchange for payments from the lawyer. . . such agreements made sense for plaintiffs' attorneys - who were able to reduce the search costs associated with initiating a case by having a ready stable of plaintiffs.
As an aside, I am unable to buy into the theory that pre-PSLRA investors were both: (a) able to predict likely litigation targets in advance with great precision; and (b) that they agreed to buy and hold these stocks and suffer guaranteed losses.

If the investor (or the attorneys) for that matter, were able to predict securities fraud (much like the SEC's "Pre-Crime Unit" joked about by Bruce Carton over at Securities Litigation Watch) wouldn't they do better financially by shorting the stock before the disclosure caused the resulting decline in price and the supposedly inevitable "race to the courthouse?"

Update: The D&O Diary has a thoughtful post on the article, here and the WSJ Law Blog has a post here.

Daily Trivia: Professor Perino was "one of the principal developers of Stanford Law School's Securities Class Action Clearinghouse." The Clearinghouse was nominated by the Smithsonian Institution for the 1997 Computerworld Smithsonian Award (since renamed The Computerworld Honors Program) as one of the five most important applications of information technology created by an educational institution.

The eventual winner in 1997 was The Virtual Alphabet Book, which is a:
multimedia presentation of the traditional ABCs. It contains alternative ways to learn the alphabet. You can also interact with the objects in the Virtual Alphabet Book with switches, infra-red head pointers, or a touch screen. This makes the alphabet accessible to children with severe physical limitations.

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