The recent indictments of Milberg Weiss Bershad & Schulman and two of its senior partners have made some members of the business lobby giddy with delight. They see these indictments as the moment they have been waiting for a golden opportunity to revive old stereotypes and discredit a profession whose mission is fighting corporate fraud.
The inevitable attacks on all plaintiffs’ law firms and all shareholder lawsuits are potentially harmful to investors.
The business lobby would like the public to believe that law-abiding companies are the victims of a shakedown game that needlessly drives up the cost of doing business. They have been rehashing these same talking points for two decades: lawyer-driven litigation, races to the courthouse, pennies on the dollar, exorbitant fees, etc., etc., etcäó_
There’s only one problem with these criticisms. They do not reflect reality in the current securities class action environment.
The fact is that institutional investors now run many of these lawsuits, much as Congress intended when it passed two so-called “tort reform” laws aimed at securities litigation in 1995 and 1998.
And these institutional clients – public pension funds, mostly – oversee the litigation process as diligently as they guard their investment portfolios.
These institutional investors are fiduciaries and function as such. They recognize the need for responsible private litigation as a valid method of enforcing the federal securities laws.
Since the Private Securities Litigation Reform Act of 1995 was enacted, institutional investors have steadily increased their participation as lead plaintiffs in securities fraud class actions. According to Pricewaterhouse-Coopers, public and union funds were appointed lead plaintiffs in 40% of cases filed in 2005. That compares to a 14% share in 1996-1997.
Echoing other analysts, PwC also recorded a nine-year low in new cases last year, debunking yet another myth that of lawsuits forever spiraling out of control.
Moreover, multiple studies from academics and national think tanks – including those not usually friendly to the plaintiffs’m bar – have demonstrated that these institutional lead plaintiffs are significantly raising settlement amounts while lowering attorney fees.
A recent examination of 230 securities class action settlements by Michael A. Perino, of St. John’s University, for example, found that the mean attorneys’ fee award was approximately 20% of the recovery in cases with a public pension fund lead plaintiff. That compared to 27% for other lead plaintiffs. (For more on Perino’s findings, see the winter issue of our newsletter.)
Institutional investors appear to drive larger settlements, as well. According to NERA Economic Consulting, cases with institutional lead plaintiffs settled for a third more money, on average, than those with other plaintiffs. A second study by law professors James D. Cox of Duke and Randall S. Thomas of Vanderbilt found a statistically significant increase in settlements in those cases led by institutional plaintiffs, after adjusting for size.
Meanwhile, corporate fraud continues to cost investors money and shake their confidence. Glass Lewis & Co. found 1,200 financial restatements last year – almost double the 2004 amount. About half the restatements involved companies that also reported problems with their internal accounting controls.
The “reformers” who hoped the PSLRA would eliminate shareholder lawsuits in the 1990s now want to use the indictment of a single law firm as a springboard for even more restrictions on investors’ rights. But the checks and balances are already in place.
Public pension funds and other large institutional investors should continue to exercise their power to hire and fire lawyers, pick and choose cases, and negotiate attorney fees.
They already do an excellent job in all of those areas, ensuring that only the most professionally ethical firms represent them as lead plaintiffs. More legislative interference is totally unnecessary.