Does the Plaintiff Matter? An Empirical Analysis of Lead Plaintiffs in Securities Class Actions

• Published in: Columbia law review Vol. 106; no. 7; pp. 1587 - 1640
• Main Authors: Cox, James D., Thomas, Randall S., Kiku, Dana
• Format: Journal Article
• Language: English
• Published: Columbia University School of Law 01.11.2006
• Subjects: Attorneys; Class action lawsuits; Cost-benefit analysis; Defendants; Deterrence; Enterprises; Financial reporting; Fraud; Investors; Judicial process; Law firms; Legal counsel; Litigation; Panel One: Private Securities Litigation Reform Act; Plaintiffs; Punishment; Reform; Securities fraud; Securities sales; Stockholders
• ISSN: 0010-1958

With the enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA), the U.S. Congress introduced sweeping substantive and procedural reforms for securities class actions. A central provision of the PSLRA is the lead plaintiff provision, which creates a rebuttable presumption that the investor with the largest financial interest in a securities fraud class action should be appointed the lead plaintiff for the suit. The lead plaintiff provision was adopted to encourage a class member with a large financial stake to become the class representative. Congress expected that such a plaintiff would actively monitor the conduct of a securities fraud class action so as to reduce the litigation agency costs that may arise when class counsel's interests diverge from those of the shareholder class. Now, more than ten years after the enactment of the lead plaintiff provision, the claim that the lead plaintiff, and particularly the lead plaintiff that is an institutional investor, is a more effective monitor of class counsel in securities fraud class actions continues to be intuitively appealing, but remains unproven. In this study, Professors Cox and Thomas inquire anecdotally and empirically whether the lead plaintiff provision has performed as projected. The anecdotal evidence they uncover is mixed, in some instances demonstrating the virtues of the lead plaintiff provision, while in others showing that the provision has encountered difficulties, including hesitation among institutional lead plaintiffs to take on the burden of serving as lead plaintiff (though recently more institutional investors are taking on the role of lead plaintiff) and allegations of "pay-to-play" schemes between plaintiffs' law firms and potential lead plaintiffs. Professors Cox and Thomas then conduct a series of statistical analyses of the lead plaintiff provision's costs and benefits. Surprisingly, their results indicate that the ratio of settlement amounts to estimated provable losses in securities class action--the most important indicator of whether investors have been compensated for their damages--has been lower since the passage of PSLRA and that settlement size has not increased since the passage of PSLRA. However, they also find that the presence of an institutional investor increases the dollar amount of settlements in those cases in which they appear, suggesting that the current trend for institutional investors to be lead plaintiffs in securities class actions will positively affect average settlement size in such actions in the future. Their analysis also sheds new light on the relative impacts other types of lead plaintiffs, such as individuals versus an aggregation of individuals, have on the outcome of settlements. They conclude with a discussion of the policy implications of their findings.