Institutional Plaintiffs’ Impact on Securities Litigation

For those of us who must try to understand securities litigation trends, one of the developments worth watching closely has been the impact of institutional plaintiffs (mostly public pension funds) on securities litigation. It has been apparent for some time that cases with institutional lead plaintiffs usually resulted in larger settlements, but the question remained whether this was really the result of institutional plaintiff involvement or just a by-product of institutions choosing to become involved in the largest and most meritorious cases.

An October 2006 paper by St. John’s University Law School professor Michael A. Perino entitled "Institutional Activism Through Litigation: An Empirical Analysis of Public Pension Fund Participation in Securities Class Actions" (here) examines "whether public pension fund monitoring is effective"; specifically, Perino examined "whether there is any correlation between cases with public pension fund lead plaintiffs and settlement outcomes, attorney effort, or fee requests or awards." Perino used statistical techniques in reviewing class action data to control for potential institutional self-selection of larger, more meritorious cases and other factors that might affect settlement outcomes and fee awards.

Perino’s paper has three findings:

First, 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.

Second, cases with public pension 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, suggesting that institutional monitoring may reduce attorney shirking.

Third, 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.

Perino concludes that "[t]he findings suggest that public pension funds do act as effective monitors of class counsel" and that "public pension fund participation as lead plaintiffs in securities class actions appears to have many benefits Congress anticipated" in enacting the PSLRA.

These findings are important because public pensions are playing an increasingly larger role in securities class action lawsuits. According to the 2005 PricewaterhouseCoopers’
Securities Litigation Study (here), public pension funds served as lead plaintiffs in over 40% of the securities class action lawsuits filed in 2005, which is up significantly from the percentage in the early years immediately after PLSRA’s enactment. (For example, public pensions served as lead plaintiffs in only 10.3% of the cases filed in 2000.)

Many studies, including the PricewaterhouseCoopers study, have observed that average securities class action settlements have increased in recent years. If an important factor in this increasing average severity is the involvement of pension fund plaintiffs, and if pension fund increasingly are serving as lead plaintiffs, then Perino’s findings have important implications for D & O carriers’ expected severity (particularly excess carriers’ expected severity).

However, as Perino’s study notes, pension funds "will continue to appear predominately in the largest cases where the benefits of monitoring are most likely to outweigh the costs." In other words, pension funds are unlikely to become involved in smaller cases; it may be that these cases will simply not be filed, which may in part account for the observed decline in class action frequency in 2006.

Hat tip to Adam Savett at the Lies, Damn Lies blog for the link to the Perino paper. Savett's interesting commentary on Perino's paper may be found here.

The Best Coverage: According to an October 24, 2006 New York Times article (here, registration required), a panel of the nations’ magazine editors and designers has chosen a New Yorker cover depicting President Bush being flooded in the Oval Office after Hurricane Katrina as the best magazine cover of the year. While we like that cover, we don’t think it will crack into the list of the American Magazine Conference’s Top 40 Magazine Covers in the Last 40 Years, which may be found here. This list includes some covers that you will smile to see again. You may disagree with the order in which the covers are listed, but you won’t disagree with the selection overall. The D & O Diary is partial to the National Lampoon’s January 1973 cover (No. 7 on the list), "If you don’t buy this magazine, we’ll kill this dog."

Special thanks to a loyal reader for the link to the Top 40 site.