America’s securities class action system sits in “a broken state” and urgently needs to be fixed, according to new research from the U.S. Chamber’s Institute for Legal Reform.
The Institute held a press briefing Tuesday and released two research reports to substantiate its claims that plaintiffs and their lawyers are abusing the legal system.
Mayer Brown partner Andrew Pincus, who spoke at the briefing and prepared one of the research reports, told Corporate Counsel that general counsel should consider such litigation a serious threat.
“The data show that public companies today have the highest possibility of being sued of any time in history,” Pincus said. “That’s basically means every single year, one in every 12 public companies is being sued in a securities class action.”
And they are not small cases, he said. “They are the aircraft carriers of litigation, with huge costs and huge liabilities. For any general counsel, that’s a concern,” Pincus explained.
Harold Kim, chief operating officer of the Institute, said a key message from the briefing was that security class actions are “back with a vengeance. Filings are up. Hourly fees claimed by plaintiffs’ bar and which haven’t been vetted carefully by the courts, are significantly up.”
Kim said general counsel and the entire business community need to know that this exploding litigation is a problem. “Today really was for us a declaration that enough is enough and something needs to be done,” he added.
One research report, titled Risk and Reward: The Securities Fraud Class Action Lottery, was prepared by three law professors: Stephen Choi of New York University School of Law, Jessica Erickson of the University of Richmond School of Law, and Adam Pritchard of the University of Michigan Law School.
Their report says, “The high dismissal rate in such cases—roughly half—along with the high incidence of “nuisance settlements”—cases settled for less than defense costs—suggest that the plaintiffs’ bar brings cases that are either meritless or not cost justified. These data leave open the possibility that these cases are being filed purely for extortion value.”
The second report prepared by Pincus, called Containing the Contagion, offers proposals to fix what he calls a broken system.
“Federal courts have been hit by an avalanche of cases alleging misstatements in connection with a public company’s merger or acquisition—virtually every deal valued at over $100 million is hit by a lawsuit,” the report states.
A second wave of security class actions has arisen from adverse events in a company’s underlying business, such as a data breach or environmental disaster. These suits claim a company defrauded investors “by failing to warn that the adverse event might occur, even though these events are—by definition—unexpected,” the report explains.
It says the data confirm that these new waves of lawsuits are characterized by unjustified, abusive claims. “Federal securities cases are being dismissed at a greater rate, and those cases not dismissed are settled, most for an amount less than or equal to the cost of defending the lawsuit,” it says.
The Pincus report goes on to say federal courts have not yet identified “effective tools for deterring the filing of unjustified claims leading to ‘settlements’ that reward the plaintiffs’ lawyers with fees but provide only meaningless disclosures to investors, who of course pay the bills for the plaintiffs’ lawyers and the defense lawyers and for wasted management time.”
The document recommends several changes, including:
- The U.S. Securities and Exchange Commission should study the state of private securities class action litigation and issue a paper acknowledging the problem of abusive lawsuits.
- The SEC also should file amicus briefs in these cases, informing federal courts of the serious nature of the problem and urging them to prevent cases from being used to extort unjustified attorneys’ fees.
- Congress should enact legislation to limit how many times a person can serve as a plaintiff in these cases, amend the Private Securities Litigation Reform Act of 1995 to help stop abusive lawsuits, and adopt a cap on damages.
Reprinted with permission from the February 26, 2019 edition of Corporate Counsel © 2019 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.