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Study says securities class actions actually harm investors

By John O'Brien | Feb 28, 2014

WASHINGTON (Legal Newsline) - Securities class actions lawsuits do nothing to help the investors who are seeking recovery, a new study released by Navigant Consulting shows.

The study, which was commissioned by the U.S. Chamber Institute for Legal Reform, says the lawsuits cost investors nearly $39 billion per year while recovering only $5 billion. The information was discussed Friday at an event held by the ILR, the National Chamber Litigation Center and the Center for Capital Markets Competitiveness to discuss securities lawsuits and a pending U.S. Supreme Court case - Halliburton v. Erica P. John Fund.

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"This study validates years of academic consensus that securities class action lawsuits harm the very people they are supposed to help - America's investors," said Lisa Rickard, president of ILR.

The study is authored by Mukesh Bajaj, Nikolai Caswell, Anand Goel, Sumon C. Mazumdar and Rahul Surana.

It calculated the wealth lost by shareholders upon announcements of lawsuits soon after the end of the class period, at which time the class members are largely the same shareholders who went through the stock drop.

It also showed that a significant percent of settlement proceeds are given to plaintiffs who "almost certainly" could not have recovered anything if the case were litigated. The report's authors further argue, after studying 50 allocation plans for large settlements, that a redistribution of wealth occurs that bears little resemblance to the alleged economic injury.

The study analyzed company stock price reactions to the announcements of almost 1,500 securities suits.

"In defending private securities class action litigation, securities class action plaintiffs' attorneys, whose fees are contingent on the size of the settlement, claim that settlement payments represent a significant benefit to their clients," the study says.

"To the contrary, our empirical analysis of over 1,400 settlements from 1996 to the present demonstrates that the shareholders who are alleged victims on whose behalf these lawsuits are ostensibly filed have actually suffered an incremental wealth loss due to the filing of such suits that is over $262 billion."

Consumer group Public Citizen released its own report Feb. 26, three weeks after the ILR released a paper titled "What's Wrong with Securities Class Action Lawsuits."

Public Citizen's study is titled "What's Right With Securities Class Action Lawsuits: A Response to the U.S. Chamber's Institute for Legal Reform."

"A more rigorous analysis of the evidence demonstrates that private securities lawsuits are effective at deterring fraud and widely supported by institutional investors as a way to maintain the credibility and sustainability of their investments," co-author Lisa Gilbert said.

Public Citizen's report, released as part of its "Chamber Watch" program, says securities lawsuits deter fraud, compensate investors, maintain investor confidence and succeed where the Securities and Exchange Commission fails because it does not have enough resources.

"The Chamber's description of securities class actions as abusive, lawyer-driven cases ignores that securities lawsuits are increasingly brought by large, professionally managed institutional investors," the study says.

The battle of reports comes before Wednesday arguments in Halliburton v. Erica P. John Fund.

In the case, Halliburton is appealing a decision from the U.S. Court of Appeals for the Fifth Circuit.

Halliburton is alleged to have disclosed misleading information that affected its stock price. It is now claiming a 1988 decision in Basic Inc. v. Levinson, which allowed stockholder-plaintiffs to pursue their cases without having to prove they relied on the allegedly misleading information, should be altered.

Many parties filed friend-of-the-court briefs in the case, including the U.S. Chamber.

One amicus brief was filed by the attorneys general of 21 states and Guam. It supports the investors.

"Quite simply, investors fear fraud much more than they fear securities litigation, and weakening securities law enforcement will damage the nation's economy," the brief says.

At Friday's event, speaker Troy Paredes, a former SEC commissioner, said securities suits force companies to spend money that they should be investing in their businesses and distracts boards of directors from everyday responsibilities.

They also cause companies to disclose more than is necessary for fear of being sued for not disclosing enough.

"These and other costs are not only bad for investors, including shareholders, but they're also harmful to employees, to local communities and to a full range of corporate stakeholders, along with the competitiveness of the U.S.," Paredes said.

From Legal Newsline: Reach editor John O'Brien at

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