Class action securities lawsuits for publicly traded companies are a racket.
That was the provocative and eye-popping title of a new white paper done by the American Chamber of Commerce.
The title of the paper was A Rising Threat The New Class Action Racket That Harms Investors and the Economy, and it was released last week.
“The securities class action system is spinning out of control. Abusive lawsuits are imposing huge costs on investors without providing any benefit. The only winners are the lawyers, who take home millions of dollars in fees. And we have seen this movie before.” The paper concluded.
“Securities class actions took off in the 1990s, largely focusing on technology companies. Plaintiffs’ lawyers initiated and controlled the lawsuits, using professional plaintiffs who purchased a few shares of stock in multiple companies, so they would be able to sue whenever called upon by the lawyers,” the paper continued, “Once again, the number of lawsuits is skyrocketing and has reached levels not seen since before the enactment of the PSLRA. In 2018, more than eight percent of all public companies, or one out of every twelve companies, will be sued in a securities class action.”
The PSLRA stands for Private Securities Litigation Reform Act and it was enacted in 1995, due to the explosion of class action lawsuits.
But as the paper noted, despite the efforts of the law, class actions lawsuits are on the rise.
“Once again, the number of lawsuits is skyrocketing and has reached levels not seen since before the enactment of the PSLRA. In 2018, more than eight percent of all public companies, or one out of every twelve companies, will be sued in a securities class action.” The paper stated.
The paper made it clear that many lawsuits are meritless: “And lawsuits are again filed without regard to their merit. Instead of an unexpected drop in stock price, the trigger today is a merger and acquisition (M&A) deal valued at over $100 million: 85% of such deals were met with a lawsuit last year. It strains belief to suggest that virtually all such deals were affected by fraud.”
The paper continued describing another category of meritless class action lawsuits: “A second variety of securities class actions has also emerged that seeks to capitalize on adverse events in a company’s underlying business, such as a product liability lawsuit, data breach, or similar high-profile, unexpected negative occurrence. The securities class action lawsuit does not seek damages for harm from the underlying event, which is addressed through other lawsuits. Rather, the securities claim asserts that the company defrauded investors by intentionally or recklessly failing to warn that the adverse event might occur, even though these events are—by definition— unexpected.
“Legal experts are skeptical about the merits of these claims: Columbia law professor John Coffee says they ‘push the envelope.’ But they are powerful weapons for extorting settlements, regardless of the merits, due to the cost of defending the case in court and the reputational harm to the defendant company were the underlying event to appear in the headlines.”
It’s noteworthy that Carolyn Maloney, a Democrat from New York, championed lawsuits as a proper means for aggrieved traders and investors to seek justice during a previous hearing.
Maloney said in a May 2018 hearing: “That’s why Congress gave investors the right to sue companies that they invest in for violations. This private right of action allows investors who have been harmed to recover their losses without relying on the SEC enforcement division to do all their work. This is one of the reasons why investors have so much confidence in US markets. They know they can hold companies they invest in accountable when they violate the law, even when the enforcement division doesn’t have the time or the resources.”
The American Chamber of Commerce found that securities class action lawsuits are part of a larger litigious class-action lawsuit culture in the US.
“We estimate the costs and compensation paid in the U.S. tort system using insurance data and estimated uninsured costs. We find that in 2016 the costs and compensation paid in the tort system amounted to $429 billion or 2.3 percent of U.S. gross domestic product (GDP). We further estimate that 57 percent of tort system costs were paid in compensation to plaintiffs. The remaining 43 percent covered the cost of litigation, insurance expenses, and risk transfer costs.” The Chamber found in a separate white paper.