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The Chamber of Commerce and Excessive Litigation: Be Careful What You Wish For (Part 4)

By J. Robert Brown

We are discussing the recent report,  ?Securities Class Action Litigation: The Problem, Its Impact, and The Path to Reform,? published by the Institute for Legal Reform of the Chamber of Commerce.

Perhaps the greatest irony in the report is the shots it takes at institutional investors.  Recall that Congress, with the support of the Chamber, adopted the PSLRA in an attempt to cut back on securities litigation.  One of the central pieces to the litigation was the effort to diminish the role of professional plaintiffs.  The PLSRA did so by replacing the race to the courthouse with a presumption that the shareholder (or shareholders) with the largest loss would serve as plaintiff.  It was expected that this would transfer control of the litigation to institutional investors who could exercise greater control over the case and over counsel. 

In other words, the Chamber got what it wanted.  But it doesn't seem to want this anymore.  The Chamber complains that the reliance on institutions has resulted in a "pay-to-play" mentality.

• As institutional investors like public pension funds play an increasingly important role as lead plaintiffs in securities class actions, a "pay-to-play" culture has emerged in which plaintiffs' law firms contribute to the political campaigns of officials who control the decisions of those funds.  

The evidence mostly comes from a single article in USA Today.  But even assuming this type of culture exists, it is ironic (and unmentioned) that it is a dynamic that the Chamber helped cause. 

Moreover, if anyone is harmed by this approach, it is shareholders.  But the fact that the Chamber of Commerce, an organization that represents the entities sued for securities fraud, is promoting the reforms suggests the contrary.  The fact that the Chamber doesn't like the system suggests that it is because institutional investors are too hard on public companies, perhaps seeking even higher settlements (a conclusion consistent with the data they rely on in the report).  In other words, hidden by the pejorative use of the words "pay to play" is an implicit criticism that institutional investors are, as a result, promoting the interests of shareholders, something the Chamber doesn't appreciate.   

Full post as published by The Race to the Bottom on September 03, 2008 (boomark / email).