Corporate Governance

The Chamber of Commerce and Excessive Litigation: Be Careful What You Wish For (Part 6)

By J. Robert Brown

We are discussing the recent report put out by the Chamber of Commerce on the problems of excessive securities litigation in the United States.  We have already noted that the Chamber addressed the issue without ever once mentioning the impact of the subprime problem or without discussing one of the most critical issues in the securities litigation area, the impact of D&O insurance. 

But the Report did find time to talk about the legal problems of Milberg Weiss.  Indeed, the Report concluded that reform is necessary because the "systematic failures of private class action litigation are exacerbated by the trial lawyers who have hijacked the class action mechanism and abused it for profit."  The prosecution of Milberg Weiss and the lawyers from the firm "may also be just the tip of the iceberg." 

The entire section is nothing more than a restatement of the charges brought against Milberg and those connected with the firm.  In other words, the Study is unable to make a solid case that the problems associated with the prosecution goes beyond that firm or continues in any way.  Indeed, the indictment against the firm mostly involved fee sharing agreements that occurred before the adoption of the PSLRA when the system for filing suit was a "race to the courthouse."  At that time, the firm needed a stable of potential plaintiffs to be able to rush to the courthouse at moments notice in order to be first.  The under the table payments were a form of compensation to plaintiffs who remained perpetually available to race to the courthouse. 

In a post-PSLRA era, it is decidedly unclear why a firm would ever need to pay kickbacks.  Presumptive plaintiffs are not the first to file but the ones with the largest potential loss.  These institutions don't need kickbacks.  They can gain an increased payment by driving a harder bargain with counsel on fees.  Unless the Chamber is suggesting that large institutions are being bribed with under the table payments, this practice is unlikely to still be taking place. 

In other words, the Study notes that the problem "seems to be systemic and fundamental" but can't make the case with any examples other than Milberg.  One firm's problems does not make for a systematic issue and certainly evidence of problems that mostly preceded the PSLRA does not make much of a case that they continue.  But alas none of this was discussed in the Chamber's Report.

Full post as published by The Race to the Bottom on September 05, 2008 (boomark / email).