Home -> Law Blog Directory -> Corporate Governance Blogs -> PomTalk

Corporate Governance

: PomTalk

From the Pages of The Pomerantz Monitor: Institutional Investors Have Greatly Strengthened Securities Litigation

By Carolyn Moskowitz

As Adam Prussin reports in the July/August issue of The Pomerantz Monitor, Congress instituted the "lead plaintiff" provisions of securities law to encourage institutional investors to become more involved in securities class action lawsuits. Since investors with the largest losses are favored as lead plaintiffs, institutions, with greater assets, typically have a leg up on individual investors. Is that good or bad?

As reported in the D&O Diary, a blog that follows securities litigation developments, a recent academic study concludes that institutions have heeded the call and that, when they act as lead plaintiffs, they get better results than individual investors do. The D&O Diary quotes the authors:  

institutional investor involvement in securities litigation not only enhances investors? success in seeking financial recovery, but also improves the quality of the companies? corporate governance. [It] is an effective corporate monitoring tool for institutional investors.

The study, published earlier this year by professors at LSU, Prairie View A&M, Purdue and the University of Houston, examined all 1,811 securities lawsuits filed between January 1, 1996 and July 20, 2005 that had been resolved by June 1, 2006. Two hundred eighty-six of these had an institutional investor as lead plaintiff. Although this is about 16% of the total, that percentage had reached more than 30% for cases filed in 2004. Today, institutional investors, especially public and union pension plans, are lead plaintiffs in most of the really large class action securities cases filed. 

The authors found that cases with institutional lead plaintiffs are 38.2% less likely to be dismissed on motion than cases without them; and that all else being equal, cases with institutional lead plaintiffs produced total settlement amounts about 60% higher on average than cases without them. The authors also found that within three years of the lawsuit filing, defendant companies that faced institutional investor lead plaintiffs experienced greater improvement in board independence than those facing individual lead plaintiffs. The authors conclude that: 

institutional investors? involvement in securities litigation enhances not only investors? success in seeking financial recovery, but also the quality of the defendant firms? corporate governance . . . institutional investors could use litigation as a mechanism to discipline management and to secure the long-term health of the firm.

The study confirms that institutions have much to contribute to the enforcement of federal securities laws, and that more and more of them are stepping up to the plate.

Full post as published by PomTalk on August 13, 2009 (boomark / email).