Risk Management

Study Hits InstitutionaI Investor Suits

Institutional investors don't merely break even in class actions, the U.S. Chamber of Commerce study contends; they actually profit from them via a...
Stephen TaubOctober 27, 2005

A U.S. Chamber of Commerce study asserts that the outcomes of class-action lawsuits are stacked in favor of large institutions.

“The average American investor gets the short end of the stick in the securities class-action system as compared to large institutional investors,” says Lisa Rickard, president of the chamber’s Institute for Legal Reform (ILR).

Conducted for ILR by Navigant Consulting, the study argues that most institutional investors can actually profit from class-action settlements, rather than merely breaking even. It contends that they benefit from the gains of stock prices inflated by alleged fraud, combined with the compensation they get for losses suffered as a result of the disclosure of the alleged fraud.

In contrast to institutional investors, the portfolios of individual investors aren’t diversified enough to offset losses in stock value that follow allegations of securities fraud, added Rickard. She asserted that another big problem is that class members who remain invested in the defendant companies are the real losers. “The companies in which they’re invested pay settlement and legal fees, leaving the shareholder with devalued stock,” she added.

Just five law firms have collected more than $2.75 billion in fees in the past 10 years, Rickard noted. “We’ve seen a dramatic surge in the number of securities class actions because the plaintiffs’ bar has seized on this arena as another way to game the system for its own benefit,” she said.

Lawyers who file shareholder suits and executives of institutional investors took issue with the study, according to a story in The New York Times. “Our losses are very real,” Cynthia L. Richson, corporate governance officer at the Ohio Public Employees Retirement System, told the paper.

Plaintiffs’ lawyer William Lerach reportedly asserted that the study clearly implies that investors who gain from fraud-inflated share prices should be required to pay back those who lost money. But that would be a logistically complex task and one that would be unfair to fortunate investors who intended to do no wrong, he told the Times.