Institutional investors are taking the lead in a steadily growing number of securities class action lawsuits, judging from a new report.
The year-end study by RiskMetrics Group found that institutions acted as lead plaintiffs in 82 percent of the 100 largest securities class action settlements – a dramatic leap from 2005, when institutions headed just 56 percent of the top cases.
Institutional involvement in securities class actions got a boost from the Private Securities Litigation Reform Act of 1995, which directs courts to appoint the qualified investor with the largest loss to be lead plaintiff. Before that, judges often chose the first investor who filed a complaint, typically an individual, without considering his or her stake in the matter.
“Institutions are stepping up to the plate in increasing numbers, taking on the role Congress intended when it passed the PSLRA,” said Glen DeValerio, a partner in the firm’s Boston office. “In the last few years, we have seen more institutions actively seek to recover lost assets through the courts, particularly in the most egregious cases of fraud.”
The SCAS Top 100, as the RiskMetrics study is known, also showed that many of the very largest settlements since the PSLRA have occurred in the last few years, coinciding with the predominance of institutional lead plaintiffs. Seven of the top 10 settlements have occurred since 2006. In addition, six of the top 100 settlements were reached in 2008.
The parade of mega-recoveries continued this year with January’s approval of a $750 million settlement in a class action against Xerox Corp., which would rank 10th on the SCAS list. Berman DeValerio acted as co-lead counsel in the case, representing the Louisiana State Employees’ Retirement System.
Meanwhile, another study predicted securities class action filings would hit a six-year high in 2008, due to fallout from the subprime mortgage crisis and related financial meltdown. NERA Economic Consulting estimated in its December report that total filings in 2008 would reach 267 – 37 percent more than in 2007. That would be the largest annual total since 2002, two years after the Internet bubble burst. The rising trend is continuing this year.
Not surprisingly, the 2008 spike can be attributed primarily to the credit crisis, which featured the collapse or government takeover of the nation’s largest financial institutions. As of Dec. 14, 43 percent of the 255 cases filed at that time were credit related, almost triple the number from 2007, NERA said.
Settlement amounts declined, however. The median settlement was $7.5 million in 2008, down from $9.4 million in 2007. While investors have suffered unprecedented losses in the market downturn, the size of settlements in future cases may be limited in cases in which defendants do not have the deep pockets that could be tapped in better economic times.
“The subprime fiasco has prompted more lawsuits – and with good reason,” DeValerio said. “Now, more than ever, investors need expert advice to help them navigate the confusing legal environment spawned by the economic crisis and find ways to recoup the money they have lost as a result of wrongdoing.”
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.