class actions, securities fraud, private litigation, settlements
The ongoing Great Recession has triggered numerous proposals to improve the regulation of financial markets and, most importantly, the regulation of organizations such as credit rating agencies, underwriters, hedge funds, and banks, whose behavior is believed to have caused the credit crisis that spawned the economic collapse. Not surprisingly, some of the reform efforts seek to strengthen the use of private litigation. Private suits have long been championed as a necessary mechanism not only to compensate investors for harms they suffer from financial frauds but also to enhance deterrence of wrongdoing. However, in recent years there has been a chorus calling for reform, singing a distinctly deregulatory tune and calling for serious restraints on private litigation as a vehicle for protecting investors. In this revisionist story, securities class action suits were cast as the villain that placed U.S. capital markets at a serious competitive disadvantage without producing any net benefits for institutional investors, whose trading makes them not only dominant participants in securities markets but also important beneficiaries of successful securities class action settlements. It is interesting to note, though, how quickly a crisis can change the discourse of public debate on the value of private litigation. Now it seems likely that reform will occur. While we are hopeful that the recession will ultimately abate, a significant question nonetheless remains: which of these two views of securities class actions should guide the formation of public policy with respect to the role of private litigation in the greater constellation of financial market regulatory mechanisms? In this Article, we provide evidence addressing this very issue.
James D. Cox et al., Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms, 158 University of Pennsylvania Law Review 1877-1914 (2010)