Securities Class Actions Need 'Repair,' According to U.S. Chamber White Paper

Monday July 28, 2008

Private securities class actions in the United States are threatening the health of American businesses and the strength of the nation's global competitiveness, and Congress must act soon to repair the system, a white paper released July 24 by the U.S. Chamber of Commerce's Institute for Legal Reform said.

According to the paper, entitled "Securities Class Action Litigation: The Problem, Its Impact, and the Path to Reform," the number and size of new private securities class actions continue to increase rapidly.

New lawsuits increased 58 percent in 2007 over 2006, and the number of new filings during the first half of 2008 grew nearly 60 percent compared to the same period last year, the paper said. At the same time, the average estimated losses in terms of the decline in market capitalization of the defendant companies nearly doubled in 2007 compared to 2006.

Settlement Amounts

In addition, settlement amounts for such lawsuits are now in the billions and growing, the paper said. The total value of securities class action settlements in 2007 was almost 15 times greater than the total settlement amounts for 1998. In 2006 alone, settlements amounted to some $17.6 billion, the paper said.

"Excluding billion-dollar plus settlements, the average settlement in 2007 increased approximately 43 percent from the previous year," it said.

According to the paper, much of the settlement amounts are paid to plaintiffs' lawyers and other middlemen, who earned almost $17 billion from securities cases in the last 10 years. The paper noted the recent prosecution of attorneys from Milberg Weiss LLP, stating that the "systemic failures of private class action litigation are exacerbated by trial lawyers who have hijacked the class action mechanism and abused it for profit."

Kickback Scheme

On June 2, Milberg Weiss co-founder Melvyn I. Weiss was sentenced to 30 months in federal prison, forfeiture of $9.75 million in illegal profit, and a criminal penalty of $250,000 for his role in a decades-long secret kickback scheme with plaintiffs in class action lawsuits (106 DER A-21, 6/3/08 ). The law firm admitted that senior members participated in the scheme that brought in some $239 million in legal fees from more than 165 lawsuits (117 DER A-5, 6/18/08 ).

According to the paper, an average of 261 federal securities class action cases were filed yearly between 1998 and 2007. Since 1996, at least 2,758 public companies, or 41 percent of the 6,000 companies presently listed in the three major U.S. stock exchanges, were named as defendants in at least one federal securities class action, it said.

The ILR paper noted that securities litigation is driving up the costs of doing business in the United States, and driving away potential investors and foreign companies. In 2006, the U.S. exchanges attracted only about one-third the share of global initial public offering volume it attracted in 2001, it said. "This trend is only worsening: through the end of 2007, the U.S.'s share of global IPO proceeds dropped to 20 percent."

The paper added that the costs of defending against securities class actions have contributed to skyrocketing insurance costs in the United States. It noted that insurance costs for a Fortune 500 company in the United States are more than six times higher than in Europe.

Reform Urged

The paper called for "[c]ommon sense reform measures" for litigation in this area. Among other recommendations, it suggested:

enacting the Securities Litigation Attorney Accountability and Transparency Act to target abusive attorney fee practices;

requiring detailed documentation and verification of clients' alleged losses;

encouraging the use of arbitration procedures; and

coordinating with the Securities and Exchange Commission's Fair Funds authority to ensure that damage awards are offset by funds collected by the SEC to compensate shareholders.