Professor James D. Cox
Brainerd Currie Professor of Law
U.S. House of Representatives Committee on Financial Services; Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, June 28, 2006
Cox challenged proposals to reform the conduct of securities class actions in H.R. 5491, “Investor Protection: A Review of Plaintiffs’ Attorney Abuses in Securities Investor Protection”:
H.R. 5491 … embraces three distinct provisions: a modification of the present procedures and substantive standard for imposing costs on the plaintiff or his/her attorney, disclosure of conflicts of interest(s) the plaintiff may have with respect to the suit, and authorization for auctions and other mechanisms for the selection of counsel to be considered by the presiding judge.
… Simply stated, we don’t know what the right number of suits in any year is or should be. Rather than focus too much on that number, it is far wiser to focus, as the Congress did in the Sarbanes-Oxley Act of 2002, on how best to strengthen the financial reporting process.
My co-author, Randall Thomas, John S. Beasley II Professor of Law and Business, Vanderbilt University Law School, and I have carried out a series of empirical studies of securities class action settlements. See e.g., Cox & Thomas, SEC Enforcement Heuristics: An Empirical Inquiry, 53 Duke L. J. 737 (2004); Cox & Thomas, Public and Private Enforcement of the Securities Laws: Have Things Changed Since Enron?, 80 Notre Dame L. Rev. 893 (2005); Does the Plaintiff Matter?, Cox & Thomas, An Empirical Analysis of Lead Plaintiffs In Securities Class Actions, working paper (May 2006) Our data set now includes several hundred settlements dating from 1990 through spring of this year. … [O]ur work documents that most settlements involve significant sums of money, with the median settlement in the post-PSLRA era approaching $6 million (median settlements attracting institutions as lead plaintiffs yield settlements more than five times as large as settlements not involving institutional lead plaintiffs) and suits consistently reflect large provable losses per the economic model we use in our analysis. Our data clearly reflects that significant sums are recovered in securities class actions.
If investor protection and sparing American business needless expenses are the focus of this committee’s efforts, it is doubtful that H.R. 5491 will achieve much toward that goal.
The chief disquiet arising from our work is the evidence we have gathered that financial institutions for a variety of reasons fail to submit claims in settled securities class actions. Our study of settlements prior to 2002 reveal that approximately 70 percent of the financial institutions with claims in settled securities class actions do not submit them. See Cox & Thomas, Letting Billions Slip Through Your Fingers: Empirical Evidence And Legal Implications Of The Failure Of Financial Institutions To Participate In Securities Class Action Settlements, 58 Stan. L. Rev. 411 (2005); Cox & Thomas, Leaving Money on the Table: Do Institutional Investors Fail to File Claims in Securities Class Actions?, 80 Wash. U. L.Q. 883 (2002). Our articles suggest means to easily remedy this problem. We believe our suggestions are worthy of this committee’s and the SEC’s attention since it would assure that those harmed by securities fraud equally participate in the settlements.
If investor protection and sparing American business needless expenses are the focus of this committee’s efforts, it is doubtful that H.R. 5491 will achieve much toward that goal. … Indeed, it is quite likely that H.R. 5491 will have totally unintended consequences of actually increasing the defendants’ cost of litigation.