Professor Grunfest on Securities Class Actions

Professor Grunfest of Stanford has an editorial in the Wall Street Journal noting the surprising falloff in securities class actions filings since 2005.  He argues that the best explanation for the decline in filings is that, in response to Sarbanes-Oxley perhaps, managers are behaving better.  He dismisses as not "holding water" my view, expressed in an earlier blog, that the difficulties of the country's two largest plaintiff law firms, once joined, are to blame.  Milberg Weiss & Bershad split with Lerach, Coughlin et al. a few years ago. When joined the firms filed over 60 percent of the country's class action suits and apart the two firms combined continued to dominate the market with similar numbers.  Cooperman, a named plaintiff in over 70 lawsuits by the firms, pled guilty to accepting kickbacks of over $6.4 million.  Two lawyers in Milberg have been indicted and there is speculation on whether Milberg and Lerach, the two founders are under investigation.  The charges have caused both firms to lose clients and to lose partners and associates.  Professor Grunfest argues that there are many more plaintiff's firms out there ready to take over whatever cases could be brought.  I think he overlooks the barriers to entry in the business.  Plaintiff firms have to be very-well financed and very-well staffed;  they take substantial risks on a portfolio of cases, carrying the costs of each, and hoping that some will come in and pay for those that do not.  This is not for the faint of heart.  The firms also must have reputations for success that attract shareholders who are willing to named plaintiffs.  Bankrolling the very largest cases, against multiple determined and well represented opponents, is not something any small plaintiff's firm can do.  I think he underestimates the difficulty of starting and maintaining a successfully law firm that does the very largest cases.  New firms will emerge but it will take time, and we will see the class actions come back.  As evidence for my position, I note that the earnings restatements are down only slightly but that the percentage of earnings restatements that have immediately stimulated securities class actions seems to have declined (my data is anecdotal however)