Sunday, March 30, 2008
Accountability and Competition in Securities Class Actions: Why 'Exit' Works Better than 'Voice,' by JOHN C. COFFEE Jr., Columbia Law School, was recently posted on SSRN. Here is the abstract:
The consensus view has long been that the class action plaintiff's attorney possesses excessive discretion to prefer his own interests over those of the class. Critics have thus favored remedies such as the "lead plaintiff" provision of the Private Securities Litigation Reform Act ("PSLRA"), which in theory give class members a stronger voice. Empirically, however, such "voice-based" reforms appear to have had no more than a modest impact. But an alternative remedy appears to be more promising: "exit-based" reforms that seek to provoke greater competition between class counsel and attorneys soliciting class members to opt out of the class and file individual actions with them in state court. Unnoticed by academics, a major trend towards institutional investors opting out of securities class actions has developed over the past five years. More importantly, these opt outs appear to be recovering per share amounts that are a multiple of the class per share recovery. This development poses a variety of issues that this paper examines: (1) Do the opt outs gains come at the expense of those who remain in the class?; (2) Can defendants feasibly restrict opt outs and how should courts respond to such attempts?; (3) Are institutional investors under a fiduciary or ERISA-based duty to opt out?; and (4) Will greater competition produce greater accountability?