Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Saturday, July 18, 2009

Webber on Pay-to-Play in Securities Class Actions

Is 'Pay-to-Play' Driving Public Pension Fund Activism in Securities Class Actions? An Empirical Study, by David H. Webber, Center for Law & Business at New York University School of Law and Stern School of Business, was recently posted on SSRN.  Here is the abstract:

The emergence of public pension funds as frequent lead plaintiffs in securities class actions has prompted speculation that the funds’ litigation activism is driven by “pay-to-play”. “Pay-to-play” posits that plaintiffs’ lawyers make campaign contributions to politicians who control public pension funds; in return, the funds seek lead-plaintiff appointments and select the contributing lawyers as their lead counsel. This paper provides a comprehensive analysis of the securities litigation activity of 111 such funds from 2003 to 2006. The paper’s primary finding is that the percentage of politicians on a fund’s board correlates negatively with lead-plaintiff appointments obtained by the fund, whereas the percentage of fund beneficiaries on a board correlates positively with such appointments. These results suggest that the influence of “pay-to-play” on public pension fund securities litigation activism has been overstated. The substantial role played by beneficiary board members in driving the funds’ litigation activism is analyzed by the author in the context of prior literature comparing such board members to corporate managers with an equity stake in the corporation, and the possible influence of unions on such members. In light of these findings, the author criticizes legislation pending in Congress designed to curb “pay-to-play” in the securities class action context.

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