Saturday, May 15, 2010
The Plight of the Individual Investor in Securities Class Actions, 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:
Individual investors victimized by securities fraud have no voice in directing class actions brought on their behalf once institutional investors obtain lead plaintiff appointments. The same holds for securities class actions brought at the state level claiming breaches of fiduciary duty by boards of directors in connection with mergers and acquisitions. In theory, the interests of institutional investors align with those of individual investors, nullifying the need for a separate voice for individuals; one rationale for the lead plaintiff reforms of the Private Securities Litigation Reform Act of 1995 was that individual investors would benefit from the sophistication of institutional investor lead plaintiffs. But in practice, individual investors’ interests in securities class actions often differ from, and may directly conflict with, those of institutional lead plaintiffs. The steady appointment of institutional lead plaintiffs without regard to these conflicts effectively elevates the interests of institutional over individual investors, running afoul of procedural requirements that the lead plaintiff be adequate and typical of the class. This paper examines the recurrent conflicts between institutional and individual investors in the securities class action context, and suggests that the best remedy for such conflicts is for courts to appoint an individual investor as co-lead plaintiff with an institutional investor. The paper proposes a procedure for selecting such an individual co-lead plaintiff from the pool of sophisticated individuals who are likely to be class members.