Tuesday, July 21, 2009

ERISA as an Explanation for Drop in Securities Class Actions

Graphup Ashby Jones writes over at the Wall Street Journal Law Blog:

It’s bad news for plaintiffs’ lawyers as well as for the big law firms that defend them: Securities-related class-action suits are down. According to a report by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research, filings in the first half of 2009 declined by more than 22% from the levels set in the first half of 2008.

The reasons behind the drop aren’t particularly hard to finger. According to this NLJ story, the decline is partly reflected in the fact that the largest financial firms — a big target of the latest wave of securities suits — were sued en masse in 2008, as the credit crunch and ensuing economic meltdown were in full swing. Another possible factor: securities-fraud suits tend to get filed in the wake of swift stock drops. While the market levels are still well down from highs hit in earlier in the decade, they’ve largely stabilized when compared to last year.

I want to suggest another possible explanation, first developed in this law review article back in 2006: What's Up on Stock Drops? Moench Revisited, 39 John Marshall L. Rev. 605 (2006). That article points out what I have often felt: ERISA breach of fiduciary class actions are easier to win than the securities class actions. 

Here's what I wrote on this blog back in September 2008 about this:

I have written abut this type of stock drop litigation before.  The issues at the forefront are how ERISA is overtaking securities as the litigation vehicle of choice by plaintiffs who suffer stock losses and how these cases almost never make it to trial because the firms being sued are forced to settle if certification of the class is granted by the court.

Given the financial pain being felt by everyone these days, and with little hope of an end being in sight, I would suspect courts to either cut down on certification of these classes or for a movement by the corporate lobby to amend ERISA to cut down on these types of suits.

These new empirical findings about securities suit convince more of this dynamic.  It would be interesting to see whether the number of ERISA class actions have gone up this year.  For more on this topic, see this article and my comments to it.

PS

https://lawprofessors.typepad.com/laborprof_blog/2009/07/erisa-as-an-explanation-for-drop-in-securities-class-actions.html

Pension and Benefits | Permalink

TrackBack URL for this entry:

https://www.typepad.com/services/trackback/6a00d8341bfae553ef0115712c3644970c

Listed below are links to weblogs that reference ERISA as an Explanation for Drop in Securities Class Actions:

Comments

Paul,

First, among attorneys who litigate these claims the phrase "stock drop" is a pejorative term applied by defense counsel -- not a neutral description of this type of case. Second, all these claims that ERISA employer stock cases are the new securities action and (implicitly and explicitly) need to be curtailed overlook an important distinction between employer stock cases and garden-variety securities actions: ERISA only protects employees who have invested in employer stock in their retirement plans. It's not as though any investor can initiate an ERISA breach of fiduciary duty claim to remedy wrongs or cause trouble. Also, employers can easily protect themselves from this type of liability if they would simply stop hitching their employees' retirement to the same wagon as their employees' day-to-day income. Employers who, in their capacities as ERISA fiduciaries, cause their employees to invest in their own stock are intentionally creating a conflict of interest and should not be surprised to get sued when it all goes to hell.

Also, your point about class certification is incorrect. These cases are always brought on behalf of the plan as a whole, and the remedies always flow to the plan, not individual participants. Class cert, while it is routinely sought (to facilitate notice to class members) and granted (because these cases typically meet the Rule 23 standards), is not legally necessary for a participant to bring a claim on behalf of the entire plan. So class cert does not really create any additional settlement pressure for the defendants.

Posted by: kpj | Jul 22, 2009 11:22:14 AM

Thanks for the response, kpj. Can you explain in what way "stock drop" is perjorative - not sure I follow. Isn't a stock going down usually involved in these cases?

Of course you are right about there needing to be company stock in an employer's retirement plan for there to be an ERISA action. But that is frequently the case. The statistics show that employees, regardless of investment education to the contrary, still place much of their money into their employer's stock because they believe they have "inside knowledge." So although garden-variety securities claim do not magically morph into ERISA claims, a lot of them do qualify for ERISA treatment. But I do agree that employers may not want to provide their own stock as an option as part of a 401(k) menu of investment choices in the future because of the lack of "diversification" for their employees potential income.

As to class actions, the individual can only sue on behalf of the plan under Section 502(a)(2). In those cases, you are right that class certification is not required, but many plaintiff lawyers seem to do this anyway with the thought that certification might make it difficult for the company to fight it to the end because of the potential liability involved. I am not criticizing this tactic, I am just observing what I have seen in the past. I disagree with your assessment that certification does not create any additional pressure.

And I take issue with your statement that these types of class actions are "always" brought on behalf of the plan. I don't think that is right. Although not as fertile because of remedial limits, 502(a)(3) class claims can be brought for individual relief in this setting. Additionally, 502(a)(2) relief may be available through a class action device for groups of individuals who sue on behalf of their own 401(k) plans a la LaRue - much like they would in individual claims. In any event, remedies don't always flow to the plan in these cases.

Finally, and by anecdote, I might point out that a friend of mine whose firm tries many of these cases indicates that these ERISA cases may not in fact be any more successful than their securities counterpart. He tells me that many have lost on summary judgment or lost at trial. He also points out that they tend to be difficult cases to keep going because some judges see them as end-runs around securities law limitations.

Posted by: Paul | Jul 22, 2009 3:08:24 PM

Post a comment