Does an Asset Manager Have Standing under the Federal Securities Laws?

Article excerpt

INTRODUCTION

In 1995, amidst much fanfare and after millions of dollars in campaign contributions, Congress enacted the first substantive amendments to the two cornerstone acts of the federal securities laws since they were passed in the 1930s.1 Entitled the Private securities Litigation Reform Act of 1995 (the "PSLRA"),2 one of its purposes is to attract large investors to serve as class representative and fill the newly created position of "lead plaintiff,"3 whose job it is to choose lead counsel and fulfill the other responsibilities of a class representative.4 The theory behind the lead plaintiff provision is that a plaintiff with a greater economic stake in the litigation would more effectively monitor and control lead counsel.5

What was left unclear in the PSLRA was exactly who would qualify as the large-investor plaintiff.6 Many people, and institutions, delegate responsibility for managing their money to asset managers or investment advisors.7 While title to the account remains in the name of the owner, the decisions concerning which securities to buy and sell and the actual execution of the orders is handled by the asset manager. Further complicating matters, an asset manager will sometimes have purchased the stock for the accounts of multiple clients, so that an issue arises as to whether the plaintiff is one person (the asset manager) or a group of persons (the asset manager's clients).

This Article will discuss the rationale behind including or excluding asset managers as lead plaintiffs or class representatives and the various approaches taken by courts in dealing with the issue.

I. THE PSLRA WAS INTENDED TO ENCOURAGE INSTITUTIONAL PLAINTIFFS TO STEP FORWARD

The legislative history of the PSLRA demonstrates that Congress intended to encourage large investors and institutions to serve as lead plaintiff.8 As the Statement of Managers in the Joint Explanatory Statement on the Committee of Conference for the PSLRA stated:

[The PSLRA] protects investors who join class actions against lawyer-driven lawsuits by giving control of the litigation to lead plaintiffs with substantial holdings of the securities of the issuer . . ..

. . . These provisions are intended to increase the likelihood that parties with significant holdings in issuers, whose interests are more strongly aligned with the class of shareholders, will participate in the litigation and exercise control over the selection and actions of plaintiffs counsel.9

. . . The Conference Committee seeks to increase the likelihood that institutional investors will serve as lead plaintiffs by requiring courts to presume that the member of the purported class with the largest financial stake in the relief sought is the "most adequate plaintiff."

. . . Institutional investors and other class members with large amounts at stake will represent the interests of the plaintiff class more effectively than class members with small amounts at stake.10

Similarly, the Senate report on the PSLRA states: "The Committee believes that increasing the role of institutional investors in class actions will ultimately benefit the class and assist the courts."11 An influential law review article cited frequently in the legislative history of the PSLRA makes the same points: "Institutional investors with large stakes in class actions surely are more capable than typical figurehead plaintiffs of effectively monitoring how plaintiffs' attorneys conduct such litigation."12 The article further states that "[institutions with the largest stakes in class actions are better situated than plaintiffs' attorneys or courts to protect class members' interests."13

The congressional goal in enacting the PSLRA was to encourage investors with a substantial stake in the litigation to serve as lead plaintiff and to provide input to the lawyers serving the class.14 When analyzing the question under section 10(b) of the Exchange Act, one court has held that "the rule in Blue Chip Stamps [requiring a plaintiff to be a purchaser] is not meant to exclude institutional investors and money managers, but rather should be interpreted broadly to include them as they are often the parties who make investment decisions. …