Who Really Wins and Loses in Class-Action Securities Litigation?
Record, Journal, THE JOURNAL RECORD
Since 1995, there have been 755 separate cases of class-action securities litigation on allegations of companies inflating their stock prices due to fraud or untimely disclosure.
Although settlements from the cases totaled $25.4 billion, research from a professor at the Olin School of Business at Washington University in St. Louis shows that individual shareholders aren't receiving much benefit at all - in fact, if anything they're losing out.
"The majority of participants in securities class-action suits are institutional investors who trade more than $100 million a year," said Anjan Thakor, finance professor at the Olin School of Business.
"They don't have to pay for any gains they made from selling the inflated stocks, and once they're compensated for their losses they actually come out ahead," said Thakor. "Institutional investors are trading such a large volume. The net trading loss they suffer from buying inflated stocks is only 20 percent of their gross losses."
Of the more than 2,300 firms in the study, 40 percent realized a net benefit from the settlement proceeds."
The only way institutional investors might lose from buying inflated shares of stock is if they buy newly issued securities, Thakor said.
Thakor said that the Private Securities Litigation Reform Act of 1995 causes an asymmetry in how much benefit investors receive when companies act fraudulently.
"What's worse is that the system is set up so that one group of shareholders ends up suing another group of shareholders," Thakor said. "If I'm a shareholder who bought stock before the period where stocks were inflated, I can't take part in the litigation, yet I will essentially be paying the settlement to those investors who did buy inflated shares.
"It's a process of taking money from one group of shareholders in the company and giving it to another for some wrongdoing by the company," he said. …