• What is securities litigation and why is it important to institutional investors?

    Securities litigation – actions alleging violations of federal or state securities laws – is one of the most important tools that institutional investors can use to recover assets lost through fraud or other corporate misconduct. While the Securities and Exchange Commission and the Department of Justice are the primary governmental regulators with respect to these issues, they do not have the resources necessary to prosecute most of the frauds that occur. Thus, it is critical that individual shareholders, and in particular institutional investors, initiate litigation on their own behalf (and on behalf of their fellow shareholders) to ensure that damages caused by fraud are remedied.


  • What is a securities fraud class action?

    A securities fraud class action is a special type of lawsuit, brought by an investor against one or more defendants, on behalf of the investor and all similarly situated investors (the “Class”), which seeks to hold defendants liable for an alleged fraud relating to securities. Such an action is managed by one or more plaintiffs, known as “lead plaintiffs.”


  • Who files securities class actions?

    The Private Securities Litigation Reform Act of 1995 (PSLRA) provides an incentive for institutional investors to serve as lead plaintiffs in securities fraud class actions and creates a presumption that such investors are best equipped to serve in that capacity. Indeed, studies have shown that cases in which institutional investors are lead plaintiffs tend to result in significantly higher recoveries. In 2007, the median settlement in securities class actions filed by institutional investors was $18 million, verses $6 million in cases with other kinds of lead plaintiffs.


  • On what grounds can an institutional investor file a securities class action?

    The Securities Exchange Act of 1934 gives shareowners the right to bring a private action in federal court to recover damages suffered as a result of securities fraud. The majority of securities fraud claims are brought under Section 10(b) of the Exchange Act and the accompanying Securities and Exchange Commission (SEC) Rule 10b-5. Section 10(b) prohibits fraud in connection with any purchase or sale of a security. Although Section 10(b) is extremely wide in scope, it requires proof that the misleading statements were made with “scienter” (either intentionally or recklessly). Section 11 of the Securities Act of 1933 is another important anti-fraud provision of federal law. This provision applies only to misrepresentations and omissions that are included in prospectuses or registration statements. A Section 11 claim provides important advantages over a Section 10(b) fraud claim. Most notably, Section 11 has no scienter requirement.


  • What does it mean for an institutional investor to be a lead plaintiff in a class action?

    Congress passed the PSLRA to encourage institutional investors to become involved in federal securities fraud class actions. Among other things, it requires notice to be disseminated once such a securities class action is filed to inform investors of the pendency of the lawsuit and of their entitlement, withing 60 days of the notice, to file a motion to be appointed lead plaintiff in the action.

    Under the PSLRA, the court is to appoint as lead plaintiff the member of the class "that the court determines to be the most capable of adequately representing the interests of class members." By focusing on the class member with "the largest financial interest" in the relief being sought through the class action, Congress clearly was targeting institutional investors who would have the resources to oversee and administer a lawsuit in order to maximize the recovery for the class.

    In evaluating whether to seek to be appointed as a lead plaintiff in a securities fraud class action, the institutional investor needs to weigh the pros and cons.  These, of course, differ depending upon the unique circumstances of each case.  Moreover, different institutions have different considerations.  Public institutions, for example, may perceive it to be advantageous to be recognized as an active entity that is strongly defending the financial interests of its investors rather than leaving this to others.


  • What are the advantages of serving as lead plaintiff?

    There are several advantages to serving as lead plaintiff for the class. Critical decisions are made by the lead plaintiff that can affect a fund's interest. First, the lead plaintiff plays a role in determining what claims can be alleged and how the class will be defined. The definition of the class circumscribes the time period covered by the class action. Second, the lead plaintiff has the responsibility, and the prerogative of choosing the attorneys who will act for the class. The primary question here is whether the investor believes that its interests will be better protected by being involved in a litigation, particularly where substantial losses have occurred, rather than allow another party, with their attorneys, to prosecute and settle the case. Third, the allocation of proceeds of a recovery is typically crafted by lead counsel and lead plaintiff, making the ability to draft the plan of allocation an important element of lead plaintiff position.


  • What are the factors not favoring becoming a lead plaintiff?

    The primary reason not to become involved as a lead plaintiff in a class action is that it takes time to properly oversee a litigation, with the plaintiff having to participate in discovery at least to the extent of producing relevant documents and making available an appropriate representative for a deposition to discuss the investment strategies and how the plaintiff decided to invest in the defendant corporation.


  • What are the alternatives to serving as lead plaintiff?

    Institutional Investors can sometimes win bigger recoveries by “opting out” and pursuing individual litigation. The decision to opt out, however, is complex and includes evaluation of the size of the client’s damages, the likelihood of a recovery greater than would be obtained through the class action, and the costs of litigation.


  • What is the fee structure associated with pursuing a securities class action?

    Pomerantz is willing to negotiate a fee structure with its clients on either a case by case basis, or as part of a retainer agreement, whichever is more appropriate for the client in question. Attorney’s fees are generally awarded by the court as a percentage of the benefit achieved by the attorneys for the class. These percentages vary depending upon, among other factors, the size of the recovery for the class and the length and complexity of the litigation. It is the court, after full notice to all class members, that ultimately determines what is a fair and reasonable fee.


  • What is an institutional investor's role once a securities class action has been settled?

    If an institutional investor has a large loss in a case and has elected to take no active role, that is, remain a class member in an action initiated by others, it is important that it evaluate the fairness of the settlement and the plan of allocation. Even if the settlement value is large, the fund's actual recovery can be a small portion of its losses because of the huge size of the class.  The following options are typically available to clients at the time of settlement:

    File an objection to the settlement and/or plan of allocation.  In some cases, the Plan of Allocation in a given settlement may not adequately compensate certain class members, even though their claims may be stronger than those of other class members.  A classic example of this is a case involving claims arising under Section 10b of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933.  Since Section 11 claims do not require proof of scienter, they are stronger claims and should be treated more favorably under a Plan of Allocation.  However, this is not always the case, and in such situations, a client would be well-advised to file an objection to the Plan of Allocation.

    Opt out of the class and pursue an individual action.  The decision to opt out is a complex one and includes evaluation of the size of the client's damages; the likelihood of increased recovery against giving up guaranteed money; the risk of no recovery; and the costs of litigation. 

    File a proof of claim and participate in the settlement.  While this may seem like a straightforward and simple task, many institutions are failing to collect monies owed to them in class action settlements.  In fact, a recent study found that less than 30% of [eligible] institutional investors file claims in securities fraud settlements. 






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