Institutional Investors Begin to Embrace Lead Plaintiff Role
Despite the benefits of serving as a Lead Plaintiff and despite Congress’s stated goal of trying to encourage more active participation by institutional investors in leading securities litigation, institutions appeared initially hesitant to seek Lead Plaintiff status. In the first two years after passage of the PSLRA, institutional investors served as Lead Plaintiff in only 17 out of 280 securities class actions – 6% of the total cases. More recent data, however, demonstrates that institutional participation as Lead Plaintiffs is increasing. Cornerstone Research has reported that institutions served as Lead Plaintiffs in roughly 30% of post-PSLRA cases through December 2003, a figure that Cornerstone described as a substantial increase from the pre-PSLRA participation rate. Pricewater-houseCoopers has reported that institutional investors represented 51% and 42% of Lead Plaintiffs, respectively, in all securities class actions filed in 2002 and 2003. With respect to union and public pension funds, in 1996, they served as Lead Plaintiffs in less than 3% of all cases filed but by 2003 the number had increased to 28%.
The primary reasons offered as to why institutional investors had been slow to embrace the idea of seeking Lead Plaintiff status revolved around the perceived costs associated with serving as a Lead Plaintiff and a general lack of awareness of securities litigation and the Lead Plaintiff role. An SEC study of the effects of the PSLRA in 1997 found that institutional investors identified concerns about costs they would face if they became Lead Plaintiffs, including the amount of time that they would need to spend to manage the case, the costs of investigating whether such claims are meritorious, reading the complaint, selecting lead counsel and actively overseeing the litigation and settlement of any cases. Lead Plaintiffs, however, are authorized to recover costs and expenses after a successful outcome in securities class actions. Under the PSLRA, a Lead Plaintiff serving on behalf of a class will be awarded reasonable costs and expenses, including lost wages, directly relating to the representation of the class. While passing the PSLRA, the House Conference Committee stated that “Lead Plaintiffs should be reimbursed for reasonable costs and expenses associated with service as Lead Plaintiff, including lost wages” and allowed the courts “discretion to award fees accordingly.” Courts have reimbursed Lead Plaintiffs for costs incurred for travel and lost business opportunities attributable to time spent representing a class. Additionally, institutional investor participation as Lead Plaintiffs has steadily increased since the PSLRA because more institutions have adopted portfolio and litigation monitoring services that enable institutions to be better informed of class actions where they may qualify as a Lead Plaintiff. For example, at no cost to the institution, Scott + Scott LLP’s PT+SM portfolio and litigation monitoring services inform the firm’s institutional clients of holdings that are affected by securities class actions and the potentially recoverable losses associated with each. Based on the amount of losses and the advice of counsel, institutions can then make an informed decision as to whether to seek Lead Plaintiff status. Scott + Scott’s PT+SM clients receive timely information concerning all securities class actions in which they are entitled to recover funds.