Pension funds and other institutional shareholders pursuing securities class-action lawsuits got a big vote of confidence from the Supreme Court in late June that could lead to more scrutiny of corporate and market practices, and more financial recovery, some experts say.
“It's a tremendous victory for investors because this type of litigation — and the threat of it — helps in keeping the markets clean,” said Lawrence Sucharow, chairman of law firm Labaton Sucharow LLP in New York, whose firm represents investors in such lawsuits.
The Supreme Court's unanimous June 23 ruling in Halliburton Co. vs. Erica P. John Fund Inc. largely upheld a 25-year-old legal precedent that allows class actions to go forward on the presumption that stock prices can be negatively affected by corporate actions or misrepresentations, but corporate defendants got an opening to rebut the suits at earlier stages of the case.
The goal of keeping the markets clean, as well as recovering substantial sums in class actions, led the Council of Institutional Investors to file an amicus brief signed by 20 of its pension fund members, including the $300.4 billion California Public Employees' Retirement System, Sacramento; the $184.8 billion California State Teachers' Retirement System, West Sacramento; the $176.2 billion New York State Common Retirement Fund, Albany; the $45.3 billion Colorado Public Employees' Retirement Association, Denver; and the Florida State Board of Administration, Tallahassee, which oversees $181.9 billion in assets.
“It's the first time that the Supreme Court acknowledged that this is the right place to be. This means that litigation is playing the role it is supposed to be playing,” said Jill Fisch, a securities law professor at the University of Pennsylvania Law School, Philadelphia. She and some colleagues surveyed large pension funds in 2005 about how they decide whether to get involved in such cases. Since then, she said, “We've seen a lot more awareness, lot more sophistication,” she said.
While the Supreme Court's unanimous decision was welcome news to investors who actively pursue class-action cases, it could mean more work for their lawyers, as the legal action shifts back to the lower courts.
The petition brought by Halliburton, Houston, and backed by numerous business groups gave companies some ammunition for challenging the forming of classes at the initial stage of a lawsuit, if they can argue that any misrepresentation did not affect the stock price. The legal precedent known as the “Basic” presumption “does not relieve plaintiffs of that burden” of proof, Chief Justice John Roberts, wrote in the opinion.
Still, said Mr. Sucharow, “it's basically a timing issue. You don't lose your right to take action.”
Michael McCauley, senior officer for investment programs and governance with the Florida State Board of Administration said the FSBA and many other public retirement systems have been very active in finding class-action suits to join to recover participants' losses from securities fraud.
“Most of our members have processes in place to do that,” agreed CII General Counsel Jeff Mahoney in Washington. But he noted that joining class actions is more typical than starting as lead plaintiff in a case, unless there is a lot of money involved or the pension system's corporate governance guidelines call for it.
“Pension funds are a critical piece of class actions,” said Mr. Sucharow, whose firm provides class-action monitoring and advisory services to more than 200 institutional investors representing more than $2 trillion in assets. “We counsel clients (that) you have to look where your losses were, and you have to evaluate (if you have a case). You may have an obligation,” he said.
Labaton Sucharow's pension fund clients get involved in class actions for various reasons, including being good corporate citizens and good fiduciaries, he said. For elected officials who serve on pension fund boards, “they get the benefit of informing their constituents that they're doing the right thing, protecting retirees.”
Then there is the money. Economic and financial impact consulting firm NERA Economic Consulting, Washington, found that in 2011, institutional investors were lead plaintiffs in 62% of securities class actions. In 37% of all cases, public pension funds were lead plaintiffs, and the result was higher awards. Compared to a median settlement in 2011 of $22.75 million for actions led by other institutional investors, the median settlement when led by public pension funds was $96.3 million.
But it's not just about money, said Mr. Sucharow. “There's also a generalized goal that we want the markets to be clean or cleaner. We try to get corporate governance reforms in the settlement. Those are enhancements if you can get them,” he said.
“The real value of securities litigation is the prevention of future frauds,” said Greg Smith, executive director of Colorado PERA. “Our focus is the deterrent effect resulting from an environment of management accountability for accurate and thorough financial reporting and public disclosures.” The Supreme Court's recognition of the legal groundwork for those actions “sends a message to companies regarding the ramifications for misleading the market and investors,” said Mr. Smith.
The decision is also good news for firms that service institutional investors, including securities law firms, economic modeling consultants and award recovery experts, who expect to see more business because of the ruling.
Keith Jamaitis, Stamford, Conn.-based senior vice president of sales and operations, with Battea Class Action Services LLC, which finds and delivers class-action awards to investors, sees the New York attorney general's recent pursuit of Barclays PLC over dark-pool trading practices as one hint of other growth areas. If the Securities and Exchange Commission also gets involved, “that will basically translate into lawsuits over shareholder damage,” said Mr. Jamaitis. “Follow the dark pool and trading conversations. It's not going to go well as the SEC peels back the onion. The pension funds are absolutely paying attention. That is going to be the tip of the iceberg,” he said.
According to Battea figures, roughly 200 securities class-action cases are approved each year, and roughly half are settled on ongoing basis. Altogether, the cases produce $14 billion of awards each year. Only $5 billion of those funds are distributed, which leaves roughly $9 billion in a reserve pool until claimants come forward; in some cases, states can claim those funds.
While some pension funds and their custodians or financial advisers might be looking to see if they qualify for any of the class actions or the awards, they could do more, said Mr. Jamaitis.
“We believe it's a fiduciary responsibility. They need to get comfortable with this process. It's just a matter of paying attention to servicing assets.”