When I teach my students about what corporate and securities class action lawyers do, I try to present their role critically but fairly: I label them as claim entrepreneurs who (hopefully) have a disciplining effect on managerial behavior, but also often simply act as a tax on ordinary transactions and corporate behavior with no meaningful governance impact. I typically tell the story of the Hammer Museum in LA, as related by my business associations professor at UCLA, Steve Bainbridge; in essence, Armand Hammer used $89 million of Occidental Petroleum’s money to build a museum in his name. Class action lawyers, acting for the shareholders, brought a derivative suit against the directors. The lawyers were paid, but what was the benefit to the shareholders? The museum was to be renamed to acknowledge Occidental (it wasn’t), and shareholders were offered a “first look” at the museum when it opened, at the cost of only $40 a ticket.
The Private Securities Litigation Reform Act of 1995 created a presumption that the lead plaintiff in a given securities class action should normally be the shareholder with the most money at stake. The idea behind this was to put those with the most skin in the game in charge, in the hopes that they would do a better job of supervising their lawyers than the professional plaintiffs who were hired by Milberg Weiss. The significant positions held by pension funds in many public companies make them natural candidates for lead plaintiff status, hence the courtship of pension funds by class action law firms. Rather than eliminating potential conflicts of interest in class action litigation, however, the PSLRA generated different ones, as made clear in an illuminating speech by Edward Siedle. Here are a few of his important takeaways:
For years I’ve urged public pension officials to scrutinize the arrangements they enter into with class action law firms, just as they vet investment consultants, money managers, brokers and anyone else doing business with their funds. Nevertheless, scrutiny of lawyers by public pensions remains severely limited–and not just among pension officials.
For example, in 2009 New York Attorney General Andrew Cuomo who was going after allegedly crooked investment consultants for bribing their way into doing business with the state’s giant pension fund, stated that he would not subject class action law firms (from which he reportedly received large campaign contributions) to similar scrutiny for similar behavior.
Given that the Invasion of the Class Action Securities Lawyers is a very recent event—largely a phenomena of the new millennium – it is not surprising that the issues related to arrangements between these law firms and public pensions have yet to be adequately addressed. This is a new development in the world of pensions. . .
If you’re looking for lawyers to represent you when the next Enron scandal surfaces in the pages of the Wall Street Journal, these guys are very likely to be tough litigators up to the task. However, I wouldn’t necessarily call what these firms do “monitoring your portfolio for potential fiduciary breaches or violations of law.” Further, if all they’re doing is suing for widely-known wrongdoing, do you really need a monitoring arrangement at all? Simply hire firms on an as-needed basis.
It’s important for public fund boards to keep in mind the narrow services the class action securities law firms actually provide, as opposed to the expansive capabilities these firms often claim. Further, the contract between monitoring firms and public funds should reflect the actual services being provided “for free” and firms which are not performing pursuant to their contracts should be terminated. . . .Disclosure of political contributions and fee-sharing arrangements should also be required and fully understood by boards. Local counsel should be required to annually disclose any compensation, derived from any source, related to the pension.
The entire speech is well worth a read.