Of all the Supreme Court opinions you've read and argued about this term, Halliburton v. Erica P. John Fund probably isn't one. But it could be vitally important to your retirement security. The decision, handed down in late June, places modest limits on lawsuits in which large numbers of investors sue a company after losing money on its stock. In practice, such suits -- known as securities class-actions -- are not limited to occasional, genuine fraud cases where investors get clobbered because of a company's management manipulating share prices. Since 1995, when Congress passed the Private Securities Litigation Reform Act, more than 4,000 of these cases have been brought, and more than 40 percent of corporations listed on the major American stock exchanges have been sued.
Such cases are so common because the evidentiary bar for plaintiffs has been so low. They didn't even have to show that they relied on or were even aware of a company's alleged misrepresentations. This is one reason most such cases were settled without trial. If the deck is stacked against your company, why not just pay the ransom and make the litigation go away?
|Securities class-actions have historically destroyed between four and six times as much wealth as they have distributed back to plaintiffs.|
The unanimous Halliburton decision may alter this balance in a little more positive direction. It allows companies facing such litigation to present evidence that plaintiffs were not harmed by an alleged misrepresentation in order to prevent a plaintiff class from being certified. This small and reasonable change may prompt companies to fight more frivolous claims instead of treating settlements as part of the cost of doing business.
Trial lawyers, who make about $1 billion per year from these lawsuits (and then give multi-millions to Democrats), claim that the suits reduce fraud and do little harm because they merely return wealth to the company's owners, the shareholders. But comprehensive data analyzed by the Chamber of Commerce's Institute for Legal Reform, long an advocate for reining in such lawsuits, suggests otherwise. Securities class-actions have historically destroyed between four and six times as much wealth as they have distributed back to plaintiffs.
ILR's study analyzed 1,456 such federal securities class action cases since 1996 that were settled out of court. The data show a massive imbalance between investors' recoveries in such cases and the aggregate shareholder losses they inflict. Plaintiffs recovered just $68 billion, minus attorneys' fees (which on average consume 18 percent of all settlements), whereas shareholders on aggregate lost $262 billion, or nearly four times as much, as a result of litigation driving down stock prices.
Including the broader universe of cases that were later dismissed or where settlements are still anticipated, the ratio becomes even more lopsided. ILR estimates that all such lawsuits past and pending have lost “at least” $701 billion for shareholders, while returning or promising to return just $109 billion to plaintiffs. In short, trial lawyers have created an enormous wealth-destruction machine that devours $39 billion per year, returns $5 billion to plaintiffs and generates $1 billion in legal fees. The Halliburton decision should be a wrench in its gears.