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An Empirical Study of Securities Litigation after WorldCom

David I. Michaels

Delaware Court of Chancery; UCLA School of Law

November 18, 2008

Rutgers Law Journal, Vol. 40, No. 2, 2009

In this article I present the first empirical study analyzing whether and to what extent In re WorldCom, Inc. Securities Litigation impacted class action litigation brought under Section 11 of the Securities Act of 1933, one of the securities laws' principal liability provisions. The study tests the hypothesis of an article I previously published in which I argued that WorldCom would encourage plaintiffs to increasingly utilize Section 11 as a means to obtain settlement awards in securities class action cases.

WorldCom, I argued, made it virtually impossible for outside directors to successfully assert Section 11's "due diligence" defense - an affirmative defense for parties involved in securities offerings who have completed the requisite investigation of the information disseminated to investors in connection with public offerings of securities - even though historically outside directors were held to a low standard. At the same time, outside directors' liability under Rule 10b-5, the securities laws' most broadly sweeping liability provision, has historically been negligible. Therefore, I concluded that plaintiffs would likely assert more Section 11 class actions relative to Rule 10b-5 actions. I described why this result is sub-optimal and proposed an effective solution. In this article, I test that hypothesis by utilizing empirical methodology, and conclude that there has been a statistically significant rise in post-WorldCom Section 11 class action flings relative to Rule 10b-5 class action filings. This supports the conclusion that the SEC should reexamine the Section 11 standard for outside directors.

Number of Pages in PDF File: 34

Keywords: Securities, Section 11, Rule 10b-5, Outside Directors, WorldCom, Shelf Offerings

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Date posted: November 29, 2008 ; Last revised: December 30, 2010

Suggested Citation

Michaels, David I., An Empirical Study of Securities Litigation after WorldCom (November 18, 2008). Rutgers Law Journal, Vol. 40, No. 2, 2009. Available at SSRN: https://ssrn.com/abstract=1303634

Contact Information

David I. Michaels (Contact Author)
Delaware Court of Chancery ( email )
United States
UCLA School of Law ( email )
385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
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