An Empirical Study of Securities Litigation after WorldCom

Abstract

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.

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