The Plight of the Individual Investor in Securities Class Actions

Abstract

Individual investors victimized by securities fraud have no voice in directing class actions brought on their behalf once institutional investors obtain lead plaintiff appointments. The same holds for state-level transactional class actions claiming breaches of fiduciary duty by boards of directors in connection with mergers and acquisitions. In theory, the interests of institutional and individual investors align, nullifying the need for a separate voice for individuals; one rationale for the lead plaintiff modifications of the Private Securities Litigation Reform Act of 1995 was that individuals would benefit from the sophistication of institutional investor lead plaintiffs. But in practice, individual investors’ interests in these actions often differ from, and may directly conflict with, those of institutional lead plaintiffs. The routine appointment of institutional lead plaintiffs without regard to these conflicts effectively elevates the interests of institutional over individual investors, running afoul of procedural requirements that lead plaintiffs be typical and adequate class representatives. This Article examines the recurrent conflicts between these two groups of investors and suggests that the best remedy is for courts to appoint representative individual investors as co-lead plaintiffs with institutional investors. This Article proposes a procedure for selecting such individual co-lead plaintiffs from the pool of sophisticated individuals who are likely to be class members.

Keywords: Private Securites Litigation Reform Act of 1995, securities fraud, class actions, selecting co-lead plaintiffs from the pool likely to be class members

JEL Classification: K22, K41