Piling On? An Empirical Study of Parallel Derivative Suits

Abstract

Using a sample of all companies named as defendants in securities class actions between July 1, 2005 and December 31, 2008, we study parallel suits relying on state corporate law arising out of the same allegations as the securities class actions. We test several ways that parallel suits may add value to a securities class action. Most parallel suits target cases involving obvious indicia of wrongdoing, indicating that parallel suits do uncover additional targets. Moreover, we find that although a modest percentage of parallel suits are filed first, over 80% are filed after a securities class action (termed “piggyback” parallel suits). Although we do find that parallel suits, and in particular piggyback parallel suits, sometimes target individual officers not already named as defendants in the securities class action, suing more officers do not positively correlate with an increase in settlement incidence, monetary recovery amounts, or attorney fees. Parallel suits sometimes result in settlements when the corresponding class action is dismissed; however, only rarely do the parallel suit settlements provide monetary recovery for investors. We find that piggyback parallel suits often result in non-monetary, corporate governance settlements, particularly for frequent filing plaintiffs’ attorneys. Corporate governance settlements correlate with significantly lower attorney hours and attorney fees for the plaintiffs’ attorneys. We conclude that such settlements are used to justify fees in cases where there is no monetary recovery.

Keywords: Derivative suits, securities class actions

JEL Classification: K22