The Business of Securities Class Action Lawyering

73 Pages Posted: 9 Feb 2023 Last revised: 11 May 2023

See all articles by Stephen J. Choi

Stephen J. Choi

New York University School of Law

Jessica Erickson

University of Richmond School of Law

Adam C. Pritchard

University of Michigan Law School

Date Written: May 9, 2023

Abstract

Plaintiffs’ lawyers in the United States play a key role in combating corporate fraud. Shareholders who lose money as a result of fraud can file securities class actions to recover their losses, but most shareholders do not have enough money at stake to justify overseeing the cases filed on their behalf. As a result, plaintiffs’ lawyers control these cases, deciding which cases to file and how to litigate them. Recognizing the agency costs inherent in this model, the legal system relies on lead plaintiffs and judges to monitor these lawyers and protect the best interests of absent class members. Yet there is remarkably little data on the business of securities class action lawyers, leaving lead plaintiffs and judges to oversee this area without the tools to understand how it works.

This Article looks inside the black box of securities class action lawyering to explore the business behind these cases. Our study includes hand-collected data on all securities fraud class actions against public corporations filed between 2005 and 2018, a total of nearly 2500 cases. We find that the business of securities class action lawyering is far more complex than prior scholarship has recognized. Contrary to conventional wisdom, there are not two tiers of plaintiffs’ law firms; instead, there are multiple tiers of firms, each with its own client base, litigation patterns, and revenue model. Our study gives lead plaintiffs and judges the data and tools they need to understand these tiers and to compare the performance of the law firms within them. We also examine how these law firms are compensated, finding that judges’ fee awards fail to account for the difficulty of cases or the risk of non-recovery in any systematic way. These fees are crucial to ensuring that law firms pursue the right cases on behalf of shareholders, so we suggest ways that judges can use data to improve fee awards. As we will see, the path to reforming securities class actions starts with understanding the business behind them.

Keywords: securities fraud class actions, plaintiffs' attorneys, fee awards

JEL Classification: K22, K41

Suggested Citation

Choi, Stephen J. and Erickson, Jessica and Pritchard, Adam C., The Business of Securities Class Action Lawyering (May 9, 2023). NYU Law and Economics Research Paper No. 23-20, Indiana Law Journal, Forthcoming, U of Michigan Law & Econ Research Paper No. 23-023, Available at SSRN: https://ssrn.com/abstract=4350971 or http://dx.doi.org/10.2139/ssrn.4350971

Stephen J. Choi

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

HOME PAGE: http://rb.gy/y6mrqu

Jessica Erickson

University of Richmond School of Law ( email )

28 Westhampton Way
Richmond, VA 23173
United States

Adam C. Pritchard (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4048 (Phone)
734-647-7349 (Fax)

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