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Incentivizing Institutional Investors to Serve as Lead Plaintiffs in Securities Fraud Class Actions

28 Pages Posted: 20 Feb 2007  

Charles Silver

University of Texas at Austin - School of Law

Sam Dinkin

affiliation not provided to SSRN

Date Written: February 2007

Abstract

By enacting the Private Securities Litigation Reform Act of 1995 (PSLRA), Congress sought to put institutional investors in charges of securities class actions. In an important respect, this effort has failed. Although pension funds for public sector employees and labor unions often volunteer to serve as lead plaintiffs, private institutional investors do not. The participation of public sector and union funds may also reflect political contributions and ideological beliefs, rather than the PSLRA.

The passivity of private sector funds and the importance of ideology and political contributions as motivations for public sector and union funds reflects the incentives created by the PSLRA, which prohibits bonus payments for lead plaintiffs and encourages investors to free-ride.

This Article sets out three possible amendments to the PSLRA designed to give investors of all types selective incentives to serve as lead plaintiffs. One would give lead plaintiffs bonuses tied to the size of their holdings. The second proposal would sell 20% of the class-wide recovery to the class member willing to pay the most for it, while also requiring the lead plaintiff to pay half the class' attorneys' fees from this portion. The third proposal would auction off 30% of the recovery, while requiring the lead plaintiff to pay 100% of the class' attorneys' fees. The second and third proposals would encourage lead plaintiffs to set class counsel's fees at efficient rates.

Keywords: class actions, institutional investors, PSLRA, political contributions, attorneys' fees, auctions

JEL Classification: K22, K41

Suggested Citation

Silver, Charles and Dinkin, Sam, Incentivizing Institutional Investors to Serve as Lead Plaintiffs in Securities Fraud Class Actions (February 2007). Available at SSRN: https://ssrn.com/abstract=963853 or http://dx.doi.org/10.2139/ssrn.963853

Charles M. Silver (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
512-232-1337 (Phone)
512-232-1372 (Fax)

Sam Dinkin

affiliation not provided to SSRN ( email )

No Address Available

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