Large institutional investors, such as public pension funds, will increasingly abandon securities class actions to the detriment of defendant corporations and individual plaintiffs, according to John C. Coffee, law professor at Columbia University Law School and director of its Center on Corporate Governance.
The large investors will sue in state court, leaving individual investors to sue corporations as a class, said Mr. Coffee in remarks made Friday at Claremont McKenna College of Claremont, Calif., at a conference titled “The Future of Securities Fraud Litigation”.
The defendant corporations in class actions “have much to fear” from such a trend, he said.
For example, they could face more lawsuits in state court.
And individual investors could suffer if the large institutions – often the lead plaintiffs — opt out of class actions securities suits leaving them to fend for themselves
The first such case of institutional investors opting out of a class action securities lawsuit was in 2005, he said.
That’s when a group of state and local retirement funds and insurance companies withdrew from a class-action suit and recovered $651 million from the investment banks of WorldCom.
The individual plaintiff’s in a class-action against WorldCom received a $6.1 billion settlement, but attorneys at the time said the institutional investors had a rate of recovery that was up to 83% more that the amount they would have gained as part of a class-action suit.
One reason that such opt-out claims can potentially do better is the federal Private Securities Litigation Reform Act of 1995 does not apply in state courts, Mr. Coffee said.
Also, local courts — where judges are elected — can prove a more favorable forum for such claims, he said.