Does the Plaintiff Matter? an Empirical Analysis of Lead Plaintiffs in Securities Class Actions

The PSLRA's lead plaintiff provision was adopted in order to encourage large shareholders with claims in a securities fraud class action to step forward to become the class' representative. Congress' expectation was that these investors would actively monitor the conduct of a securities fraud class action so as to reduce the litigation agency costs that may arise when class counsel's interests diverge from those of the shareholder class. Proponents of the provision claimed that there would be substantial benefits from having institutional investors serve as lead plaintiffs. Now, ten years later, the claim that the lead plaintiff is a more effective monitor of class counsel in securities fraud class actions continues to be intuitively appealing, but remains unproven. In this paper, we inquire empirically whether the lead plaintiff provision has performed as projected. We break the lead plaintiffs into five categories: public pension funds; other institutional investors; single individual lead plaintiffs; aggregate groups of individual lead plaintiffs and groups containing both individuals and entities. Our data shows that courts fairly consistently favor financial institutions over other types of investors when there is a contest among them to be appointed lead plaintiff. We find that the public pension funds have much larger dollar claims than any of the other groups, and have the largest, or close to the largest, claims of any investors in the case in which they appear as lead plaintiffs. We then analyze a sample of 388 securities fraud class action settlements to further investigate the effect of the lead plaintiff provision. Our first hypothesis is that PSLRA and the lead plaintiff provision have increased the dollar amount of settlements in securities fraud class actions. Our results show that after controlling for estimated losses, market capitalization of defendant firms, the length of class period and the presence of parallel SEC actions, the dollar amount of post-PSLRA settlements are not statistically significantly different from those in the pre-PSLRA cases in our sample. We also find that the ratio of settlement amounts to estimated provable losses - which is the most important indicator of whether investors are being compensated for their damages - was statistically significantly lower in the post-PSLRA period. In other words, the lead plaintiff provision and the PSLRA may have made investors worse off. We next analyze the determinants of institutional investors' decision to become lead plaintiffs in the cases in our sample. Using a logit regression analysis, we find that institutions are more likely to become lead plaintiffs in cases involving larger provable losses, with longer class periods, with larger defendant firms, and when there is a parallel SEC enforcement action. Importantly, we find that the presence of an institutional lead plaintiff improves the securities fraud settlement, even holding constant estimated provable losses, firm market capitalization, the length of class period, and the presence of an SEC enforcement action. Third, we examine whether recoveries are significantly different among settlements when a single (non-institutional) plaintiff represents the class compared with the lead plaintiff being either an aggregation of individuals or a group comprised of individuals and a non-institutional entity. We find that the single individual lead plaintiff does best in the smallest cases, and performs worst in the larger cases. Groups perform relatively better than individuals in larger cases. Finally, we investigate press reports that institutions are aggressively lobbied by plaintiffs' law firms to appear as lead plaintiffs in "pay to play" schemes, with political contributions being made in exchange for institutional investors' agreement to become a lead plaintiff and select a preferred law firm as class counsel.