Reforming Securities Class Actions from the Bench: Judging Fiduciaries and Fiduciary Judging

The politicians' rhetoric seemed promising enough. With corporate scandals making front page headlines and defrauded investors facing hundreds of billions of dollars in losses, legislators vowed to "help defrauded investors to recoup their losses."1 The Bush Administration similarly promised "to put the bad guys in prison and take away their money."2 Seeking to calm the traumatized stock markets and anticipating voter outrage, the election-year Congress expedited, and President Bush signed into law, new antifraud legislation. This legislation, the Sarbanes-Oxley Act of 2002, attempts to strengthen the authority of the Securities and Exchange Commission (SEC) and to deter future wrongdoing by corporate executives and accountants through a variety of new regulations.3 However, in their lawmaking efforts, federal legislators largely ignored questions about whether and how injured investors would get any money back. Now, with fresh reforms in the statute books, public attention has turned from Capitol Hill to the courts, where federal judges face the largest number of investor class actions ever filed.4 The plaintiffs' bar has invaded, seeking hundreds of billions of dollars on behalf of shareholders of some of this country's largest publicly traded corporations-Enron, WorldCom, Tyco, Johnson & Johnson, Merck, Time Warner, Motorola, and HealthSouth. The list grew longer each month in 2002 and early 2003.5 Plaintiffs' lawyers filed a record 261 class action fraud complaints last year, including claims against seven of the thirty companies comprising the Dow Jones Industrial Average and against one out of every eight corporate constituents of the Standard & Poor's 500 index.6 With an unprecedented number of large-cap companies restating their financial results7 and spawning new investigations by the bigger-budget SEC,8 more "megasecurities litigation"9 has flooded the federal courts than ever before. Decisions made by the judges overseeing this maelstrom of lawsuits not only will attract continued attention from the media, but these cases also likely will alter the jurisprudence of securities law enforcement for years to come, generating fodder for legal academics. As in the past, most scholars will focus their work on the deterrence impact of private litigation.10 At the end of the day, however, we also should inquire about the results actually achieved for the victims of the fraud. How much money will shareholders injured by deceptive accounting and management practices receive as compensation for their losses? Will these class actions merely transfer wealth from corporate wrongdoers and their insurers to opportunistic plaintiffs' lawyers? Certainly the lawsuits hold the promise of enormous potential profits for class counsel. As a general matter, the larger the company sued (as measured by market capitalization), the larger the losses suffered by the putative class, and the larger the potential settlement fund.11 In 2002, more than half of all securities class actions generated attorneys' fees of 25% or more of the settlement funds amassed.12 Assuming that a megacase settles for $100 million, plaintiffs' counsel could expect to receive $25 million for their litigation services. In fact, a number of the pending megacases likely will settle for well over $100 million. Eight megasecurities class actions recently settled for more than $200 million each.13 From these settlement funds, plaintiffs' counsel applied for awards of "mega attorneys' fees," receiving as much as 20% of the funds recovered through settlement.14 One insurance industry analyst recently estimated that thirty-six of the one thousand securities class actions currently on file in the federal courts will settle for more than $500 million each.15 If class counsel receives court-ordered fee awards of just 10% of such settlement funds, critics of private enforcement certainly will have new ammunition in their war against the plaintiffs' securities bar. …