Articles
Why Isn't There More Outrage Over Corporate Misconduct? A Case for Institutional Activism
By Robert D. Klausner, Esq.
At our recent client conference, the 200 trustees and administrators present, numerous presentations were heard concerning the dramatic effect of the spate of corporate mega-frauds on the capital markets. More than $1 trillion in equity and bond values have been lost due to recent securities frauds. The question asked by many is: "Why isn't there more outrage?"
According to the Wall Street Journal, the number of corporations issuing public restatements (corrections) of their financial reports rose from an average of 50 per year between 1990 and 1997 to 330 in 2002. This reflects a clear failure on the part of corporate gatekeepers such as directors, auditors, analysts, and corporate lawyers to maintain integrity in the system of corporate checks and balances. More than 80% of the stock in public traded companies is owned by institutional investors, primarily retirement funds. These owners have, until recently, been passive observers and victims of systemic corporate fraud.
As noted by New York Attorney General Eliot Spitzer, a noted activist in reforming market behavior: "Institutional investors have a responsibility that flows from a very simple proposition. It's your money. You are the ones who have the capacity to stand up and say, 'we've had enough. You cannot take us for granted.'...You are the only folks who can get their attention."
Retirement plans who are victims of securities frauds have three choices:
- Do nothing and assume that others will file a class action claim to recover for the loss.
- File an individual state court claim to recover losses.
- Move to be named as a lead plaintiff in a federal class action under the Private Securities Litigation Reform Act (PLSRA).
Each of these options has pros and cons. Passive participants receive a recovery and a class member and are not required to participate in discovery, mediation or trial. On the other hand, passive participants have no control over the results of the litigation and whatever settlement is reached likely will bind the fund.
The filing of an individual state court action has been receiving interest in recent years due to the perceived simplicity of the case management over a complex class action. On the negative side, the presence of a single investor often lacks the necessary leverage to resolve a case and class actions often delay or even stay the resolution of individual state actions.
The class actions under the PLSRA have consistently had the highest recoveries at the lowest relative attorneys fees. They have also been successful in effecting changes in corporate governance to prevent recurrence of inappropriate behavior. The negative is that a lead plaintiff gets no greater recovery than a passive member of the class and has a fiduciary duty to the class because it has the authority to direct the lawyers and make all major decisions on the conduct of the litigation.
A number of large pension funds have expressed hesitancy in applying for lead plaintiff status. Without the willingness to challenge corporate misconduct, however, losses go unremedied and the illegality that has plagued corporate balance sheets and ultimately the securities is likely to continue. The PLSRA was designed to give institutional investors the power to vigorously challenge corporate greed and fraud and to secure a meaningful recovery. After one trillion in losses, why isn't there more outrage?
* * *