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The Impact of Institutional Investors as Lead Plaintiffs: A Key Provision of the PSLRA

by Randall S. Thomas
Lead Counsel |
The Private Securities Litigation Reform Act of 1995 ("PSLRA") introduced sweeping substantive and procedural changes for securities class actions

The Private Securities Litigation Reform Act of 1995 ("PSLRA") introduced sweeping substantive and procedural changes for securities class actions. One of its most important innovations was the introduction of the lead plaintiff provision. This section of the PSLRA creates a rebuttable presumption that the investor with the largest financial interest in a securities fraud class action should be appointed the lead plaintiff for the suit. It was adopted to encourage large investors that were injured by securities fraud to step forward to lead class actions against the perpetrators of these securities fraud violations.

In the thirteen years that have followed, a large number of financial institutions, such as public pension funds, labor unions, hedge funds and a host of other types of institutional investors, have stepped up to assume this important role. Although initially some institutions were reluctant to take on these responsibilities, recent estimates show that 60% of all securities fraud class action lead plaintiffs are institutional investors.(1) Given the success of the lead plaintiff provision in encouraging institutional involvement in securities fraud class actions, it is important to assess their impact on settlements and other important aspects of these cases.

Proponents of the provision claimed that there would be substantial benefits from having institutional investors serve as lead plaintiffs, including larger settlements and lower attorneys' fees for class counsel. While there are numerous examples where institutional lead plaintiffs have achieved large settlements in high profile cases and negotiated attorneys' fees' agreements that were advantageous to the shareholder class, it is only relatively recently that several academic studies using large data sets and sophisticated empirical techniques have confirmed the importance of institutional lead plaintiff participation as lead counsel.

For example, in an article published by the Columbia Law Review,(2) Professor James Cox and I were among the first to demonstrate empirically that the presence of an institutional lead plaintiff increases the size of securities fraud class action settlements. The increased recoveries observed when an institution serves as the lead plaintiffs are both economically and statistically significant. In our Columbia article, we find that for each one percent increase in provable losses, the settlement amount increases 0.26 percent, and if there is an institution as lead plaintiff, the settlement amount increases an additional 0.04 percent. This result supports the underlying theory of the lead plaintiff provision that more institutional investor lead plaintiffs should have a positive effect on settlement size in securities fraud cases.(3) Other studies have found similar results.(4)

In a subsequent paper in the Vanderbilt Law Review(5), Professors Cox, Bai and I broadened the scope of our analysis to include a much larger sample of institutional investors from the post-Enron period and separate variables for different types of institutional investors. In particular, we were interested in finding out if public pension funds, labor union funds, and other types of institutional investors, had differential effects on settlement sizes. This is a particularly important question given the large increase in the number of institutional investors appearing as lead plaintiffs, and the growing significance of labor union pension funds as lead plaintiffs.

Our results in the Vanderbilt article show a positive and significant impact on settlement size from the presence of a public pension fund, or a labor union fund, as lead plaintiff. However, the coefficient on the public pension fund dummy variables in more than twice the size of that on labor union funds, indicating a greater effect from the presence of public pension funds. The effect on settlement values of "other institutions" acting as lead plaintiffs is insignificant. It is important to note that this variable, "other institutions," is a residual category that contains a wide variety of types of investors, making it hard to sort out their individual effects on settlement values.

Overall, these results constitute a ringing endorsement of institutional investor involvement as lead plaintiffs in securities fraud class actions. They show that at least this piece of the PSLRA was well-designed and has been effective in assisting defrauded investors to recover more of their losses from securities fraud.


1 Laura E. Simmons and Ellen M. Ryan, Securities Class Action Settlements: 2007 Review and Analysis, Cornerstone Research, at 10.

2 James D. Cox and Randall S. Thomas, Does The Plaintiff Matter? An Empirical Analysis of Lead Plaintiffs in Securities Class Actions, 106 Columbia Law Review 1587 (2006).

3 Additionally, we found that the size of settlements increased with the amount of estimated provable losses, increases in firm market capitalization, the length of class period, and the presence of an SEC enforcement action.

4 Stephen J. Choi, Jill E. Fisch and Adam C. Pritchard, Do Institutions Matter? The Impact of the Lead Plaintiff Provision of the Private Securities Litigation Reform Act, 83 Washington University Law Quarterly 869 (2005); Michael A. Perino, Institutional Activism Through Litigation: An Empirical Analysis of Public Pension Fund Participation in Securities Class Actions, St. Johns' University Working Paper, available at (2006); Simmons and Ryan, supra note 1, at 10, 16.

5 James D. Cox, Randall S. Thomas and Lin Bai, There Are Plaintiffs...and There Are Plaintiffs: An Empirical Analysis of Securities Class Action Settlements, 61 Vanderbilt Law Review 355 (2008).