Securities laws For Individual Investors Are More Beneficial to Institutional Investors
US securities laws do more to benefit big institutional investors than the individual investors whom such laws were designed to protect, according to a study issued on Wednesday by the US Chamber of Commerce, America’s most powerful business lobby.
So litigation that compensates big institutions for losses on an individual stock may actually be overcompensating them for the effect of fraud overall, the study concludes.
The chamber – which is a long-term critic of shareholder class actions – issued its findings to coincide roughly with the 10th anniversary of the 1995 Private Securities Litigation Reform Act (PSLRA).
“The existing system frequently provides ‘compensation’ to large institutional investors even when they have suffered no real economic loss – indeed, they actually may have gained – from alleged securities fraud,” says the report’s author, Anjan Thakor of the Olin School of Business at Washington University.
“A litigation system so distanced from economic reality arguably cannot adequately serve the purposes for which it was initially created,” he said.
“The average American investor gets the short end of the stick in the securities class action system, as compared to large institutional investors,” says Lisa Rickard, president of the chamber’s Institute for Legal Reform.
But John Coffee, a securities law expert at Columbia Law School, says the study “should not be the basis for a sweeping condemnation of securities class action lawsuits”.
Institutional investors might be getting more than their fair share of class action settlements, but the amounts were small, Prof Coffee said. In 2004, he said the typical securities class action settled for only 2.5 per cent of the total amount lost by investors.
“If you’re looking at whether the securities class action performs any social function, it does very little in the form of compensation, but it can achieve some general deterrence. We would have more corporate fraud without these suits.”
Filed under Class Action
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