Class action lawsuits compensate harmed individuals and enforce public norms. However, restrictions preventing nonlawyer investment in suits distort the cases that make it into court and inflate attorney fees.
Top Class Actions investigates and helps investors recover money from lawsuits involving financial fraud, corporate wrongdoing, or other serious harm. Find out how you can join an investigation.
Greater Leverage for Investors
Securities class action lawsuits allow investors whose losses would be too small to justify their legal actions to aggregate their claims. Similarly, class actions enable consumer complaints to be filed against business entities engaged in systematic or deceptive practices that scam or harm consumers.
Moreover, the collective approach of class actions makes it economically feasible for investors with more minor losses to pursue their rights through litigation. This is because the attorneys’ fees for bringing and winning a class action are covered by a percentage of any judgment or settlement obtained, meaning that investors bear practically no risk.
Furthermore, shareholders who are required to vote on a proposal to approve a securities class action are likely to be more attentive and better informed when assessing whether the litigation has merit. This means that, if properly managed, shareholder-led investigations may make it easier for courts to weed out nuisance litigation while also providing investors greater leverage to achieve significant monetary recoveries through asset recovery.
Less Complexity for Lawyers
Aside from a few highly resource-intensive cases, most class action investigations are relatively straightforward for lawyers. Moreover, it is often more practicable for a single law firm to handle multiple issues on behalf of investors rather than individual investors filing their actions.
Investors are strongly incentivized to terminate securities class actions when they perceive them to be excessively costly. This incentive is magnified when the pivotal voter in a vote is a diversified institutional investor. Such voters balance their cost share of the litigation with the deterrent benefits to other investors—and, by extension, to the market as a whole.
However, when lawyers are allowed to seek outside financing for their class action lawsuits but attorneys’ fees are not set through a competitive process that accounts for a firm’s riskiness, rational attorneys focus on lower-risk suits, such as those that piggyback on regulatory action, instead of higher-risk alternatives involving more complex or novel claims.
This results in a distorted capital allocation, increasing attorney compensation and further enabling socially undesirable lawsuits. An open market in lawsuit financing would correct this problem by allowing financial investors to bid on a plaintiffs’ attorney’s share of the final judgment.
Less Risky for Investors
Investors can recover significant monetary losses through securities class action settlement opportunities. However, many investors miss out on these opportunities because they must file a claim promptly by the applicable law. Moreover, many advisers don’t have systems to assess and evaluate options to recover investment assets from class actions in the context of their stewardship obligations.
In the United States, there is a statutory presumption that the individual or institutional investor with the most significant financial loss from the class period will be appointed lead plaintiff. Then, a court-supervised auction determines the attorney fees and expenses for the litigation. This approach has the benefit of ensuring that attorneys’ compensation is tied to the case’s success.
In contrast, many jurisdictions outside North America require that investors affirmatively opt into active litigation at the inception of a case. Then, a process known as the “lead counsel auction” determines attorney fees and expenses for the patient. This structure can reduce incentives for lead counsel to prosecute a case robustly and limit the ability to recover damages for a class of investors.
Greater Recoveries for Investors
Investors in a class action can recover much greater compensation than their losses because the attorneys and their firm bear the litigation costs, leaving investors with only the nominal fee of becoming members of the class. This provides the leverage necessary to force a company to the negotiating table.
In addition, it is not uncommon for securities class actions to result in a judgment that benefits the capital market at large, such as more accurate securities prices. These benefits are generally diffused across the entire financial markets and, therefore, do not constitute a direct benefit to shareholders of a particular firm.
Our proposal considers these broader benefits when investors vote on the class action, which may lead to more informed votes than ex-ante proposals. For example, the institutional investors that make up the voting majority in a class action will have information on the allegations against the company, including the skill and reputation of the plaintiffs’ attorneys, the probability of recovery, and management’s role in the alleged misconduct. These factors will enable them to balance the cost of prosecuting the case against the deterrence benefits and potential compensatory returns from a settlement.
More Opportunities for Investors Outside the U.S.
Securities class actions allow a single investor or small group of investors to pursue claims against a firm on behalf of an economically similar group. Product liability and consumer class action lawsuits aggregate the claims of many consumers to hold business entities accountable for scams or harm that affect many individuals.
Depending on the nature of the case, these lawsuits can cost the firm in reputational terms. However, the deterrence benefits of the suit may outweigh these costs.
Conclusion
Investors with relatively small losses can become members of a class at practically no cost since a share of any recovery covers the attorneys’ legal fees. This makes class action cases an attractive option for investors with limited resources to hire lawyers to fight for their rights against a firm that has committed fraud.
Investors who invest in a class action investigation could receive payments within weeks or months of the commencement of the case. This is a significant benefit over waiting years for a judge to decide whether or not to pursue a claim.
