One of right-wing media's favorite myths about class action lawsuits -- their supposedly frivolous nature -- is now permeating respectable news sources.
On March 5, the Supreme Court heard oral arguments in Halliburton v. Erica P. John Fund, a case about securities class actions in which the conservative justices could make it practically impossible for average shareholders to effectively sue large corporations who distort the company's stock price through fraud. Plaintiffs in these lawsuits -- increasingly institutional investors like large pension funds -- have traditionally been able to join together as a class action to even the odds against these deep-pocketed corporate defendants.
Right-wing media have steadily pushed the myth that these types of equalizing lawsuits are ineffective or frivolous. For example, The Wall Street Journal editorial board has long stoked fears inaccurately and inconsistently about class actions, and has been highly supportive of the conservative justices' attempts to shut the courthouse doors to this type of collective action. In a recent editorial, the WSJ attacked the shareholder lawsuits at issue in Halliburton as "economically destructive" and beneficial only to plaintiffs lawyers, who have "dined out for years on the windfall of securities class-action suits."
Based on Supreme Court precedent, securities class action plaintiffs can file suits based on the "fraud on the market" theory. This is a 25-year-old legal doctrine that assumes for the purposes of class certification that all publicly available information is reflected in a company's stock price. Rather than forcing plaintiffs at this pre-trial stage to show that they relied on any one fraudulent statement made by a corporate officer, the fraud on the market theory assumes that in a relatively efficient market, those statements affected and unjustly inflated the company's stock price. These presumptions are later rebuttable at trial, where the merits of this alleged fraud can be litigated.
Pro-business groups like the U.S. Chamber of Commerce share the WSJ's point of view that despite these decades of precedent, shareholders should no longer be able to proceed to trial as a class in this fashion. In fact, the Chamber dedicated a day-long event to the Halliburton case, calling lawsuits based on the fraud on the market theory "a situation basically directly out of a Kafka novel" because it makes it too easy for plaintiffs to bring class actions. The Chamber has been clamoring for the Supreme Court to overturn Halliburton, at least in part because it contends securities class actions are meritless and abusive. Right-wing media frequently repeat the Chamber's spin to pretend class actions are an unjustified "cash cow for trial lawyers."
This myth has been pushed so aggressively that it has cropped up in well-respected publications like The American Prospect, which recently wrote that such lawsuits are "now routinely filed by class-action lawyers any time the stock price takes a sudden dive." The Prospect also argued that "most of these [lawsuits] are frivolous," without providing evidence to support that claim.
But as explained by a recent report from consumer advocacy group Public Citizen, right-wing media's class action myths "do not withstand scrutiny." Once again debunking these tired attacks, the report notes that the "description of securities class actions as abusive, lawyer-driven cases ignores that securities lawsuits are increasingly brought by large, professionally managed institutional investors." Public Citizen pointed out that criticisms of these suits are "overblown" and "exaggerated," highlighting the fact that institutional investors have no incentive to bring frivolous lawsuits:
[I]nstitutional investors have a long-term perspective that aligns their interests with those of the companies in which they invest. Institutional investors have no incentive to favor meritless securities litigation, which only harms their own investments, but they have a strong interest in policing fraud and enforcing the securities laws. Thus, it is telling that institutional investors strongly favor the [fraud on the market] presumption and that institutional investors representing millions of retirees and pension fund beneficiaries and trillions of dollars of assets under management filed two briefs in support of the fraud-on-the-market presumption in the Halliburton case.
The claim that securities lawsuits are abusive and meritless does not withstand scrutiny, either. The evidence shows that, even before legislative reforms enacted in 1995, securities lawsuits were generally meritorious. Since 1995, the meritorious nature of suits has only become clearer. Nearly two-thirds (64%) of class actions are resolved after a court has adjudicated a motion to dismiss, which is a preliminary legal indicator that the suit has some merit. If anything, the evidence is that "highly meritorious suits are brought, but settled for too little."
Finally, criticisms that attorneys' fees are too high are unsupported by the facts. Investors typically pay less than 20 percent of their recoveries to their attorneys, even though securities cases have substantial contingent risk and high litigation costs. This is substantially less than the 33 to 40 percent range of attorneys' fees for other kinds of contingency cases. Further, evidence also shows that fees in securities cases drop as a percentage as the amount of the recovery increases.
Moreover, according to the Public Citizen report, securities class actions help to deter fraud and protect investors who are, in fact, compensated in the event the class wins or settles its suit. Securities class actions also play a vital role in policing fraud in the securities markets because the Securities Exchange Commission "does not have the resources to assume exclusive responsibility for enforcing the securities laws." In other words, without private securities litigation, many investors who have been the victims of corporate fraud would have no remedy at all.
If the Supreme Court overturns the fraud on the market theory in Halliburton, plaintiffs could instead have to show that they relied on specific fraudulent statements or misrepresentations at the class certification stage, an inappropriate examination of the merits before the trial has even started. Furthermore, many institutional investors put money into multiple companies at a time, which would require them to unreasonably monitor thousands of pages of disclosures for potentially fraudulent statements. As the Public Citizen report points out, this could spell disaster for the stock market because "additional burdens could create less willingness to invest in companies or sectors with an unproven track record, distorting the securities markets and potentially reducing the funds available for innovative ventures."
The myth of the frivolous lawsuit providing huge paydays for plaintiffs' lawyers has been a favorite of right-wing media for years. As the Supreme Court mulls over the next big class action case that is Halliburton, it's crucial that this myth not make its way into legitimate outlets unexamined.