Feb 15th 2007 | NEW YORK
From The Economist print edition
Shareholder class actions are fewer in number, but bigger and
AFTER years of lost sleep over Sarbanes-Oxley and other post-Enron clampdowns, can America's
corporate chieftains finally stop fretting so much about the threat of shareholder litigation? Some of
them will be soothed by news that the Securities and Exchange Commission, the main financial-
markets watchdog, wants to make it harder for “professional plaintiffs” to win securities class
actions (in which investors band together to sue listed firms over accounting irregularities or abrupt
dips in the share price). Others will be lulled by the recent drop-off in filings of such suits.
Wake up. Alert executives will have noticed two things that should still keep them up at night:
settlements are much bigger than they were, and payouts increasingly come with strings attached.
Both developments reflect the rise of a more knowing and demanding kind of plaintiff.
Last year only 110 securities class actions were filed in America, well below the average of 193 for
the previous ten years, according to Stanford Law School and Cornerstone Research. But the
average settlement, at $65m, was much higher than in 2001-04 and only slightly below the peak of
$71m reached in 2005.
Dan Dooley of PricewaterhouseCoopers, an accounting firm, links this to the growing power of
institutional investors. Until a few years ago, the status of “lead plaintiff” was mostly awarded to
the first shareholder to file suit, usually an individual. But in recent years pension funds have
stepped into that role with increasing gusto, exploiting a law offering leadership to the investor who
has lost the most, not the one who sues first. Big institutions, including retirement funds and unions,
now front more than half of all cases, double their share of five years ago (see chart).
CalPERS, America's largest pension fund, has led several class actions over the past three years, the
latest being a case against UnitedHealth over its stock-option practices. The New York City
Employees' Retirement System, which manages $89 billion on behalf of municipal workers, agreed
last month to lead an options-backdating lawsuit against Apple. Nowadays, when S&P 500
companies are sued, a respected investor will almost always step forward to lead the disgruntled
And they lead them well. Cases fronted by unions, pension funds and mutual funds result in
settlements that are around one-third larger than those led by small fry, according to a recent report
by NERA, a consultancy.
One source of their success is the tight leash they keep on their lawyers. They often employ their
own advisers and are thus less willing to accept whatever deal counsel recommends. Plaintiff
lawyers are not above wrapping things up in a hurry when progress slows and they have other
battles to fight. The institutions are also better at squeezing lawyers' fees and their share of
settlements. As a result, some frustrated attorneys are going out of their way to avoid such
The more generous settlements may also be owing to big investors choosing cases more carefully to
start with. Unlike some small shareholders, they have better things to do than wage frivolous legal
battles. “Fewer lawsuits are being brought, but they are better,” says Stuart Grant, managing partner
of Grant & Eisenhofer, a law firm that specialises in securities cases.
Though CalPERS and its like are keen to punish corporate miscreants, they also have a higher
purpose: to improve behaviour. On top of the usual payouts, pension-fund plaintiffs increasingly
insist that companies reform their governance: bringing in more independent directors, reforming
executive-pay schemes, splitting the roles of chairman and chief executive, and even—in the case of
TXU, a utility—creating a chief governance officer. “They may want money, but they also want to
send a message,” says Adam Savett of ISS, a shareholder-advisory firm. Plaintiffs want chief
executives to take a good look in the mirror before they lie awake at night.
Torts and courts
Apr 10th 2008 | MADISON, WISCONSIN
From The Economist print edition
Life, liberty and the pursuit of a fair judiciary
JUSTICE is meant to be impartial. To this end, Britain's judges are appointed for life. In America
federal judges are as well. But in 39 states some or all judges must face election and re-election,
often with unbecoming hoopla. An election to the Supreme Court of the state of Wisconsin has just
involved about $5.5m and more than 12,000 aired advertisements. Habeas circus, one might say.
Michael Gableman defeated Louis Butler, an incumbent on Wisconsin's Supreme Court, on April
1st, and the cacophony has not yet subsided. The scuffle has revealed two worrying traits of
America's judicial elections.
First, they have become bitter contests. In 2006 91% of Supreme Court elections featured television
advertisements, up from 22% in 2000, according to New York University's Brennan Centre.
Second, the war over tort, or liability, reform has turned judicial elections into a nasty battlefield—
especially in those states where state Supreme Court justices are directly elected. Karl Rove, once
George Bush's Svengali, ascended in part by helping Texas businessmen fight trial lawyers for
control of that state's highest court. The most expensive judicial race in America's history, a $9.3m
fight in 2004, saw tort interests pour money into rival campaigns for a seat on the Illinois Supreme
In Wisconsin the signs are troubling. The state's new era of judicial elections began last year. A
series of rulings had galvanised corporate leaders, explains James Buchen of Wisconsin
Manufacturers and Commerce (WMC), the state's business lobby. In one ruling in 2005, the
Supreme Court overturned the state's caps on medical-malpractice cases. In another, the court ruled
that a plaintiff could sue several manufacturers when he did not know which (if any) had caused
In 2007 groups from all sides poured cash into a state Supreme Court race, spending $5.8m. In this
month's election one estimate is that the candidates together raised about $1m (Mr Butler outspent
Mr Gableman), while outside groups such as WMC and the teachers' union spent more than $4.5m.
This year's flood of money might have drawn less censure if it had spurred a proper debate on
judicial philosophy. It didn't. Mr Gableman's campaign produced an advertisement suggesting that
Mr Butler, a black man, had helped free a black rapist. An advertisement supporting Mr Butler
claimed that Mr Gableman was soft on paedophiles. Even WMC's advertisements were about crime.
Regardless of the tenor of the campaign, money may be undermining faith in the court. A recent
poll conducted for Justice at Stake, a group devoted to judicial independence, found that 78% of
respondents in Wisconsin believe campaign contributions influence judges' rulings.
The question is whether to change the new dispensation and, if so, how? Comprehensive legal
reform might help keep the tort war from seeping into judicial elections. But the elections
themselves are unlikely to be scrapped. More feasible would be to pass reforms, such as public
financing for campaigns or stricter rules to prevent conflicts of interest. In Wisconsin politicians
and Supreme Court judges all work beneath the state capitol's giant dome. It is getting hard to tell
the difference between them.