Class Action Reform: Lessons From Securities Litigation

One of the most damaging accusations made against class action litigation,
particularly securities litigation, is the claim that it is “lawyer-driven litigation.” In
the parlance of, among others, the proponents of the Republican Contract with
America, lawyer-driven litigation is inherently abusive.’ Recent reform efforts,
including the adoption of the Private Securities Litigation Reform Act (the “Reform
Act”),’ have been spurred by the effort to transfer control of litigation away from
lawyers and back to clients.’

One component of the Reform Act’s attack on abusive litigation was the
adoption of a lead plaintiff provision.’ By vesting control in the hands of substantial
shareholders, especially institutional investors, Congress attempted to reduce the
ability of plaintiffs’ lawyers to exercise control over securities litigation.’ This
approach typifies more general efforts to reform class action litigation. Criticisms of
recent developments in class action litigation have focused on the attorney-client
relationship and upon the agency costs created by the substantial control exercised by
the lawyer/agent’ in class action cases.’

This Article will evaluate both the theoretical underpinnings of the lead plaintiff
provision and the insights provided by its limited application to date. It will focus
upon the efficacy of encouraging institutional investors to participate actively in the
litigation process as a means to counteract lawyer-driven litigation. One possible
result of the lead plaintiff provision may be to transform securities fraud litigation
from prototypical small claimant cases into cases in which the active participants have
meaningful stakes in the litigation, but in which the needs and interests of the class
representative may diverge from those of the members it represents. By considering
securities litigation against the general backdrop of class actions, this Article will
explore the relative effects of lawyer control of the litigation process in small claimant
cases versus large claimant cases.

This analysis suggests two central insights. First, this Article questions the ability
of a lead plaintiff provision or other similar procedural reforms to effect a meaningful
change in the control of class action litigation. Second, the Article challenges the
purported value of client control. In cases in which the damages suffered by
individual class members are small, the value of litigation cannot be judged solely by
reference to class member recovery. A defense of the class action structure, in
securities cases as well as other class actions, requires a richer conception of the
litigation objectives than plaintiff compensation. Unless and until those objectives are
clarified, reform initiatives will be limited in their capacity to identify and remedy
abusive litigation.