It turns out that Elizabeth Chamblee Burch is not the only law professor currently worried about adequacy in securities class actions. Boston University law professor David H. Webber has an article in the Northwestern University Law Review on The Plight of the Individual Investor in Securities Class Actions.
While Professor Burch was concerned with whether or not institutional investors were adequate representatives on their own, Professor Weber is more concerned with whether they can ever represent individual investors. In particular, he sees three conflicts that may be insurmountable:
- Derivatives trading. Institutional investors tend to engage in derivatives trading; individual investors less so. Derivatives trading may mean that institutional investors do not suffer the same losses as individual investors, or face the same risks. More importantly, it may subject them to unique defenses, such as a lack of reliance. (Basic, Inc. v. Levinson did not do away with the reliance requirement in securities fraud, it just allowed a court to presume reliance from stock price. If a derivatives trader has not relied on the stock price …)
- Governance reforms. Webber notes that institutional investors are more likely to seek corporate governance reforms as part of their settlements. And, as he points out, if an investor accepts governance reform as part of a settlement package, it is usually in exchange for less overall money. Institutional investors who are repeat players may very well prefer the governance reform. Individual investors may prefer the cash.
- Merger class actions. Finally, institutional investors are far more likely to be on both sides of a merger transaction, a situation that may well disqualify them from representing a class challenging the approval of a merger.
Professor Webber's proposed solution is to pair up individual investors with institutional investors. (Which is not too far off from Professor Burch's "plaintiff group" proposal.) But his critique, especially when coupled with Professor Burch's, and with the circularity problem in securities class actions, raises the question of whether securities fraud cases are appropriate for class treatment after all. Meanwhile, however, his specific discussions of the problems with institutional investors can provide defense lawyers with additional ammunition to fight certification in less meritorious cases.