Georgia Professor Elizabeth Chamblee Burch has an essay out for the University of Cincinnati's Corporate Law Symposium, in which she argues that institutional investors may have problems serving as adequate class representatives in securities class actions.
As she acknowledges, this is a counter-intuitive position, but that hardly makes it wrong. We have grown used to thinking of institutional investors as "good" class plaintiffs  ever since the passage of the PSLRA, when Bill Lerach began to recruit them as named plaintiffs in securities class actions. But, as Professor Burch explains,
a divide often exists between institutional and individual investors such that the former, when acting alone, cannot adequately represent the latter. To briefly explain this divide, institutions are more likely than individuals to:
- trade in derivatives, which means that the institution may not rigorously pursue the litigation because even though it has a large voting stake in the defendant corporation, it lacks the risk of economic exposure;
- continue to own stock in the defendant corporation, which means the institution may exchange corporate-governance reforms for lower monetary settlements, whereas former shareholders would prefer to maximize their compensation;
- take litigation risks because less money is at risk vis-a-vis its overall wealth than would an individual who has lost her life savings (the so-called "peanuts effect"); and
- think that, because they own heavily diversified portfolios, fraud is just as likely to benefit them as it is to harm them over time and reason that it makes sense to avoid significant time investments and transaction costs in pursuing wrongdoing.
(Emphases added) Her solution (which she has advocated before): a lead plaintiff group.
Appointing a lead-plaintiff group solves the problem that Reynolds v. Sims paints starkly in political context: each citizen has a right to participate fully in state government and that right is "unconstitutionally impaired when its weight is in a substantial fashion diluted when compared with votes of citizens living in other parts of the State. . . ." Rule 23 assumes that a representative's self-interest overlaps with the interests of those she represents so that when she pursues her own interests, she benefits the class. Consequently, appointing a diverse, representative group with both individuals and institutions ensures equal access to voice opportunities, adequate representation, and due process in securities classes just as voting rights do in the political context.
As Professor Burch points out, this essay is not particularly new. She has written on these ideas before. But it is a quick, cogent take on one of the larger unaddressed problems in securities class actions. As such, it's well worth a read.