When Congress enacted the Private Securities Litigation Reform Act (PSLRA) in 1995, it aimed to address perceived abuses in securities class action litigation. Among the ills Congress sought to address was the prevalence in securities litigation at the time of “professional plaintiffs” — that is, repeat players who lent their names to lawyer-driven lawsuits without performing any oversight or monitoring of the litigation or of the lawyers. In the PSLRA, Congress put limits in place to try to curb these frequent filers. The reality is that these limits have not worked. As is well documented in a new paper from the U.S. Chamber of Commerce’s Institute for Legal Reform entitled “Frequent Filers Revisited: Professional Plaintiffs in Securities Class Actions,” repeat plaintiffs remain an unfortunate feature of securities litigation today, with many of the same ill effects Congress intended to remedy.


The paper, which was written by New York University Law School Professor Stephen Choi, University of Richmond Law School Professor Jessica Erikson, and University of Michigan Law School Professor Adam Pritchard, details the extent of the frequent filer problem in current securities litigation, and proposes a number of reforms to address the issue. The April 21, 2022 paper can be found here.


When Congress enacted the PSLRA it specified that no investor should serve as lead plaintiff in more than five securities class actions in a three-year period. In order to study how this rule has worked in practice, the authors analyzed a data base of 2,512 federal court securities class action lawsuits filed between 2005 and 2018. Based on their analysis, the authors concluded that the curbs Congress put in place have not worked as Congress intended.


Indeed, as anyone watching securities litigation these days knows, the same names show up again and again in securities suits. The authors identified two particular aspects of the problem; the prevalence of repeat individual claimants in merger objection litigation, and the significant involvement of a small set of institutional investors in traditional securities class action litigation.


With respect to the M&A litigation, the authors found that frequent filer individuals predominate. These individuals have “turned merger litigation into a volume business,” filing dozens of cases a year, with the same law firms involved filing “cookie-cutter complaints.” These cases “rarely lead to any meaningful benefit.” Indeed, the authors found that of the 127 securities suits filed by the nine most active plaintiffs, not a single case ended with a settlement or judgment in favor of the putative class. Instead, these cases “almost uniformly ended with voluntary dismissals,” with no recovery to the class – but, of course with a payment by the defendants of the plaintiffs’ attorneys’ fees. These individual frequent filers are able to avoid the no-more-than-three-suits-in-five-year rule because the cases never get to the lead plaintiff appointment stage — the cases are dismissed before that point.


In order to highlight the absurd extent of this problem, the authors highlight two particular repeat plaintiffs. The first of the two individuals, Paul Parshall, has filed a total of 120 cases since the beginning of 2014. His filing patterns mirror the filing patterns of merger objection suits generally; early on, Parshall filed his suits in state court, but as a result of case developments in Delaware, in 2016, he began filing suits in federal court. More recently he had been filing suits as individual actions rather than as class actions. Almost all of the Parshall’s suits were filed by the same law firms. Of the 83 out of 100 cases Parshall has filed since 2017 and for which the authors were able to determine the outcome, all 83 ended in voluntary dismissals. The dismissals occurred after the defendant company made additional disclosures and paid the plaintiffs’ lawyers a mootness fee. (The authors did a little bit of background research on Parshall; what they came up with makes for some interesting reading.)


The authors also highlight another frequent filer, Stephen Bushansky, who has filed at least 95 cases since the beginning of 2018. As was the case with Parshall, the cases Bushansky has filed most recently have been filed as individual actions, rather than as class actions. Bushansky has filed at least 95 cases since 2018. The authors were able to identify the outcomes of 87 of Bushansky’s more recent cases; of these 87 cases, 86 were voluntarily dismissed and one was dismissed for failure to serve process.


The authors point out that these experienced litigants are not delivering better outcomes; these repeat players are not getting better settlements for their fellow shareholders; instead, they seem to have “perfected the art of achieving quick mootness payments in exchange for voluntary dismissal of their suits.” The authors note that these plaintiffs and their lawyers have been “inventive in their litigation tactics”; as the authors detail, the plaintiffs recent shift to individual actions even further reduces the likelihood of any court oversight or even involvement in their numerous suits.


The authors also examine the involvement of institutional investors as lead plaintiffs in traditional securities litigation. The authors duly note that one of Congress’ objective in enacting the PSLRA was to try to get institutional investors more involved in taking the lead in securities litigation; to that extent at least, Congress was successful, as institutional investors are now an important feature of securities litigation. However, as the authors detail, certain institutional investors, frequently working with the same law firm, have themselves become repeat securities litigation players.


The authors identify 17 institutional investors that each served as lead plaintiff in at least ten securities class action lawsuits during the study period. These investors are able to serve as lead plaintiff so frequently despite the PSLRA’s limits because courts frequently grant waivers when appointing the investors as lead plaintiff. The authors conclude that “repeat institutional investors are a fixture of the current landscape in securities fraud class actions.”


The frequent filer institutional investor plaintiffs often form relationships with plaintiff law firms that regularly file lawsuits in the investors’ names. The authors focused on the three institutional investors that filed the most lawsuits – the state retirement systems for Arkansas, Oklahoma, and Mississippi. The authors conclude that in the largest cases, the plaintiffs’ attorneys “are being awarded fees that do not reflect the risk of recovery” in those cases, and that these “excess fees” suggest that these lead plaintiffs “are not vigorous monitors” and that in many cases the courts are awarding “risk multipliers” even though the cases “appear to have little risk to them.” The authors state that “there is no connection between being a prolific plaintiff and serving the best interest of the shareholders.”


In the final section of their paper, the authors propose some ways that the securities laws might be reformed to address the concerns they have identified. The most significant reform the authors propose has to do with the merger objection litigation. The authors state that the “abuse” these merger objection suits represent “calls for strong medicine.” This suits, the authors note, “offer investors zero protection,” and amount to “legalized extortion.” The authors propose that Congress should amend the relevant portions of the PSLRA to cover individual securities cases, at least of those individual actions challenge a merger or acquisition; in particular, the authors propose that there should be no fee awarded when there is no recovery for shareholders. The authors also propose that Congress should amend the PSLRA’s existing limitations to provide that no shareholder may file more than five merger objection lawsuits in a three year period, whether filed as individual or class actions. The authors also propose that Congress impose a “reasonable share ownership requirement” in order to be able to file a claim under Section 14(a).


With respect to the institutional investors, the authors propose that the Congress amend the current restrictions so that when a investor seeks a waiver of the number of lawsuits limitations, the waiver must be conditioned on demonstrated results for class members, in order to encourage more vigorous monitoring. The authors also propose amending the current lead plaintiff criteria, so that rather than the existing presumption that the candidate with the largest financial state should be lead plaintiff, the rules should provide that the courts should review the fee arrangements entered into by the competing candidates, to favor movants that have tailored their fee arrangements to incentivize greater recoveries.


For anyone involved in any way with securities litigation, this report makes for interesting reading. Many of the authors observations will be consistent with what most of us have seen in securities litigation, particularly with respect to the merger objection lawsuits. The authors careful analysis provides statistical support demonstrating what we all know, which is that the frequent filer issue remains a problem. There is much more to this report than I have been able to summarize above, and I highly recommend reading the report at length and in full.


Clearly something needs to be done to fix the problems the authors have identified, particularly with respect to the merger objection litigation. In particular, I think extending the specific parts of the PSLRA to individual actions, as the authors have proposed, and also limiting the number of actions a plaintiff may file in a specified time period and also imposing a minimum ownership requirement would go a long way toward eliminating the plaintiffs’ lawyers’ “extortionate business model.”