Vanderbilt Law Review

Article Title

Optimal Lead Plaintiffs

First Page



Good lead counsel is hard to find. We, Congress, the Securities Exchange Commission ("SEC"), and the public trust that class counsel will be a good and faithful agent so long as a lead plaintiff is there to monitor her every move. Problem is, good lead plaintiffs are hard to find, too. In part, we expect too much: the Private Securities Litigation Reform Act ("PSLRA") insists that a lead plaintiff monitor the class attorneys and hopes that she will prevent strike suits and deter fraud; Rule 23(a)(4), on the other hand, demands that the lead plaintiff adequately represent class members with diverse risk preferences, sophistication levels, and desired remedies. Contrast, for example, this lead-plaintiff heroine in securities-fraud class actions with a run-of-the-mill class representative from a small stakes, negative-value class action who we hope might have read the complaint and whom we openly dub a "figurehead."

It doesn't help that the lead plaintiffs PSLRA and Rule 23(a) obligations may steer her in opposite directions. She may monitor the class attorney like a hawk and squelch attorney opportunism at every turn, but when her self-interest conflicts with the interests of those she represents, the zealot becomes the oppressor. For example, because institutional lead plaintiffs are more likely to continue to hold stock in a defendant corporation, they may push for corporate- governance reforms, which means that their advocacy will work to the detriment of former shareholders who want to maximize their monetary recovery. This is but one of the predictable divides that often exists between institutional and individual investors. Yet, when judges appoint a lead plaintiff, they look principally for the best monitor with the largest financial loss and consider adequacy only secondarily. Contending that the lead plaintiffs primary function is to monitor plaintiffs' attorneys loses sight of her obligations as an adequate class representative-the tether to class members' constitutional due process rights. Nevertheless, courts push the adequacy question back to the class-certification stage where it might rightly belong if certification was still just another hurdle to trial as opposed to the last judicial checkpoint before settlement.

The solution is simple enough to state succinctly: Appoint lead- plaintiff groups with members who represent the class's diverse interests. But when courts have appointed cohesive groups in the past, the groups have underperformed. The prescription is thus to select lead plaintiffs whose diverse preferences and motivations mirror those of the class. This solution addresses two interrelated process-based problems: (1) that institutional lead plaintiffs tend to inadequately represent individual investors and (2) that lead-plaintiff groups have performed poorly historically, which translates into higher agency costs and lower settlement values. Parts I and II explore each problem in turn.

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