Legal News

Oh, You Again? Judges Cracking Down on Repeat Plaintiffs

By Ashby Jones

Should courthouse doors be closed, at least slightly, to some shareholder plaintiffs? That’s the question asked in an article in today’s WSJ by Nathan Koppel, who shines a light on the phenomenon of certain shareholders turning up time and time again as lead plaintiffs in lawsuits filed against companies.

Some judges are cracking down on the practice, ruling that some plaintiffs are little more than pawns for lawyers in search of big settlements. For instance, Last year, New York federal judge Denise Cote dismissed a suit against J.P. Morgan Chase, after the lead plaintiff, an elderly Arizona investor, admitted he thought his owns claims lacked merit.

A federal law enacted more than a decade ago, the PSLRA, helped thin the number of cases filed by suspect shareholders. But problems persist because the legislation doesn’t apply in state court or to all types of federal shareholders suits. As a result, corporate defense lawyers say, shareholder litigation still often is brought by individual investors who know little about the claims they have asserted.

Plaintiffs lawyers and shareholder advocates respond that small stockholders are entitled to bring these suits, and that many do so in good faith, with the goal of improving corporate governance.

A lot of the action on this front is happening in state court, specifically in so-called derivative claims, claims in which a shareholder sues on behalf of a company itself. Often, the remedies in derivative claims aren’t huge cash payouts to the shareholders, rather promises to curb some sort of behavior.

These cases, however, can prove costly and distracting to defend, and profitable to the plaintiffs firms, which often recoup fees. “The same plaintiffs file derivative actions in case after case; that suggests they are purely lawyer-driven litigation,” says Robert Giuffra Jr., a partner at Sullivan & Cromwell LLP in New York who helped draft the PSLRA bill. “There is a risk that there will be improper bonus payments or bounty payments given to the plaintiffs.”

Full post as published by Law Blog - WSJ.com on March 26, 2009 (boomark / email).