Congress, the Supreme Court, and the Securities Exchange Commission (SEC), at one time or another, have justified securities class actions as valuable “supplements” to SEC enforcement of the securities fraud laws. On the other hand, the business community and many legal scholars and commentators have criticized securities class actions as abusive excesses of the plaintiffs’ bar. Which claim is correct is an empirical question that must be answered with data, according to Michael Klausner, the Nancy and Charles Munger Professor of Business and Professor of Law.
So Klausner set out to collect data that would answer that question a few years ago. But he did not expect that his initially modest efforts would spawn Stanford Securities Litigation Analytics, a new law school “startup.” Part of the “big data” trend in law (see Stanford Lawyer, Spring 2013), SSLA team members collect data on SEC enforcement actions and securities class actions aimed at securities fraud and related violations of the securities laws.
Klausner oversees the effort, which is staffed full time by Jason Hegland, the project’s executive director, and Matthew Goforth (BS ’03), its project manager, and which employs law students and undergraduates to collect and analyze data on these lawsuits.
“We started by trying to answer the question whether, despite potentially problematic incentives, securities class actions are nonetheless valuable enforcement mechanisms. This involved making certain comparisons between securities class actions and SEC enforcement actions,” says Klausner, “but now we are collecting a massively wider set of data.” Some of the additional data collection will fuel further research at Stanford, but Klausner and his team hope that the data will be useful to practitioners as well.
The database includes all cases filed since 2000. It contains basic data items such as court, judge, names of parties, names of counsel, nature of resolution, and key dates. But what makes the database unique is that it also contains much more complex and detailed data items. For example, in both the SEC and class-action sides of the database, there are data items on the nature of the misstatement involved, the positions defendants held in their companies, how the case was resolved, and the stage of the proceedings at which the case settled. In addition, for SEC actions, there is data on the penalties imposed on individual and corporate defendants and whether the case went to trial. And for class actions, there is data for settled cases on the stage at which the case settled, the amounts paid by the company, individuals, the directors’ and officers’ liability (D&O) insurer and third parties, and the nature of the alleged evidence supporting scienter.
As Klausner explains, “It took many months to build a database to hold the data and a software program to allow users to sort and analyze it. We are about to launch a website that will allow public access on a beta testing basis. We also hope to make the project commercially viable so that the law school does not have to continue supporting it.” Klausner notes that the SSLA database is the only one of its kind. He believes it will be a valuable resource for academics and practitioners.
The SSLA database further secures Stanford Law School’s place as the central provider of information on securities enforcement. The Stanford Securities Class Action Clearinghouse, which has been a fixture in this area for many years, provides users with access to pleadings, settlement agreements, and other litigation documents in securities class actions. http://www.law.stanford.edu/organizations/programs-and-centers/securities-class-action-clearinghouse-scac.
SSLA, in turn, provides users with a granular analysis of those documents. “Based on the data we collect, one can analyze any number of questions, including, for example, how long cases drag on before resolution; how many times courts allow plaintiffs to amend a complaint before finally ruling on a motion to dismiss; how often cases settle during the pleading stage; and whether settlement size is related to whether a case settles early or late in the litigation process,” Klausner says. “The answers to these questions will surprise many people.”
While policy analysts may find the data useful in considering whether the outcomes justify the costs, litigators may find the data helpful in planning strategy. In an SEC action, for example, the defendant can get a sense of what an appropriate penalty should be based on past penalties in similar cases. And in a securities class action, parties or insurers considering a settlement at a certain dollar level can compare their case along multiple dimensions with similar cases in recent years.
Another potential market for the data exists among underwriters of D&O liability insurance. “Our data will help underwriters predict risk when setting premiums,” Klausner explains. And indeed even before the project has launched, Klausner and his team have been approached by D&O insurance carriers about licensing the database.
But what about the original question? Are securities class actions socially valuable?
“It’s not black or white,” Klausner says with a smile. “One question can be answered, though. Are people punished as a result of private lawsuits? It turns out that 95 percent of the time, securities class actions settle without any individual paying anything; the corporation and the D&O insurer pay instead.” But that doesn’t mean that these lawsuits don’t deter misconduct. Klausner’s research shows that “CEOs and CFOs lose jobs in the wake of securities class actions.” That, one would expect, is a serious deterrent to misconduct.
“Each year, on average, the SEC brings cases against roughly 180 defendants for approximately 50 alleged frauds, while private litigants bring about 150 to 200 class actions per year,” Klausner observes. “And even though courts dismiss 40 percent of the class actions, these cases still provide a substantial potential supplement to public enforcement. While there may be hints in the data that raise questions about the merits of some cases that plaintiffs’ attorneys bring, there is not a story of widespread abuse in the targeting of class actions.” Klausner hastens to add, however, that more research needs to be done on these questions before we get a clear answer. SL