Yes, Institutional Investors Can Make A Difference In Securities Fraud Litigation

Institutional investors do in fact make a difference as lead plaintiffs in reaching larger settlements and improving corporate governance.

A forthcoming paper to be published in the Journal of Financial Economics, entitled Institutional Monitoring through Shareholder Litigation,concludes that relative to securities fraud class actions with an individual lead plaintiff, lawsuits with an institutional lead plaintiff are less likely to be dismissed, have significantly larger settlements and are associated with more board independence after the lawsuit.The paper, which can be found here, is written by professors from four different universities: C.S. Agnes Cheng of Louisiana State University, Henry Huang of Prairie View A&M University, Yinghua Li of Purdue University, and Gerald J. Lobo of the University of Houston. As stated by the authors in a Harvard blog, here, the paper was motivated by the lack of evidence on the effectiveness of institutional investors exercising their monitoring power through litigation:

Such evidence is much needed because the Private Securities Litigation Reform Act of 1995 (PSLRA) established a preference of granting lead plaintiff status to plaintiffs with the largest financial stake in the class action, thus providing institutions an opportunity to critically affect the litigation by serving as the lead plaintiffs. Given the costs of serving as a lead plaintiff and the free rider problem, institutional investors may not want to lead class action lawsuits even if they hold the largest financial stake in the defendant firm. Consequently, it is important to provide empirical evidence on the effectiveness of institutional monitoring through class action litigation. In addition to documenting the implications of the lead plaintiff provision in the PSLRA Act, our findings also underscore the important monitoring role of institutions, from both an immediate disciplining of management as well as a long-term corporate governance perspective.

The authors hypothesized that generally an institutional investor will be a "free-rider" and take the benefits of class actions led by other individual plaintiffs, unless the potential benefits to them outweighed their agency costs. The study, as described by the authors, used a sample of 1,811 securities class actions filed between 1996 and 2005, and confirmed that hypothesis.Thus the study found that:

1. when the likelihood of winning is high, the potential damage is large, and the defendant firm is important to the institutional owners, institutional owners are more likely to step forward to serve as the lead plaintiff.
2. institutional investors are more likely to serve as the lead plaintiff when the lawsuit:
   • involves an accounting-related allegation,
   • has an accounting firm as the co-defendant,
   • has a longer class period, has a larger negative market reaction to the revelation event, and
   • has a larger potential investor loss.
3. the probability of having an institutional lead plaintiff is also higher when the defendant firm has a larger market capitalization, has a higher level of institutional holdings, and is operating in a high-tech industry.

The authors then sought to control forthese determinants to find our whether, even then, their was a difference in litigation outcomes when institutions became involved. Using multivariate regression analysis to control for these determinants of when institutions are likely to get involved, the authors concluded:

1. that relative to lawsuits with an individual lead plaintiff, lawsuits with an institutional lead plaintiff are less likely to be dismissed and have significantly larger settlements;
2. all types of institutions show significantly better litigation outcomes with public pension funds generating the largest settlement amount;
3. within three years of filing the lawsuit, defendant firms with institutional lead plaintiffs experience greater improvement in board independence than defendant firms with individual lead plaintiffs.

These findings should be reason enough for institutional investors to step forward and serve as lead plaintiffs. So institutions, get involved!

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Here is another ponzi scheme:

Reuters – Texan billionaire Allen Stanford talks during an interview in Miami in this May 1, 2008 file photo. REUTERS/Joe …
By Tabassum Zakaria Tabassum Zakaria –RICHMOND, Virginia (Reuters) –

Texas billionaire Allen Stanford will appear in federal court in Virginia on Friday to answer allegations he orchestrated a massive fraud through his Antigua bank that bilked investors out of billions of dollars.

Stanford, 59, arrived at the courthouse to face criminal charges at a 1:30 EDT hearing before federal magistrate Hannah Lauck after surrendering to FBI agents outside his girlfriend's house in Virginia late on Thursday.

His case will be the first major financial crimes prosecution brought under the administration of President Barack Obama, who has vowed to crack down on economic malfeasance.

Stanford already faces civil charges brought by the U.S. Securities and Exchange Commission that he fraudulently sold $8 billion in certificates of deposit with improbably high interest rates from his Stanford International Bank Ltd, headquartered in Antigua.
The SEC filed new civil charges against accountants and an Antigua regulator, saying they aided Stanford in orchestrating an $8 billion Ponzi scheme, or pyramid investment plan, according to documents filed in U.S. district court in Dallas.

"He surrendered," Dick DeGuerin, Stanford's Texas attorney, told Reuters by telephone on Thursday night after speaking with his client. "He's in FBI custody."

Justice Department officials, including the U.S. attorney from Houston, planned a news conference at noon EDT (1600 GMT) in Washington to announce the criminal charges.
Stanford, who holds dual U.S. and Antigua and Barbuda citizenship, denies any wrongdoing and has said he would put up "the fight of my life" if indicted.

"If the SEC had not come in and disemboweled a living, breathing strong organization the way they did, there's no question on God's green earth that everyone would have been made whole and we would have had a lot of money left over," Stanford told Reuters in an interview in April.

'MASSIVE PONZI SCHEME'
In its civil case, the SEC in February accused Stanford, his college roommate and three of their companies of carrying out a "massive Ponzi scheme" over at least a decade and misappropriating at least $1.6 billion of investors' money.

"This starts to bring closure for the victims," Jacob Frenkel, a former SEC enforcement official, said of the criminal indictment.
Stanford now faces concrete charges and "is no longer swinging at a pinata," said Frenkel, now an attorney in Rockville, Maryland.
Stanford, a golf and cricket promoter, became the first American to be knighted by Antigua and Barbuda in 2006. He made his first fortune in real estate in the early 1980s and expanded the family firm into a global wealth management company.

Before the SEC leveled the fraud charges, his personal fortune was estimated at $2.2 billion by Forbes magazine. Stanford was a generous sports patron and owned homes in Antigua, St. Croix, Florida and Texas.

To date, the only Stanford official to have faced criminal charges is Laura Pendergest-Holt, the chief investment officer for the Stanford Financial Group. She was arrested by the FBI in February and later freed on bail.

Pendergest-Holt and James Davis, Stanford's one-time roommate at Baylor University who served as the company's chief financial officer, were both named in the SEC's first civil complaint.
Davis has not been charged with criminal activity and is cooperating with federal authorities, although his attorney has said he expects his client to be indicted.

Nigel Hamilton-Smith, the Antiguan official named to oversee the liquidation of the offshore bank that was run by Stanford, has accused the tycoon of using client funds to pay for jets, lavish homes and yachts.

Stanford's Antiguan liquidators and the company's U.S.-based receiver have been locked in a battle over control of the offshore bank.

Ralph Janvey, the Dallas lawyer appointed by U.S. District Judge David Godbey to oversee Stanford's assets and operations, has filed court papers arguing he should oversee the Antigua bank along with the U.S.-based Stanford entities he controls.
The Antiguan liquidators disagree.

(Additional reporting by Chris Baltimore in Houston and Jim Vicini in Washington; Editing by Bill Trott and Frances Kerry)