Reassessing Damages in Securities Fraud Class Actions

No coherent doctrinal statement exists for calculating open-market damages for securities fraud class actions. Instead, courts have tried in vain to fashion common-law deceit and misrepresentation remedies to fit open-market fraud. The result is a relatively ineffective system with a hallmark feature: unpredictable damage awards. This poses a significant fraud deterrence problem from both a practical and a theoretical standpoint. In 2005, the Supreme Court had the opportunity to clarify open-market damage principles and to facilitate earlier dismissal of cases without compensable economic losses. Instead, in Dura Pharmaceuticals v. Broudo, it further confused the damage issue by (1) perpetuating the idea that courts can tailor damages from common-law deceit and misrepresentation actions to remedy open-market fraud despite the practical disparities between the two and (2) opening the door to a new form of hypothetical losses where the stock price increases after an opportune disclosure of fraud. The Supreme Court\u27s insinuation that a new form of hypothetical losses might be recoverable further inhibits predictability and could have perverse effects on investor education and motivation. In Dura, the Court implied that an investor might be able to recover damages when a stock\u27s price does not increase as much as it might have absent the fraud. This suggests that plaintiffs might not be limited to traditional out-of-pocket losses. A number of intrinsic problems could result from compensating investors for more than their out-of-pocket losses. For example, providing investors with a double-recovery, one from the net stock price increase and one from class-action damages, could create a perverse incentive to invest purposefully in companies showing signs of fraud. Accordingly, to minimize these effects and to promote predictability, this Article suggests that courts should limit plaintiffs to recovery for their out-of-pocket losses. My intention in this Article is not to imply that simply limiting investors to their out-of-pocket losses will provide a quick fix for the ills of the securities class-action system. Instead, I hope to highlight some of the intrinsic problems that could result from compensating investors with a net gain and from stretching traditional common-law remedies to fit modern securities-fraud class actions. The out-of-pocket measure is the only common-law remedy that recognizes the distinctions between face-to-face transactions and open-market fraud, that complies with the loss causation requirement, and that limits plaintiffs to their actual damages. Restricting investors to out-of-pocket losses also advances optimal deterrence by increasing predictability through a clear doctrinal damage calculation

A New Way Forward: A Response to Judge Weinstein

This short essay responds to Judge Jack Weinstein\u27s essay, Preliminary Reflections on Administration of Complex Litigations, 2009 Cardozo De Novo 1. In so doing, it also provides a condensed version of my earlier article, Litigating Groups, which analyzes group dynamics within nonclass aggregation. By drawing on the literature of moral and political philosophy as well as social psychology, I contend that, in the face of hard cases, of instability and disunity, plaintiffs who have made promises and assurances to one another can invoke social norms of promise-keeping, social agglomeration, compatibility, and the desire for means-end coherence to achieve consensus, mitigate client-client conflicts, and re-tether their attorney to their needs. Thus, using groups to overcome the problems in nonclass aggregation not only makes sense from a group responsibility perspective, it may also harmonize with wealth maximization and individual autonomy goals

Constructing Issue Classes

As government budgets shrink each year, enforcement responsibilities in products liability, consumer protection, and employment discrimination fall increasingly to private attorneys. But defendants have successfully layered new objections about noncohesive classes and unascertainable members atop legislative and judicial reforms to cripple plaintiffs’ attorneys’ chief weapon — the class action. The result? Courts deny class certification and defendants escape enforcement by highlighting the differences among those affected by their misconduct. At the other end of the regulatory spectrum lies the opposite problem. Some defendants’ actions are so egregious that hordes of public and private regulators can’t help but get involved — think the GM ignition switch debacle or the BP Oil Spill, for example. Whether regulators are chasing splashy headlines, easy money, or public support, the result is a cacophony of litigation in dispersed fora that risks inefficient resource use and inconsistent verdicts regarding a defendant’s conduct. A one-line sentence buried within Rule 23 offers a partial elixir for problems at both ends of the enforcement spectrum. That sentence, Rule 23(c)(4), allows courts to certify certain issues for class treatment. While issue certification is experiencing a renaissance in the courts, scholarship has stagnated. Commentators have fixated on the technical to-be-or-not-to-be question of how to read Rule 23(c)(4) within the rule’s predominance requirement. But they have offered strikingly little theory or guidance on how issue classes might revive private enforcement and coordinate fractured regulatory responses through issue preclusion. This Article aims to fill that void with an alternative theory of class cohesion — a term that appears nowhere in Rule 23, but has emerged at the center of Supreme Court jurisprudence. This theory not only informs the class-certification calculus by identifying core questions ripe for issue-class adjudication, but also simplifies vexing questions over the sufficiency of aggregate proof and class members’ ascertainability. Shedding anachronistic, stereotypical notions that immutable characteristics like gender and race fuse members into a cohesive class can reveal what often unites groups for adjudication purposes: defendant’s uniform conduct. When a defendant’s actions are non-individuated (GM’s failure to take appropriate safety precautions, for example), litigating the components within a claim or defense that regulate defendant’s conduct on a classwide basis can revive private enforcement and stymie inconsistent outcomes through preclusion

Securities Class Actions as Pragmatic Ex Post Regulation

Securities class actions are on the chopping block-again. Traditional commentators continue to view class actions with suspicion; they see class suits as nonmeritorious byproducts of self-interest and the attorneys who bring them as rent-seekers. Their conventional approach has popularized securities class actions\u27 negative effects. High-profile commissions capitalizing on this rhetoric, such as the Committee on Capital Markets Regulation, have recently recommended eliminating or severely curtailing securities class actions. But this approach misses the point: in the ongoing push and pull of securities regulation, corporations are winning the battle. Thus, understanding the full picture and texture of securities class actions necessitates a positive pragmatic account. This Article provides that account and thus fills a significant gap in the benefit side of academic cost-benefit literature. To do so, however, it self-consciously begins from a controversial assumption: namely, that securities class actions provide a public good. Integrating both public and private actors into ex post enforcement diminishes collective action dilemmas, agency inaction, and private resolution of public law matters through arbitration. Moreover, by supplementing ex post enforcement, securities class actions produce positive externalities, spillover effects that confer public advantages such as: innovation, cost-reduction through information sharing, deterrence, transparent judicial process, and both corporate and enforcement accountability. So, while I harbor no illusion that the securities class action always functions optimally and have a number of lingering doctrinal and jurisprudential concerns about its operation, I also recognize its comparative institutional capability to make transparent an increasingly opaque process, craft decisional rules and interpretations that guide future behavior, cultivate innovation, deter fraud, and hold corporations, exchanges, and the SEC publicly accountable. This piece thus envisions the ramifications of eliminating securities class actions by imagining a world with government-centric securities enforcement. That world, I contend, is one steeped in bureaucracy, one failing to produce behavior-guiding precedent, one filled with closed-door arbitrations, one neglecting nonprioritized misconduct, and one ignoring litigant preference for judicial process. In short, it is a world less preferable than our current system-flawed though it is

Aggregation, Community, and the Line Between

As class-action theorists, we sometimes focus so heavily on the class certification threshold that we neglect to reassess the line itself. The current line asks whether procedurally aggregated individuals form a sufficiently cohesive group before the decision to sue. Given this symposium’s topic - the state of aggregate litigation and the boundaries of class actions in the decade after Amchem Products, Inc. v. Windsor and Ortiz v. Fibreboard Corp. - the time is ripe to challenge our assumptions about this line in non-class aggregation. Accordingly, this Article examines group cohesion and asks whether the current line is the only dividing line or even the correct one. If we are willing to look for genuine cohesion among individuals who are procedurally aggregated but lack sufficiently common traits before the decision to sue, then we will find an alternative, but perhaps more compelling, justification for binding collective interests. This Article draws on the dominant justifications for group litigation - consent and interest representation - to explore this alternative line-drawing scheme in terms of political theory. Encouraging plaintiffs to form groups and reach decisions through deliberation relies on a mix of individual consent and moral obligation. Allowing plaintiffs to exercise their free will when deciding whether to associate with others preserves the liberal tenet of self-determination and escapes the anti-democratic criticism leveled at class actions. Yet, a purely liberal approach fails to capture the obligatory aspect of reciprocal promises to cooperate and the communal obligations that attach. Although plaintiffs voluntarily enter into the group, once they are group members and have tied together their collective litigation fates, they should not be permitted to exit when doing so violates their commitments. Of course, the community itself determines the content of its members’ rights and obligations to one another. Thus, this Article concludes by explaining the rationale for group autonomy in terms of pluralism and communitarianism

Data versus More Data in Multidistrict Litigation

A reply to Lynn A. Baker & Andrew Bradt, Anecdotes in the Search for Truth About Multidistrict Litigation, 107 Cornell Law Review Online 249 (2023). Perceptions of Justice in Multi-district Litigation: Voices from the Crowd presents the results of a study that no one wanted us to do—or help us to do. Professors Lynn Baker and Andrew Bradt would prefer to dismiss as “anecdote” our two-year effort to find and gain the trust of multi-district litigation (MDL) plaintiffs whose attorneys told them not to discuss their case with anyone, including us. There are decades worth of procedural justice studies demonstrating that people want their attorneys to be involved with them and their case, expedient resolution and adversarial process before a neutral decision maker, and control over the process through opportunities to participate, present evidence, and tell their story. These components form the cornerstone of fair process everywhere: in the workplace, during police encounters, in alternative dispute resolution, and, of course, in court. But these hallmark features are often lacking in MDL, which focuses on efficiency.Nevertheless, Baker and Bradt take issue with the primary finding that plaintiffs in MDL may not be happy about the process. In so doing, they assume that typical MDL plaintiffs are satisfied. But they provide no evidence to support their assumption. And they don’t want their assumption tested because, as they say, the results could be fodder for the defense bar.Academics should not avoid asking questions or studying issues because they fear how their results might be used. Unlike our critics, neither Dr. Williams nor I consult for plaintiffs or defendants (or anyone else for that matter). If small sample size and selection bias are truly Baker and Bradt’s concerns, both could be addressed by extending the study with more data. But nowhere in their essay do they suggest that. Instead, they would prefer we not ask the question in the first place.We agree that “scholars are in the knowledge-creation business.” Creating knowledge means asking hard questions even if—especially if—others would rather you not

Investigating The Effects Of Obesity On Cardiovascular Reactivity And Recovery From Acute Physical And Psychological Stress

The role that excess adipose tissue plays in chronic inflammation gives rise to its importance as an independent risk factor in cardiovascular dysfunction. By operationalizing chronic stress as obesity, we sought to explore the relationship between obesity and cardiovascular responses to laboratory stressors, including recovery from stress. Further, we examined five adiposity measures to determine which were most related to cardiovascular dysfunction. Degree of obesity was able to predict dysfunction in both reactivity and recovery. Body mass index and waist circumference were found to be the best predictors of cardiovascular dysfunction. Blunted reactivity and slorecovery were found in participants with greater levels of adiposity

CAFA\u27s Impact on Litigation as a Public Good

Class actions regulate when government fails. Perhaps this use as an ex post remedy when ex ante regulation founders explains the fervor and rhetoric surrounding Rule 23\u27s political life. In truth, the class action does more than aggregate; it augments government policing and generates external societal benefits. These societal benefits - externalities - are the spillover effects from facilitating small claims litigation. In federalizing class actions through the Class Action Fairness Act (CAFA), Congress, in some ways, impeded class action practice, thereby negating its positive externalities and inhibiting backdoor regulation. This Article critically considers those effects on the common good. It also develops an implicit but overlooked theme within the CAFA debate - the notion that litigation itself is a public good

Financing Issue Classes: Benefits and Barriers to Third-Party Funding

This essay, written for NYU\u27s symposium on Litigation Funding: The Basics and Beyond, explores the costs and benefits of using third-party financing to fund issue class actions