Thursday, October 26, 2006

The Private Securities Litigation Reform Act of 1995: The Unintended Consequence of "Pay to Play"

The Private Securities Litigation Reform Act of 1995 in effect gave large institutional investors (such as large public pension funds) more power in the selection of the lead plaintiff’s counsel in class action securities litigation.

One unintended consequence the law has created is at least in appearance and possibly in practice is a “pay to play” situation.

Certain class action law firms funnel political contributions to politicians who serve as fiduciaries or politicians who appoint various fiduciaries to the large public pension plans who often exert considerable influence in the selection of lead counsel.

As a result, other law firms who are “less politically connected” that are vying to be appointed lead counsel are at a disadvantage due to the political contributions of competing law firms. These law firms who do not make such political contributions may be able to represent shareholders interests more effectively and economically.

We have seen an increasing concentration of power in a few selected class action plaintiff law firms since this legislation has been enacted. Many such firms are those that seem to use their political clout.

Law firms should not be permitted to make political contributions (directly of indirectly) to any fiduciary of a public pension fund or any politician who appoints them.

Anything less in my book is “pay to play.”

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