Securities Class Actions Are As Targeted Or More So Than SEC Enforcement Actions

Tort reformers who dislike class action litigation and who, in particular, are skeptical of securities law class action litigation frequently argue that we should prefer administrative agency enforcement of the securities laws, on the theory that they are driven by the merit of the suit, over private class action litigation which is allegedly brought indiscriminately following a sudden plunge in the price of a company's shares.  The empirical evidence, however, does not support this claim.

Using actions with both an SEC investigation and a class action as our baseline, we compare the targeting of SEC-only investigations with class-action-only lawsuits. Looking at measures of information asymmetry, we find that investors in the market perceive greater information asymmetry following the public announcement of the underlying violation for class-action-only lawsuits compared with SEC-only investigations. Turning to sanctions, we find that the incidence of top officer resignation is greater for class-action-only lawsuits relative to SEC-only investigations. Our findings are consistent with the private enforcement targeting disclosure violations at least as precisely as (if not more so than) SEC enforcement.

Stephen J. Choi and A.C. Pritchard, "SEC Investigations and Securities Class Actions: An Empirical Comparison", Journal of Empirical Legal Studies (March 2016).