April 13, 2005

The Economics Of Securities Class Actions

The New York State Common Retirement Fund's (the "Fund") decision to act as lead plaintiff in the WorldCom securities class action has come under fire. The case has resulted in over $6 billion in settlements by the investment banks that underwrote WorldCom's bonds. Some commentators have argued, however, that the settlements actually lowered the value of the Fund's investments in those investment banks by more than the amount the Fund will receive from the settlements. In chronological order:

(1) Wall Street Journal editorial (subscrip. req'd) in the April 1 edition.

(2) Letter to the editor (subscrip. req'd) by Alan Hevesi, New York State Comptroller, in response to the Wall Street Journal editorial.

(3) New York Sun editorial in the April 12 edition.

(4) Forbes column in the April 25 edition.

Quote of note (Forbes): "Judging by a plaintiff expert's own estimate of shareholder losses, New York's claim of a $317 million hit would entitle it to 1.1% of the kitty, or a mere $11 million . . . . Hevesi's suit cost New York's pension fund by deflating the value of its investments in the banks it sued. The Hevesi fund owns stakes in J.P. Morgan, Citigroup and BofA. These three banks took aftertax charges totaling $3.2 billion for WorldCom settlement costs. The fund's pro rata share of these losses, and those of smaller-fry defendants, totes up to $13 million."

Posted by Lyle Roberts at April 13, 2005 7:31 PM | TrackBack
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