It’s an odd quirk of class action practice that an automotive company defending a products-liability class will be quick to invoke the superiority of its regulator (the National Highway Traffic Safety Administration, or NHTSA), while a securities defendant will rarely–if ever–argue that the case is better handled by the SEC. (The difference may be the relationship between the industry and the agency: car companies regularly self-report issues to NHTSA, no one voluntarily brings the SEC down upon themselves.)
Vanderbilt Professor Amanda Rose makes an argument for changing that state of affairs in her paper Better Bounty Hunting: How the SEC’s New Whisleblower Program Changes the Securities Fraud Class Action Debate.
Her argument, in a nutshell, is that the advent of the SEC’s Whistleblower Bounty Program has stripped the securities fraud class action of its arguable benefits (such as investigation and appropriate deterrence) while leaving its problems (such as the circularity problem, which points out that the damages paid to shareholders come from the shareholder’s investment, minus attorneys’ fees).
The upshot is that [fraud on the market] suits are less likely to be responsible for exposing frauds in the wake of the WBP, and more likely to merely parrot information that is already in the public domain. [Fraud on the market] suits that do not expose frauds produce no social benefits, while imposing significant costs on both investors and the judiciary. The effect of the WBP will therefore be to tip the cost-benefit scales against the social desirability of [fraud on the market] suits, warranting their elimination.
Professor Rose notes that, given the provisions of the SEC’s Whistleblower Bounty Program, it’s unlikely that plaintiffs’ lawyers will be able to rely on confidential witnesses (who could collect far more from the SEC), and are likely to simply piggyback on other investigations.
More importantly, however, Professor Rose also points out that there is nothing to stop securities class action lawyers from taking advantage of the program themselves:
Under the WBP, corporate “outsiders” whose tips are based on an “independent analysis” of publicly available information may be treated as having provided the SEC with “original information” and thus may be eligible for bounties. A class action lawyer (or group of lawyers) with this sort of fraud- detection ability could therefore profit from it through personal participation in the WBP.
If class counsel truly has important fraud-related information (as opposed to just piggybacking or fishing for fraud), then the defendant can now ask why counsel didn’t submit their information to the SEC. The likeliest answer is that the whistleblower bounty will not be as large as a possible attorneys’ fee. But, as we’ve seen before, that’s a good reason to find class representatives inadequate.