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Fordham Law Prof Catalogues Shortcomings Of Current Securities Class Action Settlement Process

The negotiated resolution of securities class action lawsuits - and absent dismissal, there is rarely any other types of securities suit resolution - is always complicated and occasionally messy, and often involves inefficiencies and sometimes produces distortions and even excesses. Anyone who has ever been through a securities suit settlement negotiation likely will have had the thought that there has to be a better way for resolving the cases.

In an April 12, 2012 paper entitled "How Collective Settlements Camouflage the Costs of Shareholder Lawsuits" (here), Fordham Law School Professor Richard Squire catalogues the many shortcomings in the current securities class action settlement process and sets out his proposal to improve the process and to eliminate process inefficiencies and excesses.

According to Squire, securities class action settlements suffer from a "collective action problem," owing to the fact that current practices and law require a single case resolution that collectively binds the defendant and all of its D&O insurers - even though the D&O insurance itself is "segmented" in a tower of insurance with the insurers in the different layers having different settlement positions and differing perspectives and interests regarding the settlement.

Among other things, Squire notes that insurers in the primary layers and lower level excess layers are often compelled to contribute toward settlement when the settlement demand (or more accurately, the settlement opportunity) exceeds their layer. This compulsion, Squire notes, is often effectively given legal force through a rarely identified but nonetheless very real "duty to contribute." These forces lead to a number of ills, including "plaintiff overcompensation at insurer expense"; overpriced liability insurance; and lawsuits of doubtful merit.

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Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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