IS "PAY-TO-PLAY" DRIVING PUBLIC PENSION FUND ACTIVISM IN SECURITIES CLASS ACTIONS? AN EMPIRICAL STUDY

The recent emergence of public pension funds as frequent lead plaintiffs in securities class actions has prompted speculation that the funds' litigation activism is driven by "pay-to-play." Pay-to-play alleges that politicians drive the high rate of public pension fund lead plaintiff appointments; the politicians purportedly direct the funds to pursue securities class actions in return for campaign contributions made to them by plaintiffs' lawyers. This Article provides a comprehensive analysis of the securities litigation activity of 111 such funds from the years 2003 through 2006. Three of the Article's findings cast doubt on the pay-to-play theory, including that: (1) politicians and political control negatively correlate with lead plaintiff appointments; (2) beneficiary board members and outright beneficiary control of the board positively correlate with such appointments; and (3) the degree of a pension fund's underfunding positively correlates with lead plaintiff appointments, particularly when the fund is controlled by beneficiaries. This evidence suggests that beneficiary board members (not politicians) drive these cases for reasons having to do with the financial soundness of the fund. The Article analyzes the substantial role played by these members in securities class actions in light of prior research comparing such board members to corporate managers with an equity stake in a corporation. The Article also finds no support for the theory that unions drive beneficiary board members to obtain lead plaintiff appointments, and offers evidence that resistance by politicians to lead plaintiff appointments correlates with the degree of business influence in the politicians' home states.