Law360 published an article by Prof. Sean Griffith and co-author Dorothy Lund defending the research and findings from a previous article that they wrote titled, “Toward a Mission Statement for Mutual Funds in Shareholder Litigation.”
We are flattered that Ropes & Gray LLP attorneys Amy Roy and Robert Skinner took the time to comment on our forthcoming article, “Toward a Mission Statement for Mutual Funds in Shareholder Litigation,” in their recent Law360 article. We only wish they had read it more carefully.
Our article observes that it is passing strange that mutual funds, which have recently made so much noise about engaging with portfolio companies, do not use one of the principal levers available to do so, namely shareholder litigation. Our central empirical finding — which Roy and Skinner do not dispute — is that mutual funds very rarely participate in shareholder litigation.
Over a 10-year sample period, we found that the 10 largest fund families filed only 10 shareholder suits involving only five different instances of corporate misconduct. All but one of these were securities cases, typically filed as individual rather than class actions. The only other case we found was T. Rowe Price Group Inc.’s ill-fated attempt to seek appraisal in In re Appraisal of Dell Inc. in the Delaware Chancery Court. The 10 largest mutual funds filed zero state law class or derivative claims during our sample period. Nor did our mutual funds serve as lead plaintiff even a single time over the 10-year period.
Our findings raise two obvious questions. First, why don’t mutual funds participate in shareholder litigation more often? And second, how should mutual funds participate in shareholder litigation? For Roy and Skinner, the answers to these questions are obvious: Mutual funds do not and should not participate because shareholder litigation is not worth it. They point out that recoveries are small, litigation is burdensome, and the key elements are hard to prove.
We are well aware of these critiques of shareholder litigation, of course, and we acknowledge each of them in our article. But they are rather general. Do Roy and Skinner mean to argue that no more than 10 of the 1,500 or so securities class actions filed during our sample period were worth the effort? A 0.6% rate of good cases to bad ones strikes us as low.