Sunday, July 09, 2006


Will Hedge Funds Displace Pension Plans in Court?



There is no doubt that hedge funds are here to stay, especially with respect to their increasing clout in the boardroom. According to editor and associate publisher of Directors & Boards, Jim Kristie, "Corporate America is owned by hedge funds". He points out that institutions, including hedge funds, own more than sixty percent of equity issued by top U.S. corporations. Moreover, he cites research that "the average institutional holding period is about 12 months" and possibly even shorter.

In the same issue, William G. McBride warns that activist hedge fund investors "rely on negative media to keep the pressure on boards of directors", highlighting bad practices, sluggish earnings and/or vague communication about strategy.

For some institutional investors, seeking redress by going to court as lead plaintiff is another type of activism. (See the recent post about this topic.) Given their significant ownership stake, is it possible therefore that hedge funds could displace pension funds as key players in litigation against company boards?

In a recent speech, U.S. SEC Commissioner Paul Atkins cites a concern about "complicity between short sellers, namely hedge funds, and plaintiff's lawyers". He adds: "As the story goes -- and I have personally seen instances of this before I came to the Commission -- the two groups can act in concert to systematically drive down the price of a company's stock, to their mutual gain and the company's and its shareholders' loss."

Institutional investors that use the legal system to ferret out wrong-doing serve society well. Their actions arguably help to promote capital market transparency and thereby facilitate economic growth.

Regarding activist hedge funds and their role in litigation as plaintiff, lead or otherwise, it is impossible to generalize anything from a few anecdotes. Moreover, the selection of lead plaintiff depends on many factors.

We welcome hearing about research that directly examines the role of hedge funds as lead plaintiffs and will keep you posted as our investigation ensues.
posted by Susan Mangiero at 7/09/2006 11:17:00 PM