Class action and financial markets insights from law and economics

Description
Class action (CA) has long been used in practice (mainly in the USA) and studied by
academics especially in the shareholder protection area. This paper aims to apply the same practice
within the current financial meltdown context

Journal of Financial Economic Policy
Class action and financial markets: insights from law and economics
Donatella Porrini Giovanni B. Ramello
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Donatella Porrini Giovanni B. Ramello, (2011),"Class action and financial markets: insights from law and
economics", J ournal of Financial Economic Policy, Vol. 3 Iss 2 pp. 140 - 160
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Class action and ?nancial
markets: insights from law
and economics
Donatella Porrini
Dipartimento di Scienze Economiche e Matematico-Statistiche,
Universita` del Salento, Lecce, Italy, and
Giovanni B. Ramello
Dipartimento di Politiche Pubbliche e Scelte Collettive,
POLIS, Universita` del Piemonte Orientale, Alessandria, Italy
Abstract
Purpose – Class action (CA) has long been used in practice (mainly in the USA) and studied by
academics especially in the shareholder protection area. This paper aims to apply the same practice
within the current ?nancial meltdown context.
Design/methodology/approach – The paper faces the issue by comparing ex ante regulation with
an ex post regulatory system, basically dependent on the action of the consumer who can sue ?rms that
behave unfairly. The arguments are provided by the law and economics (LE) approach.
Findings – According to LE, pure economic loss is a private loss that is not socially relevant but
simply implies a redistribution of wealth. Consequently, wrongful behavior that induces reallocation
of costs and bene?ts with no consequences on social welfare is not considered socially harmful, so is
not necessarily subject to compensation. Since pure economic loss is very often ?nancial, the above
reasoning also applies to ?nancial markets. However, the same LE arguments suggest that in ?nancial
markets, the policy of internalizing pure economic loss by means of CAs can be more far-sighted than
simply compensating the victims: the liability system has the particular feature of producing
deterrence and driving the market towards an ef?cient outcome.
Originality/value – The paper maintains that CA intended as a complementary ex post regulatory
device can play a signi?cant role in addressing a failure that ex ante regulation has not in ?nancial
markets. This is coherent with the LE tradition that interprets tort law remedies as a solution for
internalizing externalities and providing the correct incentive to the markets.
Keywords Legal action, Financial markets, Laws and legislation, Torts, United States of America
Paper type Research paper
1. Introduction
The problem of ef?ciently regulating ?nancial markets has come to light dramatically
and repeatedly in recent years. The failure of the institutional devices designed and set
up to safeguard these markets has in fact led to several cases of heavy losses for
investors.
In other words, although ?nancial markets appear to be strictly regulated and
supervised, something in the current regulatory mechanismwent awry and in a number
of circumstances the system was unable to cope with the resultant crisis. More
importantly, it was totally powerless to avoid or at least limit the considerable harm to
the economic system as a whole.
Regulation of ?nancial markets usually rests upon a speci?c tradition and
practice, mostly designed to provide ex ante constraints using a centralized authority
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1757-6385.htm
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Journal of Financial Economic Policy
Vol. 3 No. 2, 2011
pp. 140-160
qEmerald Group Publishing Limited
1757-6385
DOI 10.1108/17576381111133615
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for enforcement. According to the lawand economics (LE) literature, this approach takes
into account the social perspective – i.e. the social economic loss – while neglecting the
private economic one – known as pure economic loss – which does not affect the social
welfare as a whole. The previous rationale assumes that when harm results from the
relationship between parties and does not affect total ef?ciency but simply the transfer
of wealth, it may be not compensable.
This assumption, however, mainlyrelies on a static viewof ef?ciency. Froma dynamic
perspective, the lack of protection of private interests can have consequences on the
behavior of agents, which in turn affects dynamic ef?ciency and leads to suboptimal
outcomes. In particular, this lack of protection determines a suboptimal level of deterrence
for harmful behavior that may in turn affect social losses.
The solution to this problem involves strengthening complementary regulatory
instruments based on different principles and focusing on a more fragmented
perspective compared with ex ante regulation. This is not only in general possible, but
widely recommended by the literature on regulation (Noll, 1983).
In the case of ?nancial markets, new regulatory devices should push the economic
system to develop a kind of “antibody” springing from the private action and that can
react to harmful behavior by ?rms[1]. However, the standard solution provided by tort
law – the individual action – is not suf?cient to warrant the expected outcome as in
many cases imperfections in the judicial framework prevent the litigation of meritorious
lawsuits. Under these circumstances, a solution increasingly gaining attention in many
national legal systems and potentially designed to restore the balance in tort lawis class
action (CA), which empowers consumers to enter the regulatory framework by aligning
private and public interests.
In the case of ?nancial markets, the above refers more precisely to the investor’s
ability to ?le CAs that may be considered as ex post regulatory devices permitting the
recovery of losses and generating a deterrent effect that promotes dynamic ef?ciency.
This article aims to face the issue bycomparing ex ante regulation – a centralized and
well-de?ned incentive system normally enforced by a single authority appointed by
governments – with an ex post regulatory system, basically dependent on the action of
the consumer who can jointly sue ?rms that behave unfairly and thus create a deterrent.
The benchmark here is the US experience, in which investors who suffer harm by
the misconduct of a corporation or some form of management abuse can self-protect by
exploiting private litigation procedures, in cases that normally fall under the Securities
and Exchange Commission (SEC’s) jurisdiction.
LE arguments suggest that in ?nancial markets the policy of internalizing pure
economic loss by means of CAs can be more far-sighted than simply compensating the
victims: the liability system has the particular feature of strengthening deterrence and
driving the market towards an ef?cient outcome.
The article is organizedas follows: Section2 summarizes the rationale of pure economic
loss with reference to ?nancial markets. Section 3 illustrates the role of traditional
regulation and liability intended as an ex post regulatory system, then discusses the
relationships between the two systems. Section 4 extends the analysis by discussing
the traditional role of ex ante regulation in ?nancial markets, while Section 5 focuses on
the main economic features of CA. Section 6 discusses the role of CAs in ?nancial markets
and country speci?city issues, and Section 7 concludes.
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2. Financial markets and pure economic loss
Several legal systems recognize the existence of pure economic loss, although solutions
have not yet been harmonized and vary considerably from one country to another. The
concept here is linked to social welfare analysis. Pure economic loss is a private loss
that is not socially relevant but simply implies a redistribution of wealth (Backhaus,
2003). Accordingly, wrongful behavior that induces a reallocation of costs and bene?ts
with no consequences on social welfare is not considered socially harmful, and so is not
necessarily subject to compensation[2].
Since pure economic loss is often ?nancial, the above reasoning also applies to ?nancial
markets. Undeniably, traditional regulatory devices are designed to deal with social
ef?ciency by focusing on economic systems as a whole and pursuing behavior that causes
social losses. The regulation of ?nancial markets aims for the stability of economic
systems and thus applies to socially harmful behavior, mostly leaving aside or not
safeguarding distinct private interests. If social and private harmcoincide, i.e. there are no
externalities, ?nancial regulation provides remedies for pure economic loss. Otherwise,
it widely adopts de facto – when not de jure – the pure economic loss approach.
Nevertheless, if we consider the static representation of ?nancial markets together
with their dynamic structure, whichis endogenously affected bythe outcomes produced,
we ?nd that this attitude is shortsighted. Indeed, the equilibriumwith pure ?nancial loss
not only concerns the movement of wealth among individuals, but also under-produces
deterrence, since many tortfeasors will not be sued (Porrini and Ramello, 2005a).
The effect on social welfare is twofold. First, it leads to an excess of wrongful behavior
because the tortfeasor’s expected ex ante liability depends on the possibility of being
sued. If such behavior only determines pure economic loss, the welfare balance will still
not be affected. However, if it brings about ancillary social losses, the lack of deterrence
will also affect social welfare. Second, it eventually leads the would-be victims to reduce
their participation in underprotected activities – i.e. to under-invest in ?nancial
markets – since the opportunity cost is increased by the expected losses[3]. This in turn
affects individual preferences and thus leads to a different choice fromthe optimumone
with no pure economic loss.
All in all, this is tantamount to observing that deterrence in ?nancial markets is a
public good and that pure ?nancial loss can lead to the (under)provision of such a good.
Fortunately, the original balance can be achieved with the ?ling of CAs which act as an
ex post regulatory device that can increase deterrence.
3. Two types of regulation
Traditional regulation is characterized by a centralized structure whose advantages are
based on the fact that it is well suited to serve as a standards-based control. Centralized
search facilities, continual oversight of problems and a broad array of regulatory tools
mean that the regulation system can systematically assess risks by implementing a
comprehensive set of policies, although regulatory agencies may not be well-equipped to
the nature of the underlying problems. Moreover, a centralized command structure with
specialist decisions may be subject to political pressure, to regulatory capture and to
various forms of collusion (Glaeser and Shleifer, 2003)[4].
On the other hand, liability is a more decentralized system where the victim ?les an
action claiming a causal link between the defendant’s conduct and the claimant’s injury.
It relies upon a case-by-case adjudication system[5]. Aspecial extended liability system
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is generated by CA, in which multiple claimants who aggregate their similar cases and
are represented by attorneys may ?nd it rewarding to ?le civil actions against
defendants who otherwise would not be sued.
The standard conclusion of the literature, as we shall see in the following section,
is that when considering features and weaknesses the two systems should be thought
of as complementary rather than alternative.
3.1 Regulation versus liability
The traditional pillar of regulation is represented by an ex ante centralized scheme,
designed to constrain behavior. Its structure generally requires enforcement through
an appointed authority acting outside the courts system. The alternative method for
solving market failure is with a liability system, which basically entitles a number of
individuals to push behavior towards an ef?cient outcome simply by pursuing their
own interests. This solution does not require the burden of a speci?c administrative
structure but can rely on existing organizations.
Ex ante regulation is frequently applied in civil law countries while common law
countries have tended to develop ex post regulation (La Porta et al., 1998). However,
a dialectic process exists between the two systems and in fact it is possible to assert
that “[. . .] the regulation of markets was a response to dissatisfaction with litigation as
a mechanism of social control of business” (Glaeser and Shleifer, 2003, p. 401). Certain
scholars have justi?ed the increasing presence of ex ante regulation in our economies
since the end of the nineteenth century on the grounds of the inability of tort law to
address problems arising in a speci?c market, because of the progressive technical
specialization not afforded by normal courts or because pure liability involves large
payments as an albeit infrequent deterrent (Glaeser et al., 2001).
It is worth noting that while regulation needs to de?ne ex ante what can or cannot be
done and intervenes when speci?c infringing conduct has been adopted, liability does not
need such a system because it shifts the burden to private agents affected by damaging
behaviors. This ?exibility may represent a more adaptive measure against harmful
behaviors when it cannot easily be identi?ed ex ante. In addition, it decentralizes control,
since any would-be claimant will monitor the conduct of the tortfeasor.
Shavell (1984b) argues that administrative costs and differences in knowledge
between private parties and regulatory authority favor liability, while incapacity to
pay full compensation by private parties and the possibility to avoid the lawsuit favor
regulation. In general, a liability system is more ef?cient where private parties are
better informed and where there is only a slight probability of accident. Regulation is
preferable where harm is usually large, suffered by many victims or takes a long time
to manifest, where accidents are common, and where standards or requirements are
easy to ?nd and control.
Moreover, there are differences between regulation and liability when they are
considered as alternative strategies for the enforcement of legal rules, in the sense that
regulators can be more easily prone to identify and punish alleged violations, while
judges are more independent and in a sense more cautious[6].
3.2 Regulation and liability as policy complements
When comparing the two regulatory frameworks, the LE literature suggests that in a
world of perfect information, either may be ef?cient for solving market failures: ex ante,
Class action and
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the perfectly informed authority can set up the optimal incentive scheme and the
potential tortfeasor will face the proper incentive to take the ef?cient level of prevention;
ex post, the harmed individuals will be able to protect their own interests and receive
complete compensation (Calabresi, 1970; Shavell, 1987).
Whenever markets are not perfect from an informational point of view, the two
systems may be unable to produce an ef?cient outcome separately. In this case, the
combined solution – i.e. regulation plus liability – may be necessary to provide a
complete set of incentives for economic agents and to reach at least a second best
solution. In the mentioned work, Shavell (1984a) looks at the joint exploitation of ex ante
and ex post regulation as the solution for controlling risk, thus solving the puzzle of
producing the socially desirable level of prevention.
In a similar vein, Kolstad et al. (1990) point out that economics has mostly studied the
regulatory frameworks separately and underlines the distinct inef?ciency of each of
them, whereas the solution of overlapping ex ante regulation and liability is widespread.
The general problem is to de?ne ex ante the proper standard which can drive ?rms to
choose a level of preventiondifferingfromthe sociallyoptimal one. The liabilitysystemis
then frequently used to correct the previous shortcoming by integrating what is missing.
Other scholars go further in supporting complementarity as the only way to overcome
single imperfections. Schmitz (2000) further extends the previous conclusions, suggesting
that the joint use of the two systems may solve the problem of the limited ef?ciency of
liability caused by enforcement errors and by the injurers’ efforts to avoid lawsuits.
Finally, Glaeser and Shleifer (2003) showthat when the probability of an accident and
of being caught by a regulator are independent, and there is a possibility of capture, the
combined “regulation and liability” solution is usually more effective than regulation
alone. Moreover, the introduction of regulation in a liability framework does not involve
abandonment of liability.
4. Ex ante regulation in ?nancial markets: the stability objective
The above arguments apply to ?nancial markets, since the vulnerability of regulation
alone has been repeatedly revealed by recent failure. The capture, or at least the
excessive indulgence of regulators, has been emphasized by commentators[7].
Whether these failures should be considered pure ?nancial losses or not, they clearly
stress that the lack of protection of private investors’ interests, even when they do not
directly impair the present social welfare, can affect the deterrence level and more
dynamically future social welfare. Relying upon the ex ante regulatory system based
mainly on the “command and control” approach with no participation of investors has
led the market to systematically neglect signals of the oncoming failure and to
under-provide deterrence for would-be injurers.
In most industrialized countries, the stability objective was ?rst enshrined in
regulations issued in the aftermath of the 1930s as a reaction to the Great Depression,
the most serious case of market failure in modern history. Therefore, even though the
national regulations for the safeguard of stability developed independently, under
separate institutional frameworks, all systems nevertheless show common traits. The
persistent leitmotif of regulatory policies has been to avoid failures that could trigger a
domino effect, causing other ?nancial institutions to fail in turn and culminating in the
collapse of the entire market, with extremely serious repercussions on the economic
system as a whole (Goodhart and Illing, 2002).
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To some extent, it can even be asserted that the goal of stability has long absorbed
regulators’ attention at the expense of the ef?ciency of ?nancial markets, for example, by
roughly sidestepping competition (Porrini and Ramello, 2005b). To reach this objective,
national legislators have generally provided devices resting upon ex ante regulation and
supervision.
Two main lines of institutional design have been adopted by various countries. On
the one hand, there are nations whose regulatory framework is based on a distinction
between banking and ?nancial market operators, such as the USA, where the Banking
Law and Securities and Exchange Acts were enacted almost simultaneously, but as
completely separate legislation. On the other hand, there are countries where the
?nancial market rests heavily upon the banking sector, which acts as a pivot in
collecting savings in the form of deposits and as a ?nancial intermediary for investors.
Accordingly, a consolidated banking law further conditions the ?nancial market with a
regulation characterized by the priority of stability over transparency.
In the 1980s, the European Commission started building a common regulatory
system in which a very important role was to be played by directives, starting with the
First Banking Coordination Directive, and continuing with a series of directives aimed
at harmonizing the ?nancial regulatory systems of member states[8].
Thus, despite the recent thrust toward increased competitiveness, regulation in
Europe remains very strong, basically still due to the issue of ?nancial market stability
which requires the adoption of supervision mechanisms for ascertaining and limiting
the risks to which ?nancial institutions are exposed. This is closely related to the
evolution of ?nancial markets and activities forced by the ?nancial innovation process,
by European Monetary Union and by the introduction of the euro. In fact, the tendency of
investors to shift towards securities instead of investing all their savings in banks, and
the corresponding increased market share of ?nancial intermediaries other than banks,
have fostered the need for ?nancial (not only banking) regulation and supervision[9].
Nowadays, ?nancial policy recognizes the need for competition among markets,
intermediaries and products; the need to protect investors and depositors from the risks
associated with privately issued securities through the enhancement of transparency
and the monitoring of behavior; and the need to maintain stability of ?nancial system.
The achievement of these somewhat contrasting goals by means of just one regulatory
device appears to be quite unlikely.
Although the directives have accelerated the convergence between national ?nancial
regulatory systems, there are still differences that re?ect the underlying domestic
?nancial sectors. It seems reasonable to believe that in the near future, certain gaps will
be ?lled by European Economic and Monetary Union[10]. Whatever the outcome of this
process may be, it is reasonable to expect a common ex ante regulatory framework that is
typically more sensitive to the goal of stability.
Accordingly, decentralized ex post regulatory instruments will once more be relevant
to address the uneasytaskof ef?ciency ina ?nancial market, whichis affectednot just by
followingcertainrules but also by avoidinga catalogue of behaviors harmful to investor.
Notably, the kind of solution such as securities CA affects not just the individual utility
but also the integrity of the market, by promoting investor con?dence, and of the
economic system as a whole if it is effective in lowering systemic risk (Weiss and
Beckerman, 1995).
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5. LE of CA: compensation and deterrence
This section aims to outline the role of CA from a LE perspective, particularly looking
at their role in improving the incentive system to the optimal level of prevention in the
?nancial market. In this perspective, CA can be seen as a system of private provision of
a public good, by means of the incentive provided to plaintiffs or to lawyers.
5.1 Origins and essential procedural features
CAis a device nominally introduced in the US legal systemin 1938 through Rule 23 of the
Federal Rules of Civil Procedure, in order to remedy the existing imbalance between
plaintiffs anddefendants inseveral areas of regulationbybroadeningthe potential liability
of defendants. The full implementation of the system into civil procedure dates to 1966,
when the new version of Rule 23 was issued by the Supreme Court (Hensler et al., 2000).
The simple goal of CAis to enable the vindicationof claims that otherwise wouldnever
be litigated, no matter howmeritorious (Rodhe, 2004), althougha broader political agenda
has been involved since the beginning – ranging from civil rights (e.g. segregation) to
health protection, consumer protection, environmental matters, etc. (Hensler et al., 2000).
CA is a legal device for tackling torts in a broad array of cases, including securities
fraud (e.g. breach of ?duciary duties, failure to disclose important features to the
plaintiff, giving false information, or insider trading)[11].
However, despite the idiosyncratic domain of application, CA presents a core of
common procedural features that rest on two precise pillars:
(1) the aggregation of separate claims united by design and not by substantive
theory; and
(2) the indirect representation of absent parties.
CA is a form of representational lawsuit that eliminates duplications by binding upon
individuals with related claims, even if they were not originally named party to the
proceedings, and by giving a lawyer – the so-called “class counsel” – control over all
of them. Accordingly, once the judgment has been given, it extinguishes all claims
included in the class and not just those of the parties named. This means that everyone
falling within the class is considered an absent class member and thus included de jure
in the lawsuit (Dam, 1975).
From a procedural point of view, CA is a form of indirect representational litigation,
since lawyers are not appointed directly by all claimants but through a speci?c set of
procedures established by law. The action is ?led by an individual (or a group) and then
the class is certi?ed by a judge (Haymond and West, 2003). It is important to note that
indirect representation is a mechanismthat alters the typical principal-agent relationship
between claimant and lawyer, seriously challenging the ef?ciency of judicial activity.
Hence, it demands a speci?cally designed set of incentives in order to work properly
(Klement and Neeman, 2004). However, the same kind of indirect representation is also
found in regulation, where the authority acts on behalf of interested parties as a parens
patriae, pursuing the public interest by means of a specialized bureaucracy[12].
By contrast, CA is a solution to this under-representational problem, which affects
overall access to justice and the vindication of certain claims (Tidmarsh, 1998). Indirect
representation merely serves to exploit the possibility of aggregating related claims
without bearing the costs of coordinating a huge number, often a “mass,” of potential
plaintiffs. On the whole, CA makes it possible to exploit a different and more ef?cient
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litigation technology and empowers an entrepreneurial subject – the attorney – to ?le
a lawsuit on behalf of victims. Hence, CAs can address a market failure of the judicial
system stemming from the suboptimal level of demand for legal services for exogenous
reasons. This is, in itself, an important economic feature in their favor.
CAs nonetheless present additional economic virtues worth recognizing.
In particular:
1. They promote economies of scale in the judicial market on both the demand side
(by creating a temporary “public company in litigation”) and the supply side
(by tackling a large number of claims in a single trial).
2. They promote ef?ciency in risk allocation by allowing it to shift to the subject
more able to bear it. This typically happens when the contingent fee reward
scheme is adopted, shifting the risk to the attorney in exchange for a share of the
expected damages.
3. They make speci?c individuals, who eventually become defendants, internalize
the externalities arising from their behavior on the class members. Put another
way, they set up a deterrent by creating a speci?c incentive mechanism. This
feature is fundamental to providing ex post regulation.
These three aspects will be further disentangled in the following sub-sections.
5.2 CA and “judicial economy”
The ?rst virtue refers to what has been de?ned in the literature as “judicial economy.”
At ?rst glance, a CAcan be simply viewed as a litigation technology enjoying increasing
return to scale, and that therefore gives a multitude of claimants incentive to ?le a
lawsuit that otherwise would cost themmore than the expected bene?t (Bernstein, 1977).
However, CA achieve ef?ciency in two distinct way: it reduces the average cost by
aggregating claimants and it can reduce the court’s cost by concentrating a multitude of
lawsuits in one.
Some scholars have pointed out that the increase in ef?ciency can be reduced for
three distinct though somewhat related reasons. Primarily, the class counsel can adopt
rent-seeking behavior in order to maximize revenue, which can increase costs for
claimants. Increased costs usually occur when lawyers’ fees are based on hourly billing
rather than results. However, this is an agency failure that can be resolved by setting
up the right incentive scheme, such as contingent fees[13].
Second, CAs last longer than other trials, up to 11 times more than a standard
lawsuit (Willging et al., 1996). This may be due to the lawyer’s rent-seeking behavior as
above, but also to technical reasons. However, since a class is normally made up of
hundreds if not thousands of claimants, the amount of time required to settle each
lawsuit, if ?led, would be considerably longer than in a single action.
Finally, it canbe arguedthat the possibilityof CAincreases the number of lawsuits that
are ?led, which implies additional costs for the judicial system. This observation can be
questioned if we consider social ef?ciency rather than legal costs. As we emphasized
above, CAs are legal devices designed to solve the problemof suboptimal legal protection
and deterrence, so an increase in lawsuits in this case would be welfare enhancing[14].
Furthermore, since CAs can promote dynamic ef?ciency in economic systems by
setting up a deterrence mechanism which decrease harmful behaviors. In this respect,
CAs are more than a device that redistributes wealth among parties.
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5.3 Plaintiffs, risk shifting and the role of the class counsel
CA’s second merit is its utility in managing risk and changing the balance of expected
bene?ts. Individuals often do not ?le lawsuits for purely economic reasons, as the expected
reward may be lower than the costs incurred[15]. Those ?gures depend on three elements:
litigation costs, the compensatory damages to be obtained and the probability of winning
the case. For the sake of simplicity, a formal representation – considering a risk-neutral
subject – could be the following: EðRÞ ¼ pðD 2LÞ 2ð1 2pÞL, where 0 , p , 1 is the
probability of winning, Drepresents the awarded damages and L the litigation costs. It can
be seenthat E(R) is increasinginDandp, while decreasinginL. As observedpreviously, the
aggregation of several claims increases judicial economy by lowering the average costs of
litigation. It is obvious that if D 2L , 0 inanindividual action, the lawsuit will not be ?led.
In general, CA alters the claimant’s expected reward in several ways: by spreading
the litigation cost over the class, thus rendering D 2L . 0, and in the case of contingent
fees, since the claimant will not pay the lawyer directly, by setting the second term
of the equation at 0[16]. In addition, it generally raises the probability of winning
since the lawyer is specialized in this kind of suit and has greater resources to invest
in the technical needs of the trial[17]. Additionally, it fosters the emergence of an
entrepreneurial attorney, who is better equipped to face the risk of the litigation and
accordingly has more incentive to ?le the lawsuit than the single victim. The standard
equation here is that the attorney fosters the protection of victims’ rights in exchange for
a share of the awarded damages, as a reward for risk. On the whole, this possibility alters
the cost-bene?t ratio for the individual and provides the incentive to proceed (Dam, 1975;
Eisenberg and Miller, 2006; Cassone and Ramello, 2011).
It can be shown that lump sum fees – such as the lodestar method[18] – and
contingent fees can both be designed in order to extract part of the awarded damages.
However, while lump sum fees imply a certain cost for the plaintiff and can therefore
discourage her from ?ling the lawsuit, contingent fees because they cancel the certain
cost are better suited for shifting the risk.
5.4 Internalization of harms and production of deterrence
CA also modi?es the risk portfolio of the defendants, who in the case of multiple
litigation are in a better position to handle risk than the claimant. They enjoy risk
diversi?cation, as opposed to the individual claimant, who is faced with just one risky
event. Insucha case, the defendant minimizes the risk througha portfolio of independent
litigations and has an expected outcome that will be the average of successes and
failures. Of all possible lawsuits, some will not be ?led, and the likelihood that a given
party will or will not sue further in?uences the defendant’s overall chances. The
individual claimant, on the other hand, bets everything on a single lawsuit. Accordingly,
her risk is not diversi?ed and is on average greater.
By concentrating a number of suits in one, CA rebalances probabilities as both
claimants and defendants face a more similar risk fromthe start[19]. If we then consider
that risk can be transferred by the claimants to the attorney in exchange for a signi?cant
part of expected compensatory damages, there is a further interesting remark:
lawyers generally present a higher risk tolerance than single class members and are in a
similar position to the defendant in terms of handling it. Hence, they can play a similar
role to entrepreneurs in the market, who exchange risk for expected returns.
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Incidentally, this is precisely the feature that renders CAs more effective than
traditional suits: they increase the incentive to sue for harmful behavior. This leads to
their fundamental economic virtue – the deterrence effect – which economically
speaking is a public good (Rosenberg, 2002; Cassone and Ramello, 2011). If a judicial
system without CA permits a higher degree of impunity because of the lower incentive
for injured parties to sue an infringing ?rm, the would-be defendants will be less
inclined to adopt virtuous behavior. Accordingly, this situation is likely to overproduce
externalities over the would-be claimants. CAs are a way to push for the internalization
of such externalities in the same vein as a Pigovian tax[20].
Since CAs basically extend liability, they should be seen as a way of pursuing
deterrence by means of a versatile decentralized judicial system, thus complementing
ex ante regulation. It is worth noting that CAs by means of private incentives – i.e. the
recovery of private losses – are designed to produce an optimal level of public good,
that is to say deterrence (Coffee, 2006).
This is why even though CAs are not perfect and have been ?ercely criticized by a
number of opponents, to the point of starting what has been termed a “holy war” in the
1970s[21], they are viewed as an effective means of serving ef?ciency. Where introduced
in ?nancial markets, they have certainly been successful for decades at extending
liability and enforcing the protection of widely dispersed consumers, thus making it
possible to deter speci?c harmful behavior that otherwise would not be addressed.
Further, they play the non-ancillary role of preserving certainty for investors and thus
promoting the integrity of markets and of the economic system as a whole.
6. CA, ?nancial markets and social welfare: a different interplay between
law and economics
The trouble with enforcing liability in ?nancial markets is the asymmetry between the
parties: the claimants are usually highly fragmented and widespread, while the
defendants are players with extensive resources and skills. This situation often leads
the would-be claimant not to ?le a lawsuit because the expected cost of doing so exceeds
the expected bene?ts. In such a case, private harm will not be compensated – implying
pure economic loss – but the market will face an under-deterrence for possible harmful
behavior, to the detriment of social welfare.
6.1 Investor protection and the economic system: insights from the US experience
The asymmetry described can be redressed simply by permitting collective lawsuits in
the form of CAs. In the US ?nancial market, securities CAs aim to expand the
opportunity for action of large numbers of dispersed shareholders. Thanks to securities
CAs, each shareholder can take part in a single lawsuit with all the injured parties
instead of pursuing a lonely action against a corporation[22]. Indeed, individual action
in this sector is rare since the expected bene?t for the individual claimant is often
outweighed by the cost, while CAs redress this balance (Coffee, 2006).
As previously argued, the extended liability regime combined with ex ante
regulation can better achieve ef?ciency, although this does not necessarily imply that
CA in ?nancial markets is without shortcomings. The perception that many
US securities CAs were based on frivolous claims was speci?cally addressed by
Congress with the enactment of speci?c measures, which increased the importance of
merit-related factors in determining which companies could face securities CA[11].
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However, the merits still outweigh the costs and there are several reasons for
making this assertion. Most countries do not allow securities CAs, with the exception
of the USA, which interestingly still has the largest and most lively capital market in
the world despite the infamous market failures. The two factors are not unrelated.
According to certain scholars, at least part of the success of the US capital market “may
be attributed to the ability of lawyers to organize a class action against corporate
of?cers and directors” (Strahan, 1998, p. 29).
This can be explained on two different although complementary grounds. First, the
extension in liability created by CAs reduces the opportunity for tortfeasors of
pro?ting from wrongful behaviors and produces new incentives for ef?ciency. In other
words, the potential tortfeasor will only be able to (legally) maximize pro?t within the
market if harmful behavior can no longer produce the expected bene?ts.
Second, the more comprehensive tort systemandthe increasedcertaintyof investment
protection give more energy to the ?nancial sector and the economic system as a whole.
Agreat bodyof evidence shows that a commonfactor incountry-to-countrydifferences in
the concentration of ownership in publicly traded ?rms, in the breadth and depth of
capital markets, in dividend policies and in ?rm’s access to external ?nance is how well
investors, both shareholders and creditors, are protected by law from expropriation by
the managers and controlling shareholders of ?rms (La Porta et al., 2000).
This affects not only the performance of ?rms or the market, but of the economic
system itself; empirical evidence shows how the effectiveness of investor protection
and hence the integrity of ?nancial markets has a positive in?uence on GDP growth
(Haidar, 2009; Chiou et al., 2010).
One could, of course, wonder whether these results depend on ex ante regulation
rather than ex post, since investor protection depends on both. However, because the
literature has shown an unavoidable complementarity between ex ante regulation and
the court system in promoting ef?ciency, it is reasonable to assert that the
incompleteness of tort lawis a crucial reason for weaker protection, as otherwise ex post
regulation would be triggered even when the ex ante system is not working properly.
Hence, the degree of protection depends crucially on the effectiveness of tort lawand the
court system[23].
The empirical evidence thus far available on CA in the US ?nancial markets seems
to support the above arguments (Eisenberg and Miller, 2006; Dyck et al., 2007). The
counterfactual is scant and comes essentially from Europe, where requests for
introducing CA are increasingly gaining momentum (Backhaus et al., 2011).
6.2 The long and winding road of European CA
It is important to clarify that there is no uniform proposal for an “European class
action,” nor a speci?c design for collective securities litigation, although many member
states are involved in lively debate on the subject especially as regards an attempt to
improve ?nancial regulatory mechanisms. Discussion began with the Green Paper on
the Rights of Consumers ( June 1993), which then led to Directive 98/27/EC and more
recently to the Green Paper on Consumer Collective Redress (November 2008), which
has broadened the scope of consumer protection. However, despite these stimuli,
nothing has happened at the communitarian level. The CA debate has never brought
any signi?cant results, under the pretext of the differences between civil and common
law systems (Ferrarini and Giudici, 2005, pp. 48-9)[24].
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On the other hand, countries that have tried to introduce collective litigation systems
in very limited domains and with severe constraints have so far seen no impact in terms
of outcomes, with a few exceptions. Furthermore, securities cases are very often
excluded from laws that to some extent mimic collective litigations.
The evidence so far is poor and very fragmented. The champion is the UK, which
introduced CA into its legal system in 2000. Since then, “[a]round 60 such cases have
been launched [. . .] – without any egregious examples of abuse” (The Economist, 2007,
p. 15). But critics will call this an exception, since the UK is a common law country and
the transplant is therefore fairly simple compared with the case of civil law system.
Finland is one of the few other countries to introduce a CA-like device in 2007, after
almost 20 years of preparation, and it has seen negligible results that do not affect
securities at all. The Finnish law actually focuses on consumer and product liability
cases; securities are thus excluded as stock owners are not consumers (Va¨lima¨ki, 2011).
Portugal introduced a collective action law almost 20 years ago. The scope is very
broad, and encompasses public policy to the point that its effectiveness in reaching its
statutory goals is dubious (Garoupa and Gouveia, 2011). Similar concerns have been
raised about the Swiss CA-like system (Baumgartner, 2007).
All these failures have given critics fodder to argue against the transplantability of
CA in many European countries, although they have not been able to provide an
alternative solution to the under-protection of consumers and investors.
However, beyond the political and academic debate, an interesting phenomenon has
started to emerge among European consumers: victims have spontaneously begun to
look for arrangements “on a shoestring” to compensate for the incompleteness of
national tort law.
Agood example is the Italian Parmalat case, which shows tentative implementations
of a de facto CA to ?ght the under-provision of compensation by the national legal
system. Italy do not permit CA, but accepts quasi-collective mechanisms driven by
consumer associations. These plaintiffs have no standing to recover damages and can
only obtain cease-and-desists or orders to protect consumer interests. Consequently, the
dispersed investors have no choice but to ?le an individual lawsuit at their own risk and
expense. In the Parmalat case, owing to the very high costs and the extremely low
probability of recovering damages, investors attempted to use CA by relying upon the
US legal system. Many Italian investors joined the CA ?led in January 2004 in the USA,
just a fewdays after Parmalat went bankrupt, against several ?rms’ representatives and
auditors. Asset managers in the USA also ?led a second CA against some banks, the
former management and the auditors (Ferrarini and Giudici, 2005).
This forum shopping so far has proved to be very hazardous, as witnessed by the
New York Court decision not to certify non-US residents within the class[25]. Hence,
the remaining strategy for Italian investors was to build a quasi-collective lawsuit:
about 10,000 investors trying to avoid an individual suit joined the criminal trial ?led
in Milan in October 2004 as civil claimants[26]. The main idea behind this strategy is to
use the criminal proceedings and the public prosecutor, respectively, as a sui generis
CA and class counsel, and in some way to enjoy the bene?t of the consolidated lawsuit.
Nevertheless, the individual incentives of the public prosecutor and the nature
of the criminal trial are considerably different from those of CA, and liability litigation
is just an externality of criminal proceedings.
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It is remarkable to discover that similar attempts to force the availability of CA have
been made under various circumstances. One example is the Lufthansa Cargo Airline
settlement, on behalf of many European victims in the USA, which agreed to pay
$85 million to members of the CA suit (The Economist, 2007). Also, in a number of US
securities CAs litigated under the Private Securities Litigation Reform Act (PSLRA),
many European ?nancial institutions were acting as the lead plaintiff while they
cannot even ?le such a lawsuit in Europe (Gelderman, 2006).
All in all, a preliminary glance at the old continent shows a puzzling picture,
con?rming that Europeans suffer from the incompleteness of consumer protection and
are sending strong signals to legislators to show that they feel under-protected. The
creation of sui generis solutions, to “mimic” CA where not existent or not effective or to
join a US lawsuit, is somehow defying the sovereignty of national jurisdiction and
creates a puzzle that can only be solved by lawmaking.
In Italy and Germany, legislators seem to have grasped the message from victims
and have recently introduced CA-like devices. Thus, far, however, these measures are
very different from and more limited than the US model, so the outcome is likely to be
substantially different from what is expected.
Germany, in 2005, enacted the Capital Markets Model Case Act (“Kapitalanlegerthe
Musterverfahrensgesetz” or “KapMuG”), which is speci?cally designed to complement
ex ante regulation for investor protection. The KapMuG is again a sui generis CA, as it
allows similar claims in capital markets to be gathered around a test case. Further,
unlike US CA, it only applies to parties who have already ?led suit and does not allow
indirect representation. Hence, while it tries to exploit aggregation and the consequent
economies of scale, it lacks many of the de?ning features of CA.
In 2009, after years of delay, a sort of CA was introduced in Italy that should be used
for many harms, including securities fraud[27]. Owing to its very recent implementation,
it is too early to make an assessment. However, expectations are limited by the
restrictions imposed, e.g. the fact that only consumer associations can ?le lawsuits on
behalf of a group of consumers. Hence the entrepreneurial activity of the class counsel
will be signi?cantly curtailed, and the law basically extends the power of consumer
associations. From this viewpoint, the new device can be at most be considered an
extension of ex ante regulation[28].
6.3 Country speci?cities, legal transplants and effectiveness: further comments
One of the stronger arguments against the enactment of the US model and justifying
laws that in many ways contradict the rationale behind CAs is the presumed dif?culty
of transplanting a common law institution into a civil law system. This has been the
insistent refrain of the European debate.
Thus, the main question concerning CA appears to be straightforward: does the
legal system matter? The answer is simple, though not trivial: of course it does, but this
is true for any legal change, not only for introducing CA. The real point here, beyond
the technicalities required for making the new device workable, is whether there is a
political consensus for attaining the objectives embedded within the change.
This is why hesitation over legal transplants tends to blur the focus. First, there is
evidence that every legal system, even those with common roots, develop idiosyncratic
features eventhoughtheir technologies andeconomic endowments are similar (Field, 1991;
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La Porta et al., 2008). Hence, the opposition could be applied to any law – property laws,
contract laws, etc. – or any procedure that tries to harmonize different legal systems.
Second, legal transfer from common law to civil law countries has already been
accomplished in many cases – such as the antitrust law and regulatory acts in
numerous ?elds – showing that it is often possible to adapt legal bodies successfully
between one system and another.
Finally, it is well documented that the growth of lawas a general process is primarily
explained by the transplantation of legal rules, so the debate over implementing CA is
moot (Ewald, 1995). Rather, faced by the under-enforcement of liability, which in turn
stimulates the ?ourishing of harmful conduct, a national legal systemmust either opt for
CA or indicate an alternative choice, since criticism alone is useless.
A similar sticking point is that ?nancial systems vary across different nations. In a
sense the two objections are related, since there are causal links betweenthe socio-economic
environment and legal development, and also between the legal framework and ?nancial
development (Field, 1991). Empirical investigations have tried to measure the differences
deriving from the legal tradition of various countries and the level of protection for
creditors and investors: civil law countries, for instance, offer less protection and weaker
enforcement, together with a high concentration of ?rm ownership.
The quality of investor protection is linked to the development of capital markets in
the sense that countries with poorer investor protection, measured in terms of speci?c
commercial regulations, as well as the quality of enforcement, have capital markets that
are less developed[29]. Hence, empirical evidence suggests that rules associated with
common law are, in general, superior in fostering larger and broader capital markets,
especially compared with countries based on the civil lawtradition (La Porta et al., 2008;
Chiou et al., 2010).
These ?ndings, rather than challenging the introduction of CA in legal systems
different from the USA, are actually another argument in favor of legal transplant: CA
is even more important in those systems that are “genetically predisposed” to the
under-protection of investors. For instance, the possibility for stronger creditor and
investor protection by means of CA could improve the expectations of small and large
investors, attracting capital and investments to the country with a bene?cial effect on
the economic system as a whole (La Porta et al., 2000).
Naturally, the proper implementation of any legal device will require some
?ne-tuning for the speci?c legal framework. In the case of CA, this means protecting its
de?ning features – free aggregation of claimants, indirect representation, risk-shifting
mechanisms and the entrepreneurial activity of the attorney – which jointly provide
the proper incentive for litigating meritorious claims that otherwise would not be ?led.
If any of the characterizing features are missing, the result will be signi?cantly
disempowered CAand a watered down outcome in terms of both victims’ protection and
social welfare. This is precisely what has happened with European laws that under the
“class action” label have introduced the hesitant forti?cation of consumer laws or some
form of feeble claimant aggregation, while neglecting much of what de?nes a real CA.
While this timid attempt can be explained on the grounds of either technical
dif?culties in issuing the new laws or the aim to cheat citizens by passing off dross for
gold, the main risk behind this attitude is to provide detractors with strong yet bogus
arguments against the effectiveness of CA.
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7. Concluding remarks
The proposal in the LE vein to pair regulation and liability in the ?nancial markets and
to reinforce the latter by means of CArests upon the idea that, apart fromthe traditional
centralized systems, markets must be able to spontaneously develop “antibodies” to
problems that regulation does not address. This is also healthy for the economic system.
Regulation, in general, is designed to avoid speci?c market failures and is thus fully
justi?ed according to principles of ef?ciency. In other words, when the market alone is
not able to reach an ef?cient outcome, this can be achieved by regulation which de?nes
the boundaries that constrain economic action. The aim of regulation is to maximize
social welfare by outlining a well-de?ned framework to drive proper behavior by the
regulated agents. The typical strategy rests upon the “command and control” approach,
which tries to ensure that the recommendations are respected and, if necessary, punishes
non-compliance. The merits of institutional regulation are fully recognized by the
literature and are not in question here.
However, regulation alone may be unable to address all the multiform externalities
that arise in markets. The exclusion of a signi?cant number of economic agents from
protecting their own interests can produce under-deterrence for would-be injurers, with
a severe effect on the economy. Fromthis perspective, then, the standard pure economic
loss approach contains certain elements of fallacy, since even when harmful behavior
does not in itself impair the social welfare, it may do so indirectly by preventing the
market from developing those powerful antibodies against dangerous conduct that
liability is able to develop. In this respect, the possibility of ?ling CAs directly pursues
the private interests of individuals trying to recover pure economic loss, while it
indirectly produces a public good – i.e. deterrence – that affects social welfare.
This would seem to apply especially to the ?nancial sector. In many circumstances,
the existence of CAs as complementary ex post regulatory devices can play a
signi?cant role in addressing a failure that ex ante regulation has not. The presence of
this complementary regulation may indeed explain, at least partially, the greater
success of the US capital market compared to others and recommends a more robust
endorsement to the European countries that so far, with few exceptions, have endorsed
this model only timidly.
While in many countries legislators are still discussing or hesitantly introducing
watered-down versions of CA, investors themselves are helpfully driving the agenda
toward increased protection.
Notes
1. As argued by Arthur Levitt, former Chairman of the US SEC, in the case of securities
“[p]rivate actions are crucial to the integrity of our disclosure system because they provide a
direct incentive for issuers and other market participants to meet their obligations under the
securities laws.” Testimony before the House Subcommittee on Telecommunications and
Finance, Committee on Commerce, Fed. News Serv., 10 February 1995, note 5.
2. This rationale is strongly supported by LE scholars and explains why in several cases,
liability regulations that are mainly conceived to address socially relevant externalities
simply do not take pure economic loss into account (Shavell, 1987; Backhaus, 2003).
3. The point here is not about recovering damages for injured parties. The injured can replace
their losses through insurance, when affordable (Priest, 1987; Rosenberg, 2002).
Nevertheless, the opportunity cost will now also include the insurance rate.
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4. The “capture” or “interest group” theories have dominated a signi?cant part of regulation
literature since Stigler (1971). The main idea is that in such cases a ?rm can inappropriately
water down the regulation in order to obtain private bene?ts – such as a speci?c price
regime – or at least render it irrelevant, while the authority can increase their budget or their
bribes. According to this view, several laws passed in the USA were in fact justi?ed by
strategies of market foreclosure, such as raising rivals’ costs (Glaeser and Shleifer, 2003).
5. We consider here an abstract and uniform legal system that of course does not exist, as
different countries have developed different legal systems in accordance with one of the two
main traditions (common and civil laws) and added their own idiosyncratic features. We will
deal with differences further on in the article. However, in many cases in recent decades, as
pointed out by the seminal contribution of Merryman (1981) and as increasingly supported
in the literature (Ewald, 1995), there has been a process of convergence among different
systems: in civil law, for instance, precedent is often considered in the adjudication of new
disputes, while in common law statutes and law are becoming as important as earlier
decisions.
6. “The stronger incentives of the regulators have the bene?t of bringing about more
aggressive enforcement than can be achieved through courts. Yet, these incentives also have
the potential cost of excessively aggressive enforcement when regulators motivated to ?nd
violations penalize innocent suspects. There is thus a trade-off between enforcement by
judges facing relatively weak but unbiased incentives and enforcement by regulators facing
stronger but possibly biased incentives” (Glaeser et al., 2001, pp. 854-5).
7. Focusing on the role of the SEC in the US Enron case and on the ambiguous appointment of
Harvey Pitt as Chairman, Krugman (2002) meaningfully wrote: “The truth is that key
institutions that underpin our economic system have been corrupted. The only question that
remains is how far and how high the corruption extends.” Similar comments have recently
been extended to the forced replacement of the Pitt heir at SEC, William Donaldson, holder of
a strong “reputation for integrity,” with Christopher Cox, ironically de?ned “Pitt-like” (Chait,
2005). According to some commentators, the expectations were self-enforced, as Cox “[. . .]
was slow to recognize the deteriorating position of brokerage ?rms. In that sense, he bears
joint responsibility with the secretary of the Treasury and the Federal Reserve chairman”
(Westbrook, 2009).
The Italian ex ante regulatory system as a whole was just as violently criticized in the
Parmalat case. Scarpa (2004) stressed a similar fault in supervision of the ?nancial market
by the CONSOB (Commissione Nazionale per le Societa` e la Borsa) – the Italian SEC
equivalent. And the Bank of Italy was accused of not having exercised its proper role in the
bond issues – under art. 129 of the Consolidated Banking Law – and in the Parmalat risk
classi?cation (Ferrarini and Giudici, 2005).
8. A fundamental step in the recognition of competition as a primary objective of ?nancial
regulation is contained in the Second Banking Coordination Directive, which provides for
principles such as home country control, harmonization of prudential supervision and
mutual recognition. Refer Banking Directives (?rst 77/780 and second 89/646), as well as the
Own Funds (89/299 and 91/633) and Solvency Ratio Directives (89/647 and 94/7).
9. The main stage of harmonization was clearly represented by European Monetary Union,
with the creation of the European System of Central Banks built around the European
Central Bank, which is responsible – together with the national central banks – for the
monetary policy of the entire Union.
10. National regulators do not have the necessary wide view of all the risks run and activities
performed by groups operating in different countries, and some formof international ?nancial
supervision must be set up to safeguard the evolving process of ?nancial integration.
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11. These were formerly litigated under Section 10(b) of the Securities Exchange Act of 1934 and
under Rules 10-5 and 23 of the Federal Rules of Civil Procedure. The idiosyncratic nature of
securities CAs and the particular features of these kinds of lawsuits called for a dedicated
statue, issued in 1995 as the PSLRAand designed to reduce the risk of “frivolous” litigation –
i.e. a suit that, under speci?c circumstances, permits to extract a positive settlement from the
defendant despite the expected outcome would be negative – and therefore to make securities
CAs more ef?cient. It implements speci?c features including changes related to pleading,
discovery, liability, class representation, awards and expenses. In particular, the PSLRA
established the role of “lead plaintiff” to empower the investors with the largest ?nancial stake
in the litigation – very often institutional investors (Weiss and Beckerman, 1995).
12. Further, indirect representation is not a novelty in lawsuits in either civil law or common
law systems, since it occurs whenever there is the risk of systematically preventing speci?c
categories of individuals fromprotectingtheir ownrights. Inother words, indirect representation
occurs whena partyis unable to?le a lawsuit personallybecause of incompetence, lackof money
or for other reasons. This is the case, for example, with children or the mentally ill, but it also
applies to consumers who cannot afford law enforcement on their own.
13. Moreover, the lawyer’s opportunistic behavior can emerge also in individual lawsuits while
this does not seemto be a major problemso far in securities CAs (Eisenberg and Miller, 2006).
14. If there is a problem of under-deterrence, either the problem would not be solved and there
will be a cost in terms of ef?ciency, or it will be solved through ex ante regulation, which of
course is equally costly. In the absence of CAs, therefore, their cost would be replaced by that
of one of the other options.
15. CAs, of course, do not seek compensatory damages only but also punitive damages that can
be higher than the pure economic loss. Nonetheless, circumstances such as the inability to
properly measure the harm can justify the awarding of punitive damages (on CA and
punitive damages, see Cenini et al. (2011)).
16. In a CA, the lawyer supports the cost of the legal action by gaining the residual right to
obtain a signi?cant part of damages as a contingent fee. The contingent fee will impair the
damage recovery of claimants and will still imply a pure economic loss, albeit reduced. This
is consistent with the arguments of other scholars (Rosenberg, 2002).
17. It is worth noting that in this case as well, there may be an agency problem between
claimants and lawyer that must be properly addressed. See Klement and Neeman (2004).
18. This method relies upon an expected amount of hours calculated by the court multiplied by a
reasonable hourly rate, sometimes also multiplied by a factor re?ecting some particular
feature of the case.
19. If we consider the probability of an individual’s ?ling a suit as ranging from 1 to 0, this
decision being statistically independent, the probability of ?ling a CA by at least one class
member increases and will be close to 1 for a suf?cient number of class members, as it will be
given by the joint probability. This value will further increase as external subjects, namely
lawyers, also promote the action in order to be named class counsel.
20. Named after the British Economist Arthur C. Pigou, it is a tax intended to correct market
failure by levying on a given economic agent exactly the same amount corresponding to the
negative externality produced (Baumol, 1972).
21. Epstein (2003, p. 1) de?nes CA as “one of the most ubiquitous topics in modern civil law” and
asserts that “[t]he reason for the omnipresence of class actions lies in their versatility.” However,
CAs, like all juridical tools, are not per se a panacea for every possible situation. Critical concerns
have been repeatedly addressed by scholars; among others, see Choi (2004) and Klement and
Neeman (2004). For a broad survey, see the edited book by Backhaus et al. (2011).
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22. For an in-depth discussion of securities CAs, see, for instance, Choi (2004), Coffee (2006) and
Dyck et al. (2007).
23. In many countries, the regulatory system has been designed by mimicking the US model, so
we expect fewer differences in ex ante regulation. This is true not just for securities but also
for antitrust laws, communications agencies, etc.
24. It has been emphasized that the European legal system is less concentrated, and so less
suitable for this kind of action than in the USA while strong criticism concerns the adoption
of contingent fee.
25. See the report bythe major ItalianFinancial Newspaper, II Sole24Ore (Parmalat, esclusi dallaclass
action azionisti non americani), available at: www.ilsole24ore.com/art/SoleOnLine4/Finanza%
20e%20Mercati/2008/08/parmalat-class-action-esclusi-azionisti.shtml?uuid ¼ 81877382-7034-
11dd-a1e6-015d01033f80&DocRulesView¼Libero
26. Figures as of June 2005 (Colonnello, 2005).
27. “Azione Risarcitoria Collettiva” governed by art. 140 bis of the Italian consumers’ code and in
force since 1 January 2010.
28. The same example applies to the law in France.
29. La Porta et al. (1998, p. 1114) remark that “[l]aw and the quality of its enforcement are
potentially important determinants of what rights security holders have and how well these
rights are protected. Since the protection investors receive determines their readiness to
?nance ?rms, corporate ?nance may critically turn on these legal rules and their
enforcement.”
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Further reading
Bethel, J.E., Ferrell, A. and Hu, G. (2008), “Legal and economic issues in litigation arising from the
2007-2008 credit crisis”, Harvard John M. Olin Discussion Paper No. 10, Harvard Law
School, Cambridge, MA.
Bussani, M. and Palmer, V.V. (Eds) (2003), Liability for Pure Economic Loss: Frontiers of Tort
Law, Cambridge University Press, Cambridge.
Rose-Ackerman, S. (1991), “Regulation and the law of torts”, American Economic Review, Papers
and Proceedings, Vol. 81 No. 2, pp. 54-8.
Corresponding author
Giovanni B. Ramello can be contacted at: [email protected]
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This article has been cited by:
1. Giovanni B. Ramello. 2012. Aggregate litigation and regulatory innovation: Another view of judicial
efficiency. International Review of Law and Economics 32, 63-71. [CrossRef]
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