Is 'Pay-to-Play' Driving Public Pension Fund Activism in Securities Class Actions? An Empirical Study

Abstract

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” posits that public pension funds are driven by politician board members to obtain lead plaintiff appointments in securities class actions because of campaign contributions made by plaintiffs’ lawyers to those board members. This paper provides a comprehensive analysis of the securities litigation activity of 111 such funds from the years 2003 through 2006. Three of the paper’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. The substantial role played by beneficiary board members in driving the funds’ litigation activism is analyzed by the author in the context of prior literature comparing such board members to corporate managers with an equity stake in a corporation. The paper 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.