Yesterday's report from the Institute for Legal Reform that concluded that individual investors are getting the "short end of the stick in the securities class action system as compared to large institutional investors" (discussed here) prompted some interesting and immediate responses from SLW readers, which are cut and pasted below:

1.  The report recognizes that if A sells 100 shares to B at a price inflated by $1 per share, A gained $100 and B overpaid by $100.  Now if one party is an institutional investor that trades a lot, it is on both sides of the trades fairly evenly, and its gains and losses tend to average out; it could be A in one case and B in another.   (More specifically, its average net gain or loss will tend to be a small fraction of its overall holdings.)  If another party is a small investor that trades infrequently, it could be a big winner or a big loser, particularly if it has only one trade, either as party A or B.  The report correctly points out that the institutional investor is thus somewhat hedged, while the individual could be a big winner or loser.  This is not really the same thing as what the press release says when it states,

"The average American investor gets the short end of the stick in the securities class action system as compared to large institutional investors," said ILR President Lisa Rickard. "The stock holdings of individual investors are generally too few in number to offset losses in stock value that follow allegations of securities fraud." 

Yes, individuals who are losers in one stock probably are net losers, but half of them are also net winners.

2.  The report carefully pointed out in its footnote 11 that it ignores where the funds for the settlement are coming from.  That is a big issue!  If the funds are coming from the company (i.e., if insurance is small or is recouped through higher premiums), then the results may be completely reversed!  That is, a long-term investor, which is more likely to be an institution, will have bought before the class period and thus help pay the settlement (from its share of ownings in the company) but have bought too early to be in the class.  If A sells to B and B is compensated from the settlement with outside money, A can win and B can break even or lose only a small amount.  But if A, B, or another investor pays for part or all of the settlement, then the results for investors overall are  worse.  Basically, if you toss in "free" money for the settlement of course investors will generally do well.  But if the investors, as shareholders, have to pay for part of the settlement, they will do worse.  Add in the leakage to attorneys, and the claim in the press release that "most institutional investors don't simply break even from securities class action settlements; many benefit," is strained.  (And besides, if half gained and half lost by chance, one could also say that "many benefit" from just a random redistribution of money, so that part of the claim in the press release is not particularly meaningful as it now stands.)

UPDATE:

3.  Another point is that "institutions", i.e. pension funds, mutual funds, are simply aggregation of individual investor interests.