An article published earlier this year may puncture the long-held belief that elected public pension fund trustees solicit (and receive) election contributions from plaintiff-side law firms in exchange for favorable treatment when those trustees are selecting outside counsel to represent the pension fund in securities litigation.
The article, Is 'Pay-to-Play' Driving Public Pension Fund Activism in Securities Class Actions? An Empirical Study, was written by David H. Webber, the Wagner Fellow in Law & Business at NYU's Law School and Stern School of Business.
The article takes a comprehensive look at the securities litigation activity of more than 100 public pension funds that had elected officials serving on the board of trustees during the period from 2003 - 2006.
Despite widespread media reports to the contrary, the article's primary finding is that
the percentage of politicians on a fund's board correlates negatively with lead-plaintiff appointments obtained by the fund, whereas the percentage of fund beneficiaries on a board correlates positively with such appointments.
Given that the finding is at odds with a widely-held belief, Webber goes on to examine the apparently out-sized role played by beneficiary board members in spearheading the active litigation agenda of those funds. Webber looks at analogous academic literature comparing such beneficiary board members to corporate managers with an equity stake in a corporation, and also notes that with public funds, the possible influence of unions on these members is another possible factor driving the litigation agenda.
The belief that pay to play is an ongoing systemic problem has a long shelf life. Earlier this summer, Senator Bob Bennett asked the SEC to investigate the issue, and back in 2007, the Paulson Committee report specifically suggested barring any attorney that makes a contribution to an elected pension fund official from representing that fund.
The full paper can be downloaded from SSRN, here.
Full disclosure - David used data from RiskMetrics Group's Securities Class Action Services database for his analysis.