William & Mary Business Law Review


Brian J. Shea


Securities class actions provide a vehicle for plaintiffs to recover billions of dollars in settlement awards. Given the prevalence of institutional investors in the market for publicly traded securities, it is no surprise that large investment funds are often implicated as lead plaintiffs in securities class actions. Despite having recoverable claims in many of these settlements, these investment funds often fail to participate in the action on behalf of their beneficiaries (their investors). Some scholars argue that fund managers have a fiduciary obligation to participate in claim filing and monitoring processes in an effort to recover settlement awards and to maximize the value of their beneficiaries’ investments. Courts have yet to hold fund managers liable for failure to do so.

This Note explores a separate but related phenomenon: the increased prevalence of class action “opt-outs” in which a plaintiff may choose not to be a part of the action in favor of pursuing a separate action, and hopefully recover more than would be available within the class action structure. Inherent in the opt-out calculus is the risk of receiving nothing at all. Given this phenomenon, this Note asks whether it would make sense to extend fiduciary duties to contemplate opt-out behavior in an effort to encourage fund managers to monitor those securities class actions that implicate their respective funds. According to this argument, a fund manager would have a duty to opt out when the recovery outside the class action was likely greater, and when there was a reasonable likelihood that such recovery could be obtained.

At the moment, such an extension would not be appropriate. A clear departure from case law related to fiduciary duties and officer liability, such an extension would also inject too much legally encouraged risk taking into the capital markets; it would undermine many of the valid policy objectives of the securities class action; and it would place an undue burden on fund managers to take monitoring obligations to unprecedented levels.