This Forbes article addresses a trend noted in these earlier posts — public pension funds becoming the lead plaintiffs in securities fraud litigation. And the public policy implications are not pretty:

And so it goes in the cozy confines of the class action racket. Plaintiff lawyers give handily to the politicians who hire them. They hire ex-insiders to woo pension funds, fete clients at cushy conferences and pay referral fees to powerbrokers who hook them up with new pension plaintiffs. None of this is illegal per se; nor does it violate existing rules of legal ethics. But even some lawyers have problems with it.
“This is corruption on a grand scale,” says class action lawyer Howard Sirota of New York, who says payola by his rivals may force him out of the game. Contributing cash to the officials who oversee your business “is illegal in municipal finance. The American Bar Association [discourages] it. A grand jury is investigating it (see Forbes, Feb. 16). And absolutely nothing happens,” Sirota says.
Last year plaintiff shareholders won $3 billion in class actions against the companies they had invested in, says Institutional Shareholder Services. (Let’s ignore, for now, that often they drain money from companies in which they still hold a stake; see box on this page.) The take was distributed in small chunks to thousands upon thousands of recipients. But $800 million of it will go to a small circle of very lucky people: securities plaintiff lawyers.
The plaintiff lawyers had help in amassing their $800 million take-from pension fund trustees who are oblivious, defense attorneys who won’t challenge the fees because it might prompt the other side to push for an even bigger settlement and insurers who are happy to charge higher premiums to cover the rising costs of litigation.

How did this happen? As usual, the law of unintended consequences of regulatory “reform” had a lot to do with it:

The Republican-controlled Congress hoped to smash this lawsuit cabal when it passed the Private Securities Litigation Reform Act in 1995.
The reform law hands control to big institutional investors. Nicknamed the “Anti-Milberg Weiss Act,” it requires that lead plaintiff status must go to the investor who suffered the greatest loss. Big investors, Congress hoped, would shun frivolous suits and push to cut legal fees.
But the act has morphed into an industrial-strength shakedown. Trial lawyers reached out to new partners: the boards of public and union pension funds. They often include union veterans unabashed about suing corporations. These boards, rather than cutting back on lawsuits and pressing lawyers for lower fees, have jumped into bed with them.

And the results of the reform legislation? Take note:

All told, public and union pension funds were lead plaintiffs in 28% of investor class actions last year; in 1996 they led just 3% of cases, says PricewaterhouseCoopers. Yet they have done nothing to improve shareholder recoveries or reduce significantly the lawyers’ cut.”We have a system where the courts consistently allow law firms to file cases on behalf of figureheads,” complains University of Arizona law professor Elliott Weiss. Translation: The lawyers still run the show. It is a pointed criticism, for Weiss did the research on class action settlements that helped shape the reform act.

Read the entire article. Hat tip to the 10b-5 Daily for the link to this article.