PERA Securities Litigation: Protecting our Investments

The money PERA invests in securities is always guarded both by PERA’s investment staff to watch for appropriate returns and by PERA’s legal staff to make sure PERA does not lose money as a result of a company’s bad actions that could devalue its stock price. This happens if company officials publicly state that their company is doing better than it actually is, causing inflated stock prices that go down as soon as the truth comes out.

To protect PERA’s investments, the PERA Board has adopted a Securities Litigation Policy that provides procedures and guidance for monitoring cases that are brought against companies as a result of their bad actions, commonly referred to as securities litigation.

In the United States, securities litigation matters are most commonly brought as class actions. A class action is when a large group of claimants brings a suit against another party. As a shareholder, PERA may be part of class actions against companies for losses incurred by the bad acts of those companies. However, occasions arise when it’s in PERA’s best interest to break apart from the class action (“opt-out” of the action) to pursue its own claims, or to seek leadership of the class action (seek “lead plaintiff” status). Opt-out actions may lead to increased work and risk, but plaintiffs can achieve better results than if they had remained part of the class action.

The Securities Litigation Policy provides factors for PERA staff to consider in deciding whether to opt-out or seek lead plaintiff status. Factors include viability of the case (whether staff believe that the case could be successful in court), the level of culpability for the bad acts, and cost/benefit analysis of pursuing active participation. The overall goal is not only to recover financial losses incurred by the company’s bad acts, but also to deter future bad acts by others.

In its effort to deter bad acts, PERA also actively contributes to securities litigation jurisprudence by joining relevant court cases and actively participating in policymaking groups. In 2014, PERA, along with other institutional investors, signed onto an amicus brief filed with the United States Supreme Court in the Halliburton Co. v. Erica P. John Fund, Inc. case. The Halliburton case caused concern for PERA because the Supreme Court was addressing the level of reliance that a plaintiff must show in order to sue for securities fraud. Investors can only recover damages in a private securities fraud action if the investors prove that they relied on the defendant’s misrepresentation about the company (for example, that the company is doing better than what the numbers show) in the decision to buy or sell stock. The legal standard challenged in Halliburton was how investors can prove they relied on the defendant’s misrepresentation. Specifically, the challenge was to the “fraud on the market” standard, which allows investors to show reliance by simply buying or selling stock at the market price, on the reasoning that the market price reflects misstatements made by the company.

The Supreme Court ultimately decided that the fraud on the market standard would not be overturned. Had the Supreme Court overturned the standard, PERA and similar investors would have had to prove that company misrepresentations actually had a price impact, rather than assuming that the misrepresentations were included in the market price. If the Supreme Court had gone further, investors could have been required to prove that misrepresentations actually caused the investor to take action. Halliburton did provide defendants of securities fraud cases with a new right – to rebut the fraud on the market presumption at an early stage of the case, at class certification (class actions are certified when the court determines the members of the class have the same legal or factual questions). Previously, defendants in many courts could not rebut the fraud on the market presumption until later, when the case reached the merits stage (the stage where the class is putting on evidence that the defendant did something wrong). PERA and other institutional investors are standing by to see exactly what effect this will have on securities litigation.

PERA’s Executive Director, Gregory W. Smith, is also a member of the Board of Directors of the Council of Institutional Investors (CII). CII advocates for shareholder rights and is a leading voice when it comes to corporate governance policies. By participating in this organization, PERA is able to join with other funds representing more than $3 trillion in assets to extend influence and exert pressure on companies to be accountable for their actions. Because of CII, PERA is also in a position to unite with other funds when issues like Halliburton arise.

PERA continues to work hard to protect its members’ assets. After all, the health of the trust fund benefits the most important asset of Colorado: the public employees working to build and serve our communities every day.