By James J. Park. Full text here.
Prior studies of corporate and securities law litigation have focused almost entirely on cases filed by shareholder plaintiffs. Bondholders are thought to play little role in holding corporations accountable for poor governance that leads to fraud. This Article challenges that conventional view in light of new evidence that bond investors are increasingly recovering losses through securities class actions. From 1996 through 2000, about 3% of securities class action settlements involved a bondholder recovery. From 2001 through 2005, the percentage of bondholder recoveries increased to about 8% of all securities class action settlements. Bondholders were involved in 4 of the 5 and 19 of the 30 largest securities class action settlements, and tended to recover in frauds associated with a credit downgrade. By 2005, almost half of all securities class actions alleged claims on behalf of all public investors, not just shareholders. The rise in bondholder recoveries is evidence that securities fraud has increased in severity over time, causing harm to a broader range of corporate stakeholders. Certain frauds can be understood as transferring wealth from bondholders to shareholders. In providing a remedy for such transfers, bondholder class actions are an example of the continuing evolution of the securities class action.