In 2023, a securities class action lawsuit against Meta settled for $725 million — one of the largest securities fraud settlements in history. The plaintiff's lawyers received approximately $145 million in fees, or roughly 20% of the total recovery. The institutional investors who constituted the actual class — pension funds, asset managers, and other large shareholders who had bought Meta stock during the alleged fraud period — received the remainder, distributed in proportion to their losses. Most of them had not chosen to participate in the lawsuit in any meaningful sense. They were class members by virtue of having owned the stock.
The securities class action system is, by design, a mechanism for aggregating small individual harms into claims large enough to prosecute. In theory, it disciplines corporate misconduct by ensuring that companies cannot defraud shareholders without facing consequences at a scale that reflects the total harm done. In practice, the system has developed a set of structural characteristics that have less to do with shareholder protection than with the economics of the litigation industry that operates it — and those characteristics depend, fundamentally, on an information architecture that blockchain is beginning to change.
The trust problem the securities litigation industry solves is straightforward: shareholders who have been harmed by corporate fraud often lack the resources, information, and coordination mechanisms to pursue claims individually. A law firm with contingency financing can aggregate those claims and pursue them on behalf of all affected shareholders. The intermediary provides access to justice. The fee — typically 20% to 30% of the settlement — compensates the intermediary for the risk and cost of litigation. What the system does not address is whether the intermediary's incentives remain aligned with shareholders once the litigation machine is running, or whether the information asymmetry at the heart of the system creates enough slack for the intermediary to extract more than the risk justifies.
How the Machine Actually Works
Securities class actions in the United States are governed primarily by the Private Securities Litigation Reform Act of 1995 — the PSLRA — which was designed to reduce frivolous litigation by raising the pleading standard and, importantly, establishing a process for selecting a lead plaintiff. The PSLRA requires courts to appoint the plaintiff with the largest financial interest in the case as the lead plaintiff, with the expectation that large institutional investors would take that role and exercise meaningful oversight over the plaintiff's lawyers.
In practice, the lead plaintiff process has produced a specific and somewhat circular industry. Plaintiff's law firms — Bernstein Litowitz, Labaton Sucharow, Robbins Geller among the most prominent — maintain relationships with large institutional investors, particularly public pension funds. When a potential securities fraud claim emerges, these firms notify their institutional contacts, help them calculate their losses to establish lead plaintiff eligibility, and file motions to be appointed lead counsel once a fund agrees to serve as lead plaintiff. The fund gets the status of lead plaintiff — and the obligation to participate in the litigation and review settlement terms — without bearing any of the financial risk. The law firm gets a client with standing, access to discovery, and a fee arrangement approved by the court.
The institutional investors in these relationships are not passive victims. Many public pension funds have active monitoring programmes and deliberately participate in securities litigation as a matter of fiduciary duty. CalPERS, the largest public pension fund in the United States, has a dedicated securities litigation team and has served as lead plaintiff in numerous significant cases. The system, at its best, creates genuine accountability for corporate misconduct at scale.
The system at its less-than-best is a different picture. The Stanford Securities Class Action Clearinghouse, which has tracked securities litigation since 1996, estimates that approximately 200 to 250 new federal securities class actions are filed each year. The settlement rate is high — roughly 70% of cases that survive a motion to dismiss eventually settle — and average settlement values have been inflating for decades. The aggregate fee income flowing to plaintiff's law firms from securities class actions is estimated by industry researchers at $3 billion to $5 billion annually. The total overhead cost of the system — including defense legal fees, D&O insurance premiums, and the administrative cost of settlement distribution — is several multiples of that.
The Information Asymmetry at the Center
Every element of the securities class action system depends on an information problem that the existing ownership architecture makes intractable. To identify who is in the class, calculate individual losses, verify trading histories, and distribute settlement proceeds, litigation administrators need to know who owned shares of the defendant company during the class period, in what quantities, at what prices, and when they bought and sold.
Under the current street name ownership architecture, that information does not exist in a single authoritative place. The DTC — the Depository Trust Company, which holds the vast majority of US publicly traded equities — knows which broker-dealers hold shares on behalf of their clients. The broker-dealers know which of their clients hold shares. But neither the DTC nor the broker-dealers maintain transaction-level records in a format that is directly usable for class action purposes without a significant data extraction and reconciliation exercise. When a securities class action settles, claims administrators — firms like Epiq Class Action & Claims Solutions, Kroll, and Garden City Group — must collect transaction records from class members who choose to file claims, verify those records against brokerage statements, and calculate losses using the court-approved methodology. The process is slow, expensive, and structurally incomplete: a significant fraction of eligible class members never file claims, meaning the lawyers collect fees on a recovery that a substantial portion of the injured class never receives.
The information asymmetry runs in multiple directions. Plaintiff's lawyers know more about the strength of the case than their institutional clients, creating the standard principal-agent problem of any contingency fee arrangement. Claims administrators know more about the claims process than individual class members, who face a bureaucratic obstacle course that a rational person with a $200 claim rationally abandons. Defense counsel and D&O insurers know more about the defendant's actual exposure than plaintiff's counsel negotiating a settlement. Each information gap creates slack that can be, and often is, captured by the intermediary best positioned to exploit it.
What On-Chain Ownership Records Change
A tokenised equity on a public blockchain resolves the ownership information problem at the architecture level. Every transfer is recorded on the ledger with a timestamp, a quantity, and the addresses of the transferring parties. The complete trading history of every token holder during any defined period is available from the chain without a claims process, without brokerage statement submission, without data extraction from broker-dealer records, and without a claims administrator intermediating the recovery.
This has several direct implications for securities litigation. The class definition becomes automatic rather than constructed: every address that held tokens during the class period is, by definition, a class member, and their transaction history is available for loss calculation without any action on their part. Settlement distribution can be executed as a smart contract rather than an administrative process: a court-approved distribution formula encoded in code, triggered by the settlement payment, distributing proceeds to every eligible address proportionally without a claims filing requirement. The filing rate problem dissolves. The claims administrator becomes unnecessary. The settlement distribution process that currently takes months and costs millions in administrative fees can be completed in hours.
The implications for plaintiff's law firms are more complicated. The elimination of the claims administrator intermediary reduces total overhead without necessarily affecting the core litigation function. Identifying class members, calculating losses, and establishing the merits of a case still require legal and analytical work. But the fee basis for that work becomes more defensible under a system where recovery reaches all class members rather than only those who navigate a claims process. A 25% fee on a recovery that reaches 30% of the class is harder to justify than the same fee on a recovery that reaches 100% of the class. When the distribution infrastructure is automated, the court's assessment of whether the fee is reasonable relative to actual benefit delivered becomes considerably more precise.
The D&O Insurance Dimension
Directors and officers liability insurance — D&O — is the mechanism through which most securities class action settlements are actually funded. When a company settles a securities fraud claim, the settlement is typically paid primarily by its D&O insurer rather than by the company's operating cash. The D&O insurance market in the United States is roughly $15 billion in annual premium volume, with securities class action risk representing the largest single driver of premium pricing for public company coverage.
D&O insurers price securities litigation risk based on historical loss data, company-specific risk factors, and the general litigation environment. The opacity of the securities litigation system — the fact that settlement values are negotiated rather than calculated, that information asymmetries between plaintiff and defense counsel affect outcomes, and that the claims distribution process is administratively inefficient — contributes to pricing uncertainty that insurers compensate for with premium loads. Transparent ownership records and automated distribution do not eliminate D&O risk, but they change the information environment in which that risk is priced. A system where actual class losses are calculable in real time from on-chain data, rather than estimated through a contested claims process, is a system where loss modelling becomes substantially more accurate.
Marsh, Aon, and the other large commercial insurance brokers have begun to incorporate blockchain-related considerations into their D&O coverage analysis, primarily in the context of crypto-native companies and the specific litigation risks associated with token issuance. The broader question — how the tokenisation of traditional equities changes D&O loss modelling — has not been addressed in detail in published industry analysis, which is a reliable indicator that the industry has not yet worked out what it means for their pricing models.
The Regulatory Pathway
The SEC's ongoing engagement with tokenised securities has focused primarily on the threshold question of whether tokenised versions of registered securities are themselves securities subject to existing disclosure and registration requirements. The answer, increasingly, appears to be yes — tokenised equity in a US public company is a security, the issuer's existing disclosure obligations apply, and the fraud provisions of the Securities Exchange Act of 1934 attach to trading in the token just as they do to trading in the underlying share.
What the SEC has not yet addressed is how the tokenisation of equity changes the mechanics of shareholder litigation. The PSLRA's lead plaintiff process, the claims filing requirements in class action settlements, and the role of claims administrators all derive from a regulatory and procedural framework built around the street name ownership architecture. None of those provisions has been formally updated to account for a world in which ownership records are publicly available on a distributed ledger and distribution can be automated through smart contracts.
The plaintiff's bar has not been publicly enthusiastic about tokenised equity. The reasons are not difficult to identify. A claims process that reaches 100% of class members automatically, without administrative intervention, eliminates several of the structural features that make the current system profitable for litigation intermediaries. Fees calculated on the basis of actual aggregate class losses — which are calculable precisely from on-chain data — are harder to inflate than fees calculated on the basis of a negotiated settlement value distributed to a fraction of eligible claimants. The efficiency gains from on-chain settlement distribution accrue to shareholders rather than to the law firms and administrators who currently manage the inefficiency for a fee.
That is not an argument against securities class action litigation as a mechanism for corporate accountability. It is an observation about who captures the value when the information architecture improves. The current system's intermediaries are compensated, in significant part, for navigating complexity that exists because the ownership infrastructure makes it unavoidable. When the ownership infrastructure changes, so does the justification for the intermediation cost. The litigation industry has survived previous reforms — the PSLRA, the Securities Litigation Uniform Standards Act, the wave of state court forum selection bylaws — by adapting the fee model to the new constraints. The adaptation to transparent on-chain ownership will require more fundamental restructuring than any of those reforms produced.