|
|
| STOCK DETECTIVE
FIGHT BACK! |
| Get Your Money
Back, Part II: An Inside Look at Securities Class Action
Litigation |
|
| By Mark
McNair | Fri Jun30, 2000 2:54
PM ET
You purchased a company's stock following its
latest glowing earnings report. You (or your broker) picked a winner
and the stock has risen steadily. But this morning, the stock is
dropping like a rock after the company announced that it "improperly
recognized income" last year and that it will be forced restate its
financial results for this period. The company also indicated
several insiders recently had sold a large amount of stock and its
chief financial officer has resigned. These financial
"irregularities" have just cost you 40 to 60 percent of your
investment overnight.
Welcome to the often-criticized and
often-misunderstood world of securities class action litigation.
You now know that you paid too much for the stock when you
purchased it because its market price was based on false financial
data that the company was disseminating at that time. In any
securities class action lawsuit, the time period where the stock
price is artificially too high is the so-called "Class Period." If
you purchased the stock during the Class Period, you can initiate or
participate in a class action lawsuit as long as you did not sell
your stock during the period for a profit.
Taking Action
Securities class action
lawsuits are a tool investors may use to help get their money back
when they feel they've been cheated. They are usually filed against
a company in which the plaintiffs invested, rather than a brokerage
firm that helped them invest in a company.
Don't blame your
broker (if you used one) because the company "cooked the books."
Your broker, except in extremely rare circumstances, had nothing to
do with the "financial irregularities" that now are coming to light.
Presumably, he or she performed adequate due diligence. The company
defrauded the entire market, including the very best analysts. All
individuals and institutions that purchased based on the false
financial reporting of the company paid too much.
To get
your money back, your only option is securities class action
litigation. Except for perhaps a few institutional investors that
may have losses in the millions, it is not practical or economically
feasible for individuals to sue the company individually. A
securities class action complaint is a collective action to recover
the losses of all individuals and institutions that lost money
because of the company's fraud.
So what are your options if
one of your stocks has dropped precipitously and you believe the
drop is due to corporate fraud? You may wish to do some
investigating yourself and determine what happened. For example, the
announcement of a corporate restatement raises a bright red flag,
suggesting the possibility of corporate fraud. If you were
negatively affected, then you may wish to consider taking action
yourself.
An affirmative answer to one or more of the
circumstances below suggests that you may want to ask an attorney to
review the matter:
- The company restates its earnings downward
for a previous period.
- Corporate insiders sold their shares when the
stock price was high.
- Incredibly bullish reports and press releases
preceded a big stock drop.
- The company admits that its prior bullish
reports were untrue or inaccurate.
- A resignation or change in auditors was
associated with the big drop.
- Major civil, regulatory or criminal actions
were taken against the company or certain corporate insiders.
- The departure of key corporate
insiders.
If you believe there is a
problem, you can contact a securities class action attorney and seek
advice whether it is appropriate to bring a securities class action
complaint against the company. Law firms specializing in this area
normally will investigate and analyze the matter for you and, if
there are grounds for filing a case, represent you in this matter a
no cost.
But what if you read that one or more class action
complaint has already been filed against the company? How does this
affect you? What must or can you do?
You have three basic
options: do nothing, join an existing class action case, or consider
filing a legal action yourself. If you decide to take action, then
you need to do so (as discussed below) within 60 days after the
first class action case is filed.
Do Nothing. If the
class action lawsuits filed against the company subsequently are
successful, you will be able to recover under the terms of a
settlement or judgement whether or not you do anything. So, it is
not necessary that you take any action whatsoever.
Join
an Existing Suit. You could join a lawsuit that already has been
filed against the company. Several law firms probably have issued
press releases seeking affected individuals to join their action.
Their motivation is clear: The larger the number of individuals that
join their group, the greater their role may be in the litigation.
The lead or co-lead counsel will be selected by the court and the
number of affected shares controlled by the various law firms may be
a critical factor in this determination.
Take Action
Yourself. Finally, you could consider getting an attorney that
could file another class action lawsuit or perhaps file a
shareholder derivative suit. (A shareholder derivative suit allows a
shareholder to step forward with an action that seeks to recover
such damages for the benefit of the corporation. In order to file a
shareholder derivative suit you must be a shareholder when the
improper conduct occurred. In addition, you must retain at least
some shares of the corporation throughout the litigation.)
If you take action yourself, you and the other plaintiffs
that previously filed suits will receive no special compensation.
So, why would you want to get involved? Some individuals want to
take such action because they want to know exactly what is
happening. They want to read the pleadings. They believe they were
victimized by the corporation and want to know about details and
developments as they occur. They are not satisfied by reading a
short blurb in the newspaper or receiving a check at the end of the
day. They realize that having their own attorney will cost them
nothing. They want to be informed and possibly have a seat at the
table.
Criticism of Class Action Lawsuits
As you would expect, most criticism of class action
lawsuits comes not from individual investors, who have recovered
billions as a result of class action lawsuits, but from corporations
and business interest groups representing auditors and accountants.
These groups argue that an attorney will find a client and file a
class action lawsuit against a corporation any time a stock drops,
even if the losses were caused by market and economic conditions and
not by the company. Quite simply, that's generally not the case. In
fact, corporate interest groups successfully lobbied Congress to
tighten the pleading standards to make it more difficult for
investors to file claims.
These groups also argue that most
of the recovery goes to the attorneys filing the lawsuit and not
affected investors. Again, that's not the case. All legal fees are
closely scrutinized and millions of investors have received
significant benefits as a result of class action lawsuits. For
example, as a result of the settlement of just one class action
lawsuit against Cendant Corporation, affected shareholders recovered
more than $3 billion.
Some business groups oppose class
action litigation when high-tech stocks are affected. These groups
believe securities laws, designed to protect investors, should not
be so stringent for high-tech companies. From their perspective,
these companies should be given the benefit of the doubt, even if
corporate fraud is involved.
These critics ignore the
important role of the securities bar in enforcing the securities
rights of individual investors. The prosecution of securities class
action claims has had a very positive impact on the integrity of our
nation's securities markets. The Securities and Exchange Commission
is a relatively small agency with a modest budget and limited
resources. The SEC assists investors every day, but the agency
cannot be expected to investigate every possible wrongdoing or fraud
by all U.S. companies where individuals have invested their life
savings.
This broader surveillance investigation of U.S.
companies can only be accomplished by affected individuals and
institutions working with the private securities bar. As a result of
such joint efforts, action often is taken against corporate fraud
and there is a general belief in the integrity of our markets.
Individuals, including those who would never dream of filing a
lawsuit against a corporation themselves, believe that fraudulent
corporate activity will be uncovered and action will be taken to
assist victimized shareholders.
Larger Role For
Institutional Investors
In 1995, Congress adopted the Private
Securities Litigation Reform Act to address certain perceived abuses
of securities class action litigation. Congress was critical of what
it perceived as a system where law firms, rather than institutions
or individuals with large losses, effectively controlled the
litigation. Consequentially, Congress established a preference for
institutions to act as Lead Plaintiff in securities class action
litigation. Congress believed that the individuals or institutions
with large losses would take a more active role in the litigation
and therefore serve as preferable Lead Plaintiffs to individual
investors with comparatively modest losses.
When the first
class action case against a company is filed, it includes a notice
provision indicating that any interested party has 60 days to step
forward to become the Lead Plaintiff. The Lead Plaintiff, with the
assistance of their attorneys, is in charge of prosecuting the case
in all securities class action lawsuits. The Lead Plaintiff will
know the details of the corporate fraud and the defendant's ability
to pay and will have the ability to work with counsel to fashion a
settlement that maximizes the recovery for itself and the other
defrauded shareholders.
Some institutions, notably several
large public employee pension funds, have been stepping forward and
acting as Lead Plaintiff in high profile cases involving firms such
as McKesson, Waste Management and Cendant. One can presume that in
the future, institutions will be the Lead Plaintiff for most
big-dollar, high-profile cases.
The Future of Securities
Class Action Litigation
Does this mean that individual
investors no longer have a role in securities class action
litigation? Absolutely not. Institutions presumably will act as Lead
Plaintiff in the largest cases that are filed. Individuals should be
comfortable with institutions serving this role. Of course,
corporate fraud has just as devastating an effect on affected
investors in smaller cases as the larger cases that attract the
attention of institutions. Many of these cases can only be brought
and investor losses can only be recovered if individuals who
suffered losses step forward and take action.
All this is
not to say that companies may be sued whenever their financial
estimates are off track. A company has to be able to make forecasts
– and an occasional mistake. The courts have said that bringing a
lawsuit based on a company's forecast is quite limited. The company
must be hyping without basis or hiding bad information.
But
when a company has clearly betrayed a large number of its investors,
a class action lawsuit may be your best bet for recovering at least
some of your losses.
Mark McNair is a Washington, D.C.-based attorney and founder
of Justice4investors.com.
He was an attorney in the Division of Market Regulation at the
Securities and Exchange Commission and an Assistant General Counsel
at the Municipal Securities Rulemaking Board. He received his B.A.
and J.D. from the University of Texas.
Commentary
Archives
|
|
.gif){kind=small}
.gif){kind=small}
