When is it right to sue a company?
By Dale Oviatt
Say you bought shares in XYZ Company after company news releases predicted exponential revenue growth and expansion. A few months later you watch the stock plummet while finding out company insiders sold their shares shortly after those releases were made public. What do you do?
Well if you are one of a growing number of shareholder groups in the United States you sue. Presently there are over 500 federal shareholder suits pending, all of which have been filed since 1995. Together, the cases are valued at more than $4 billion in potential settlements including approximately $1.2 billion in legal fees.
Joseph Grundfest, a Stanford University professor who tracks securities cases says the average settlement in a securities class action case is $10 million and about 80% are settled.
In May of this year Informix Corp. (NASDAQ:IFMX) made a record-setting settlement of $143 million. The Company, a maker of database software, has tentatively agreed to pay the money to investors between 1995 and 1997 for allegedly giving false numbers for financial statements and insider trading. This case may not only raise the average of settlements, but it will raise the expectations of investors who feel they have been wronged.
William Lerach, of Milberg Weiss Bershad Hynes & Lerach, is one of the leading attorneys representing shareholders in lawsuits against corporations. He says the increasing number of lawsuits is not the result of more hungry lawyers, but rather of the amazing growth in the number of initial public offerings occurring with companies that have a single product and lucrative executive stock options. Lerach says this combination creates terrific incentive to make sure the stock price gains upward momentum.
Tower Snow, a lawyer who often defends corporations against securities suits, says more and more cases are also being dismissed so lawyers for shareholders are "hedging their bets" and simply filing more cases because less and less are surviving.
Lawyers look at many factors before deciding to try a case. One of the biggest indicators is large point movements in short periods of time. They search to find the reasons behind the price change and see if any insider trading occurred. Lawyers also often watch discussion forums to learn what is being said about a company.
Very few of these cases actually go before a judge. Nearly all of them settle out of court, presumably to stem the flow of bad publicity. There are several that have gone all the way recently and have resulted in victory for the companies. Snow says “Jurors understand that the securities laws are not investor insurance. They understand risk and that investing is a type of gambling. And most people understand that investing in AT&T is different than investing in a micro-cap high-risk company.
The courts are so full right now that there are not enough of these cases tried for lawyers from either side to predict what a settlement is actually worth, so negotiations are slow going. Once appeals courts begin making rulings on the main issues of these cases it is thought the settlements will come more quickly.
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