Interesting Article
Carrie Coolidge
10/01/2001
Forbes Magazine
Did accounting hanky-panky tank your stock? Here's how to get some money back.
The corporations that were paying so much ransom money to the plaintiff bar probably thought they would get lasting relief from the 1995 reform act covering class action securities litigation. It was not to be. After an initial dip the volume of litigation resumed its upward march. New cases dropped from 321 in 1994 to 196 in 1996. But last year saw 307 new lawsuits, and this year should break 1994's record, says James M. Newman, publisher of the industry newsletter Securities Class Action Alert.
The money is bigger. While 112 cases were settled in 1999 for a total of $1.8 billion, last year there were 156 cases settled for a record-breaking $4.3 billion. (Remember, it takes several years from filing to finale.)
If you are a high-tech entrepreneur, an investment banker or an accountant, look on these statistics with despair. As an investor, however, you should put aside your misgivings and figure out how to get your piece of the settlement loot.
There are 18 pending suits expected to be settled in the next 12 to 18 months, each for more than $500 million, involving some of the biggest companies around--AT&T, Coca-Cola, Lucent, Ford Motor, among others.
One of the larger settlements of late has involved questionable accounting at MicroStrategy (FORBES, Mar. 6, 2000), a data-mining firm. The fun started Mar. 20, 2000, when the company restated previously reported earnings, turning 1998's and 1999's profits into losses. This bad news caused the stock to drop from $227 to $87. Quick to save the day was the law firm of Milberg Weiss Bershad Hynes & Lerach, whose lawsuit against MicroStrategy alleged it improperly recognized revenues.
Admitting no wrongdoing, MicroStrategy and its auditor, PricewaterhouseCoopers , settled the matter before going to trial for a pot valued at $155 million. You could debate whether this sort of settlement really makes investors better off. Of the total payout, probably 15% to 30% will be siphoned off to pay the plaintiff lawyers. Only $10 million of the settlement sum came from MicroStrategy insiders coughing up some of their shareholdings with $55 million from the auditors. The bulk of the settlement, $90 million, was paid by MicroStrategy--that is, from the hides of current shareholders.
What went on here? The lawyers robbed Peter to pay Paul. Let's not forget that investors as a group also bear many of the costs of defending securities suits--in the form of legal bills, insurance premiums and the higher costs of hiring outside accountants.
In the MicroStrategy case the Pauls in question were those shareholders who bought a total of 12 million damaged shares between June 11, 1998 (when MicroStrategy released its first quarter 1998 financial statement) and Mar. 20, 2000 (restatement announcement). That was the so-called class period. The deadlines for filing--there were two separate settlement funds--were May 2 and Sept. 3.
Lawyers working out settlements count on roughly half the eligible participants failing to submit a claim in time, thus making payouts for those who do file a little more generous. Don't miss the next deadline, (see table). Here's how to get future boodle:
Find out about class actions.
If litigation is already in progress, check out Stanford University's Securities Class Action Clearinghouse (http://securities.stanford.edu). Milberg Weiss, the country's largest plaintiff firm specializing in shareholder class actions, lists all of its pending litigation online (http://securities.milberg.com). Also dozens of claims notices are available to download from New York-based claims administrators David Berdon & Co. (www.dberdon.com) and Gilardi & Co. (www.gilardi.com).
Don't delay.
To file a claim you need proof you bought the stock during the class period--a monthly brokerage statement or trade confirmation will suffice. Often you deal directly with a claims administrator, who takes care of all the paperwork; we've listed the contacts in our table. Since litigation takes so long, hold onto your records for up to seven years after you have sold or otherwise disposed of a stock, advises Michael A. Rosenbaum of Berdon.
You usually get 60 to 90 days to file for your chunk of the settlement. If you miss a deadline, you can plead to the judge that you never got the form you requested or were out of the country or some such. The judge must rule on every claim, big or small, which is why it can take up to 18 months after the settlement is reached to get your money.
Pay attention to taxes.
Should you still own the stock, you owe no taxes. Instead, you adjust your stock's cost basis. Example: If you bought 1,000 shares at $20, your cost basis is $20,000. But if you get $1,000 back from a settlement, your cost basis is reduced to $19,000. (Meaning: A sale at $26,000 results in a $7,000 rather than a $6,000 capital gain.) On the extreme off-chance your recovery is more than you originally paid--say, $21,000--you owe capital gains tax on $1,000 (the award minus the original cost basis), and your cost basis going forward is now zero.
What happens if you no longer own the stock? Then your settlement award is a taxable capital gain--long- or short-term according to how long you held the stock, notes Laurence Goldfein of accountants Eisner & Co. |
