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Part II: Class Action Lawsuits
by Lynn N. Duke, staff writer
When the stakes are high and the numbers great, sometimes a class action lawsuit is your best bet for recovering lost investments.
In the past two years, shareholder class action lawsuits have been filed against more than 280 companies in federal court. The lawsuits are based on a variety of complaints - from the ]misrepresentation of clinical trial results to misleading statements about an airline's safety.
But the most common charges are accounting fraud and insider sales, according to Stanford Law School's Securities Class Action Clearinghouse. Each was cited in more than half of the
lawsuits filed since December 1995.
Class action lawsuits are one tool investors have of getting their money back when they feel they've been cheated. Typically they are filed against a company in which the plaintiffs hold a financial interest, rather than a brokerage firm that helped them invest in a company (see Get Your Money Back, Part I: Arbitration).
A class action is a complaint filed on behalf of a group of shareholders who have the same grievance. Although only several people may actually be named plaintiffs on the lawsuit, the actual class may contain thousands of people.
And a class action is not a class action just because it's filed that way. A judge decides whether it fits the criteria for a class action, and whether the named plaintiffs adequately represent the entire class.
Once a class is certified, it is usually up to the defendant to notify all potential class members that the lawsuit exists and they are a part to it. If you want to pursue your case independently, you must opt out of the class action, otherwise you are bound by whatever decision is rendered in that case.
CASTING A WIDE NET
Occasionally a brokerage faces a class action lawsuit, as in the case
against Prudential Securities. Thousands of investors, who has invested $8 billion in limited partnerships during the 1980s, sued the
brokerage house for fraud. The limited partnerships lost $1 billion. Prudential has paid at least $500 million to settle the case, according to one attorney who represented the class.
But most disputes between investors and their brokers are settled
through arbitration. A 1987 U.S. Supreme Court decision, Shearson
v. McMahon, said all pre-dispute arbitration agreements are binding.
Most brokerage contracts contain a clause that requires all disputes
be arbitrated.
The 280-plus class action lawsuits filed in the past two years are a fraction of the more than 10,000 complaints filed during that time with the National Association of Securities Dealers' director of arbitration.
Even the Prudential case was a hybrid of litigation and arbitration, since an arbitration process was set up for the claims settlement, according to Lisa Mezzetti, an attorney with the Washington, D.C. law firm Cohen, Milstein, Hausfeld & Toll. Mezzetti represented 40 people
who opted out of the Prudential class action.
Sometimes class actions are so large, individual investors get shunted aside and their settlement is swallowed by legal costs. But being part of a large class may be the only hope for people with small claims to make any recovery.
"In the Nasdaq suit, you're probably better off in the class action because the damages are so small and hard to pinpoint," said Steve Samson, a Chicago-area attorney who specializes in securities arbitration.
He was referring to a recently settled case. In December 1997, 30 securities firms agreed to a $910 million settlement in a class-action suit alleging the firms fixed prices on more than 1,600 Nasdaq stocks between May 1989 and May 1994. The class in the suit included more than 6 million people - anyone who had traded in those stocks through those 30 firms during that time period.
The suit said traders kept the spreads on the stocks artificially wide and made money at the expense of investors. Spreads are the difference between the bid and offer price and are profit for the dealer. For example, if a stock is bid at $23 and offered at $24, the spread is $1. The Nasdaq suit claimed dealers were rigging the price of stocks in order to widen the spread, making more money for themselves at the expense of investors.
DO YOU WANT TO KNOW A SECRET?
One of the most common economic theories behind investor class action lawsuits against publicly traded companies is the efficient market, Mezzetti said. This theory holds that all stocks are priced efficiently, instantly absorbing and reflecting all information about a company - good or bad. Based on that, if a company withholds information its stock price is being unfairly manipulated and the whole market is being defrauded.
Take for example, ValuJet, which was one of the country's fastest
growing airlines until May 11, 1996 when one of its planes crashed in the Florida Everglades killing 110 people. Investigations into that
disaster revealed a long and troubled safety history for the fledgling
airline - information that company officials hid from the public.
Besides the lawsuits filed by the crash victims' families, a class
action was filed on behalf of ValuJet investors, based on the efficient market theory.
"Defendants' fraudulent scheme and deceptive course of business
artificially inflated and maintained the trading price of ValuJet securities during the Class Period and thereby injured members of the Class," the complaint read in part.
The lawsuit also claims that ValuJet misled investors about the company's basic strategy - rapid growth - which the complaint said was predicated on skirting maintenance and safety standards.
"ValuJet's corporate culture, which strived to cut costs without apparent regard for the maintenance or safety of its airplane fleet, led to a substantial number of FAA violations and reports that eventually resulted in the Company's agreement to cease operations," the complaint said.
Investors claimed that while the Federal Aviation Authority was regularly citing the company for safety violations, ValuJet officials publicly declared their highest commitment to safety.
"Defendants had a duty to promptly disseminate accurate and truthful information with respect to the Company's airline safety record or to cause and direct that such information be disseminated and to promptly correct any previously disseminated information," the complaint said.
ValuJet stock dropped from a high of $35 during the time covered by the lawsuit to as low as $4.50 per share in June 1996. Last year ValuJet merged with AirTran, and took that company's name.
All this is not to say companies can be sued because their predictions for the coming year are off track.
"A company has to be able to make forecasts," Mezzetti said. "And people have to realize they might make a mistake. The courts have said bringing a lawsuit based on a company's forecast is very limited. The company either has to 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.
...the Stock Detective.
stockdetective.com
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