Investors are a daring lot. They put their
hard earned cash into pieces of paper that promise a part ownership in a
company they’ve probably never physically seen. All they have to go by is the
annual statements the company publishes.
The assumption that your investment
involves risk is a prerequisite. There are protections in place, but when
things go wrong (and they often do), investors are left to see their
paper-profits turn into paper-losses right before their eyes. Most people see
this possible loss as a necessary risk of doing business – you win some, you
lose some.
However, some don’t see it that way at
all. In fact, some investors on the
losing end of an investment think that taking legal action is the solution.
Though at first such an idea may strike you
as just another example of Americans thinking they can sue over anything, it
does make some sense. It all started with the notion that publicly traded
companies had the responsibility of releasing financial information, a shift
that began in the 1930’s. Companies were required to prove their business was
doing well by being honest, and investors were supposed to take their word and
decide whether to buy or sell.
But companies aren’t always honest, or even
accurate, and this has left the door open for some investors to try and sue the
company if the stock they’ve invested in suddenly drops.
There have been attempts by Congress to
clamp down on frivolous lawsuits since the mid-1990’s, but such lawsuits still
exist. Investors can’t sue as individuals, their lawyers need to obtain Class
Certification, which requires the court to agree that the case represents all
the investors who bought the stock leading up to the bad news announcement.
This is a massive hurdle for most enterprising lawyers, but some get through.
At this point, things only get tougher. The
case can only be won if certain things are proved in court. First it must be
proved that the company lied about something and that the investors relied on
that inaccurate piece of information to make their decision. That last bit is
the toughest to explain, since many investors probably bought the stock without
being exposed to the misinformation.
These sorts of class action suits are
muddled in ambiguity. There’s simply no way to show that a company’s stock drop
was directly the result of a certain announcement or that the losses suffered
were caused by the company’s decision to hide details.
This brings us to the real question: Is it even a good idea to sue for stock
losses? To try to answer this question, let's take a deeper look…
A shareholder is, in fact, entitled to
compensation if the company’s management has published corporate disclosures
that were incorrect or inappropriate. But, as discussed above, these cases are
really very difficult to win.
So, as an individual investor, it simply
doesn’t make financial sense to fight such a case if the loses on an individual
stock were less than $100,000. If, however they were higher, a class action
lawsuit is a much better option. If there is already an existing class action
lawsuit that you can join, it’s a much better idea to join the pre-existing
case rather than to pursue the case independently.
You should be beware that most cases of
this nature end up with payments of only 5 or 8 cents to every dollar that was
lost in the stock plunge. That may seem like a paltry amount, but if the
initial investment or stock losses were substantial enough, you could be
awarded a decent chunk of change. And
something is better than nothing.
One recent case in which a group of
investors felt duped by a lie that directly impacted their investments was that
of Volkswagen. The German car
manufacturer has publicly admitted to rigging 11 million diesel cars with
software that could trick emissions tests.
This admission caused a huge drop in stock value.
To understand that in real-world terms,
consider St.
Clair Shores Police and Fire Retirement System, a pension fund that
invested $200,000 in 2011. Since this news broke, the value of their investment
has dropped a whopping 33% in just one month. So, in this instance, it made
perfect sense for the investors to sue Volkswagen for the recent plunge in its
stock.
And such class action lawsuits are only
increasing with every passing year. According to Reuters, they’ve increased
annually by 9%, and there were 166 such cases filed in 2013 alone.
But before you join those others, it may be
prudent to read a report put out by the U.S. Chamber of Commerce's
Institute for Legal Reform, which suggested that these types of lawsuits
were mostly very costly mistakes. The pennies on the dollar recovered were not
worth the time, effort and money spent pursuing the case.
For investors who have lost big due to the
dishonesty of corporate bigwigs, it’s natural to want to take action that both
punishes the culprits and rewards the victims. But before you proceed with such
a big decision, you should speak with an attorney who can give you an honest
and realistic look into the probable outcome. It may seem unfair, but the
system makes such a lawsuit fairly unfeasible.
About the Author:
Andrew May is a commercial and finance attorney who specializes in FINRA interview and arbitration cases. He is the founding
member of May Law in downtown Chicago and he enjoys sharing his expertise with
readers on a variety of investing and business blogs. To learn more, visit www.mayLawpc.net.
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