Is Class Action Right for You?

For investors who lost their shirts because of corporate misdeeds, a class-action lawsuit may look like a good way to recoup some money. So is it worthwhile to join a suit?

It depends on your expectations. While joining can be as easy as shipping off paperwork and waiting for a check, it can take a long time to get a verdict, and settlements are typically just 2% to 10% of a plaintiff's estimated damages, according to Cornerstone Research.

"When cases are settled, there's usually a huge gap between the settlement and what you lost," said Saul Cohen, a partner in the securities practice group at Proskauer Rose. "You rarely ever get 100% of what you lost, so most people should count anything they get back as found money."

Since 1995, settlement amounts have been on the rise, with the median amount nearly doubling to $16.5 million, according to data from National Economic Research Associates. This increase is partly due to the fact that corporate transgressions have been more severe, resulting in larger awards -- like the nearly $3 billion payout from Cendant(CD) in 1999. But it's also due in part to the Private Securities Legislation Reform Act, passed in 1995. The act makes it harder for frivolous lawsuits to go to trial, such as the "strike suits" that some shareholders file against a company every time its stock price stumbles significantly. As a result, better cases have been going to trial.

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Is Class Action Right for You?

But with so many court cases being filed these days, such as those against Tyco(TYC) CEO Dennis Kozlowski, Adelphia(ADELQ) and Merrill Lynch(MER) analyst Henry Blodget, the time it will take to recoup any damages can take years, and that means patience is a prerequisite for anyone who goes the class-action route.

"The usual cases of this nature take several years," said Cohen. "There's an enormous amount of jockeying, endless meetings, and at the end it might not play out right away if there's a fight over lawyer fees."