The Facts Behind Shareholder Suits

This story is part of a special series by TheStreet.com investigating shareholders' reaction to corporate corruption on Wall Street. Click here to see a full listing of stories.

The best thing about a securities fraud class action is that the majority of shareholders don't need to do much to participate, and they can possibly recoup some of their investment losses.

Once a lawsuit against a corporation is granted class action status by a judge, all shareholders receive a letter alerting them of the litigation. In most cases, the shareholder is automatically assumed to be part of the litigation, unless he or she affirmatively "opts out." Companies sometimes list a notice of a class action suit on their Web sites or in their annual reports.

Attorneys also are ordered by the court, especially after there is a settlement or a jury verdict, to advertise the terms of the award in major newspapers, and encourage shareholders to contact them, if they haven't already been notified of the litigation. Another place to keep track of shareholders' suits is on Web sites such as Yahoo! Finance, because law firms typically issue press releases announcing the filing of a securities fraud class action.

The worst thing about such suits, however, is that the lawyers who bring these cases usually make out a lot better than the shareholders.

Why? Because plaintiffs' lawyers in class action cases generally get to keep about one-third of any negotiated settlement or jury award.

The reason the lawyers get such big stakes is that shareholders, or plaintiffs, don't put up any money to pursue the litigation. The lawyers bring the case on their own dime and assume all the cost of the litigation. And if they don't prevail in either negotiating a settlement or obtaining a jury award, they can easily get nothing for their efforts.

The lawyer's cut leaves a lot less money for shareholders to divvy up among themselves. And in a securities fraud case involving a major corporation, where there are tens of thousands of shareholders, the settlement pie can get sliced pretty thin.

Unfortunately, for the average investor who lost money on a stock due to an act of possible corporate fraud, there isn't much of an alternative.