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
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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But with so many court cases being filed these days, such as those against
CEO Dennis Kozlowski,
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."
Usually you'll know you're eligible for a class-action suit because your broker will send you an official claim form. But even if you don't get a form, there are a variety of sites, such as bigclassaction.com and claimscompensation.com, that enable you to fill out claim forms online. Remember to see if you owned the stock during the claim period to determine whether you're eligible to join.
The next step is to document your losses, getting paperwork for all the trades you made during the claim period and providing evidence to the claims administrator that you are eligible. This is typically the most time-consuming process in joining a class-action suit, but for people who keep good records or have a diligent broker, it should be a snap.
Once you've gathered this paperwork, you will have a good idea of recognized losses -- what you should hypothetically recover in a class-action suit. On the claim form, you'll see information on the settlement fund, which tells you how much money would potentially be doled out.
"If there's a case with a $100 million settlement fund to be distributed, but there's $1 billion in recognized losses, then most people will get back 10% of losses," said Brad Heffler, chief executive of Claims Compensation Bureau. "But sometimes there are other factors in the plan of allocation, like when you bought a stock, that can boost how much you get. Say you bought a stock right on the day a company disseminated false information. You could get 25%."
Unfortunately, it's impossible to figure out the exact plan of allocation, since the total amount of recognized losses that will be paid from the settlement fund won't be clear until after everyone has joined the suit. Heffler says it's safe to assume you'll recover between 5% and 20% of your recognized loss.
At this stage, you have four options. You can choose to ignore the suit and say it's not worth it, especially if your damages are $20. You can also object to the settlement, which is a good idea if the defendant plans to pay out in stock warrants and you have big losses that you want paid in cash. You can also file an individual lawsuit against the company or, obviously, you can join the class-action suit.
For people with huge losses, going it alone may be a wise move because you'll recoup less money in a class-action suit.
"If you're an institutional investor with substantial losses, I can't think of any advantage from taking part in a class-action case as opposed to having an individual suit," said David Marder, partner in Robins, Kaplan, Miller & Ciresi, a national law firm based in Minneapolis. Marder noted, though, that shareholders with losses in the mid six figures should sit down and do a cost-benefit analysis before joining a class-action lawsuit, as individual suits can be time-consuming and can involve big court costs.
Regardless of whether you decide to go with an individual suit or a class-action one, "it's important to participate in some recovery mechanism to seek justice," said J. Boyd Page, partner at Page, Gard, Smiley & Bishop and counsel in a successful class-action suit against Marriott in 2000.
"There's a real sense that class-action suits do help, that they send a message," Page said. "The more an individual investor stands by and doesn't object, the easier it is for this kind of conduct to continue. Maybe it's time for all investors to say we're mad as hell and going to do something about it."