IS IT REALLY FOR ME

Like many Americans, you may have some portion of your retirement in the stock market. You routinely check your portfolio to see how the stocks are faring and one day, there it is, the company in which you invested your hard earned money has been named in a securities class action lawsuit. Don’t feel bad because you are not alone. Every year, nearly 200 securities class actions are filed on behalf of millions of aggrieved investors. With the recent surge of corporate misfeasance, investor activism has reached new heights and class action lawsuits have become the weapon of choice to reclaim losses.

The modern securities class action was born out of economic necessity. Despite the existence of laws protecting individual investors from corporate misfeasance, the costs of seeking judicial redress on an individual basis often outweighed the potential recovery. A shareholder with relatively small losses would quickly be overcome by legal fees, making individual actions economically unfeasible. The class action solved this problem. Class actions allow investors to aggregate their damages and sue collectively. Moreover, because aggregated damages are often so large, attorneys are willing to litigate the case on a contingent fee basis (i.e. fees are paid only if there is a recovery for the class) making it an economical “no-brainer” for the average investor.

Unfortunately, the proliferation of class action lawsuits exacerbated by multiple filings of the same action by different investors has caused a lot of unnecessary confusion about membership and participation in class actions. In reality, understanding the nature of the lawsuit, defining your level of participation and protecting your share of any settlement is as easy as one, two, three.

Federal laws require the investor who files a securities class action to publish notice of the lawsuit in a widely circulated national business-oriented publication or wire service.^[2] A typical notice will: identify the defendants (e.g. the Company and certain officers); provide a brief explanation of why defendants are being sued; identify the shareholders (plaintiffs) on behalf of whom the action has been initiated; and provide details on how to join the class action.

The first thing to do is read the notice and determine: (1) whether your purchases are the type of security covered by the action (i.e. stock, bond, option) and (2) whether you purchased or acquired the securities during the relevant time frame (also known as the “class period”). If both prongs are satisfied, you are automatically a member of the putative class which means that even if you take no further action, you will have a right to share in a class-wide settlement.

Don’t be fooled by multiple notices from different law firms that basically say the same thing. Often, different shareholders initiate lawsuits, each with their own counsel. Although only the first plaintiff to file is required to publish notice, typically each counsel who files on behalf of a plaintiff, will publish a notice. As a practical matter, most of these lawsuits assert substantially the same claims and will ultimately be consolidated into a single action.

STEP TWO: DO YOU WANT TO PARTICIPATE AS A LEAD PLAINTIFF OR AN ABSENTEE CLASS MEMBER?

In addition to information about the lawsuit, a notice must offer every class member the opportunity to petition the court to become a lead plaintiff (i.e. the shareholder in charge of prosecuting the case on behalf of the class). Interested class members have 60 days from the date of the first filed action to petition the court. A particular date will be given in the Notice. The court will consider the petitions and generally appoint as lead plaintiffs, the investor(s) with the largest financial interest (i.e. largest losses) in the litigation.

Being the lead plaintiff means that you will be responsible for directing the attorneys in the litigation. For most, the primary advantage is to be in charge of an entire litigation and have the opportunity to make a meaningful impact to correct a wrong. The disadvantage is that you may have to give deposition testimony and provide information about your trading history which can be time consuming and invasive. Although the lead plaintiff may be compensated for out of pocket expenses, all class members are treated equally and only entitled to their pro rata share of any settlement. If you don’t have a significant investment or don’t want to spend time litigating the case, then being a lead plaintiff is probably not the best choice. Conversely, if you do want to participate, contact any of the lawyers who published a notice and they will provide you with a shareholder packet and instructions on how to petition the court.^[3] Participating as a lead plaintiff or as an absentee class member is cost free.

If you are not a lead plaintiff, you are still a member of the class and entitled to a proportionate share of any recovery.

STEP THREE: KEEP ALL YOUR TRADING INFORMATION, HOPE FOR A POSITIVE OUTCOME AND WAIT

Resolving a class action can take a long time. Cases typically will be resolved in two years but may take longer. If the case is ultimately resolved in favor of the plaintiff class, you will receive notice of the terms in the mail. It is essential that you keep a copy of your trading records because they will be needed to demonstrate your membership in the class and prove your losses. If you own the stock in street name, (i.e. through your broker), make sure the brokerage has your current contact information. Notice is often mailed directly to the brokerage with instructions to forward to investors.

Class actions have been often criticized for returning relatively modest sums to shareholders. Many times the dollar amount necessary to fully remunerate shareholders greatly exceeds the net worth of the company and applicable insurance. Therefore any settlement must necessarily be a fraction of total damages. The amount ultimately returned to shareholders also is less attorneys’ fees, which typically range from 20-33%. If the class does not prevail on the merits, the attorneys do not get paid and will typically assume all costs associated with the litigation. Notwithstanding your level of participation, check with the lawyers periodically about the status of the litigation and while you wait for the outcome, hope that the remainder of your investments are fruitful and class action free!

^[1] The author is securities law practitioner and principal of the Braun Law Group, P.C. Questions or comments may be directed to mdb@braunlawgroup.com.

^[2] The Notice requirement only applies to actions brought under federal securities laws. For example, actions claiming that officers breached a fiduciary duty are based on state law claims and do not require attorneys to publish notice of the litigation. Sometimes the local media will run a story on the company and pending lawsuits and of course the court will have record of these cases. Absent public notice, an investors’ best course of action is to contact the Company’s investor relations department.

^[3] To become a lead plaintiff candidate, you will typically have to contact the law firm responsible for the announcement to get a shareholder packet. The packet will include a copy of the complaint and a certification which needs to be signed under penalty of perjury and returned to the law firm. The certification will require a declaration that you: (1) reviewed a version of the complaint; (2) did not purchase shares for the purpose of suing the company; (3) are willing to serve as a representative party on behalf of the class, including providing testimony at a deposition and trial; (4) list transactions in the underlying security; (5) attest that you are not a professional plaintiff (i.e. that you have not served or sought to serve as a representative party on behalf of a securities class more than five times in the past three years); and (6) will not accept any payment for serving as a representative party on behalf of the class beyond your pro rata share of any recovery, except as ordered or approved by the court.