WASHINGTON — Some angry investors -- both average Americans and giant pension funds -- are not taking their massive losses quietly. Holding portfolios that have imploded from a barrage of financial time bombs, they are turning to the courts for compensation.
"Any time people lose money, expect litigation to pick up," said John Sandy Smith, a partner at law firm Morris, Manning & Martin in Atlanta.
To cut down on legal expenses and exert their power in numbers, investors are banding together in securities class-action lawsuits. Although such suits are intended to make recouping losses easier, especially for the average American with a stake in a firm, there are many obstacles to success. For one thing, almost half the cases get dismissed. When they do not, the process is slow and the amounts retrieved can be a fraction of what was lost. With the current cases, the amounts retrieved could get even smaller because the credit crisis has left the targeted firms with slimmer pockets.
Class-action suits are usually initiated by an individual investor who has lost a substantial amount of money or by an institutional investor, such as a pension fund. That person or institution is known as the lead plaintiff. If a class-action lawsuit is filed against a firm you have a stake in, you will find out. The plaintiffs' lawyers are required to issue a news release when they file. From then, you have nothing to do until, or if, there is a settlement.
In 2008, the number of federal securities class-action lawsuit filings reached a six-year high, with 267 filings. That was a 37% increase from the previous year, a recent NERA Economic Consulting study found.
Of the 255 cases filed as of Dec. 14, almost half -- 110 -- were related to the credit crisis. In 2007, there were 40 spurred by the crisis.
Investors are claiming they have lost as much as $856 billion, according to an annual report by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research. That's a 27% increase over the previous year. Like NERA, Stanford also reported a significant increase in the number of class-action lawsuits filed in 2008.
