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.
Many of the actions are directed against companies in the financial industry. Joseph Grundfest, director of the Stanford clearinghouse, said he had not seen so much litigation against a single industry in more than a decade. Nearly a third of all financial firms were named as a defendant in a securities class action filed in 2008, the Stanford study found. The firms named as defendants represented more than half of the sector's total market capitalization. Among them: New Century Financial, Countrywide Financial, IndyMac Mortgage, Washington Mutual and American International Group Inc.
The cases allege some sort of securities fraud. Grundfest said there were three main categories of cases against the financial services sector. Some plaintiffs are claiming that companies lied about the value of securities in their portfolios. Others are claiming that they lied about their underwriting practices. Still others are filing suits against firms that sold auction-rate securities, which are bonds with interest rates reset by periodic bidding, as often as every week. The market for those bonds dried up last year, leaving investors unable to access their money.
Kevin LaCroix, a partner at OakBridge Insurance Services, an insurance brokerage in Beachwood, Ohio, said that the largest number of lawsuits per quarter last year came in the final three months of 2008, suggesting that the trend will continue and litigation will pick up even more through 2009. In December alone, he said, there were 30 new lawsuits.
And expect a lot more lawsuits linked to Bernard Madoff, who is accused of having run a $50-billion Ponzi scheme. At least seven investment groups related to Madoff have already been targeted for investor lawsuits, LaCroix said.
Given the large number of cases, there's a good chance you'll have the option to join a class-action lawsuit if you're an investor or a shareholder in a financial services firm. If you do, several legal experts said, you have nothing to lose, other than what you already lost.
"The whole purpose of the class-action device procedurally was to give the average investor an opportunity to seek recovery, because on an individual basis, it's not feasible," said Ira Press, a partner at law firm Kirby McInerney who is representing investors in a case against Citigroup Inc. "The out-of-pocket costs before you even get into the value of lawyer time . . . generally exceeds the value of the investment."
A securities class action usually begins with the lead plaintiff, who picks the attorneys and exerts the time and energy to keep the suit going.