Frequently Asked Questions about Securities Fraud Class Actions
Please review the answers to these questions before calling our offices with your questions. If you still have specific questions, our lawyers will be pleased to answer them. If you are interested in bringing one of the other kinds of lawsuits discussed on this site, please call our offices and we will be pleased to discuss your case.
What is a class representative?
What are the duties of a class representative?
Does it matter if I already sold my shares?
Do I need to hold my shares to participate?
How are legal fees calculated?
Can I sign up with more than one law firm?
“Pennies for the shareholder, millions for the lawyers?”
What is the difference between a securities class action and a shareholder derivative suit?
What is a class representative?
A class representative is a person who sues on behalf of a group of other shareholders and seeks to recover not only his own damages, but those of an entire class of defrauded shareholders. You must meet certain qualifications in order to serve as class representative:
You must not have purchased the security in order to participate in the litigation, or at the direction of your attorney;
You must have actually suffered damages in the fraud (i.e., if you made money in the stock, even though a fraud occurred, you are not a victim);
If you have served as a class representative in five cases in the last three years, you must seek leave of court to serve again;
You must agree not accept any payment for serving as class representative beyond your pro rata share of any recovery, except your reasonable costs and expenses (including lost wages) directly relating to the representation of the class; award of these amounts must be approved by the Court.
What are the duties of a class representative?
You must sign a Certification of Named Plaintiff listing your transactions in the security during the class period, any other activities as a class representative in the last three years, swear that you did not purchase the security in order to participate in the lawsuit, and that you will not accept a disproportionate recovery. We will provide you with the form to complete. That is all it takes to get the process started.
Thereafter, you must provide us with copies of your stock purchase confirmations proving your stock purchases. You must participate in the discovery process in the lawsuit. At a minimum, you must be prepared to produce your stock trading records. You may be called upon to testify in a sworn deposition. You may also be required to testify at trial, although this is significantly less likely to occur.
Most securities fraud cases are settled without going to trial, for a variety of reasons. In the event you are called upon to testify, you will not be required to possess any special knowledge, merely to confirm your stock transactions and what, if anything, you knew about the company when you bought the stock.
Does it matter if I already sold my shares?
No, you were defrauded when you bought your shares. However, it may affect the amount of your damages. If you sold your shares and you made money, you probably don’t have a claim.
The foregoing applies to a securities fraud class action; the answer is different if you are the plaintiff in a shareholder derivative action – then you must hold your shares until the case is settled or goes to trial.
Do I need to hold my shares to participate?
No, you may sell your shares at any time. (This is distinct from a shareholder derivative suit, in which you must continue to hold at least some of your shares while the lawsuit is pending.)
Will this cost me any money?
No, once we have accepted you as a client, we will advance the costs of your case and seek reimbursement of costs and payment of our attorneys’ fee from the court only upon successful conclusion of your case. If we are not successful, you will not be responsible for costs or fees.
How long will this take?
A securities fraud class action is rarely settled in much less than a year. More commonly, such cases take from two to four years to resolve. If tried and appealed, the case can last six years or more.
What can I expect to recover?
You may expect to recover your pro rata share of your damages. Often the total funds available to pay damages in settlement, or after a judgment, are inadequate to pay each shareholder in full. This is because the parties responsible for the fraud usually do not have enough assets or insurance coverage to make full payment.
For example:
If, on the average, each share of the defendant company traded for $10 more than it would have been worth had the market known the truth about the stock, and the market was deceived for many days, perhaps the better part of a year (the “class period”), and the total volume of trading during the class period was 100 million shares, then the full measure of damages in the case is a whopping $1 billion dollars.
Most companies would be unable to fund the full amount of such a judgment. Settlement amounts tend to be driven by cash available: insurance proceeds, available cash and new stock, if the company is a going concern. In either event, judgment or settlement, the total amount recovered is usually some fraction of the whole. You may expect to receive your pro rata portion of that amount.
Courts will occasionally recognize that the fraud was more severe during some parts of the class period and less severe during other parts. To apportion the available settlement proceeds fairly, the court may approve a Plan of Allocation, awarding a greater share of the settlement or judgment to persons who purchased the security during specific intervals within the larger class period.
We will help you calculate your damages. You will need to be able to document all of your purchases and sales of the security during the class period, including date, number of shares and price per share. For purchases and sales during the period, your loss is calculated as market loss (net out your purchases and sales and however much you lost, if you lost, is your claim). If you still held some the shares at the end of the period that you bought during the period, you are presumed to have sold those shares on the last day of the period at the average closing price for the 90 days following the end of the period. If this sounds complicated, don’t worry, we will do the math for our clients. We will answer any questions you may have about how to complete the paperwork.
Who pays the legal fees?
Following judgment or a settlement, we will request that the court order reimbursement of our costs and award us a fee from amounts we recover for the class. If we do not recover anything for the class, you are not responsible for our fees or costs.
How are legal fees calculated?
We keep track of our time spent on the case and maintain detailed records of all of our activities on the case and all of our expenses. When we apply for a fee at the end of the case, we may request a percentage of the recovery, but the court will usually want to see our billing records before it decides.
In federal courts, fees are commonly awarded on a percentage basis, with the actual percentage awarded ranging from 20% up to 33% (if you have seen reports in the press of higher percentages, we believe them to be unfounded or simply exceptional).
In California state court, fees are generally awarded based on “lodestar” (hours x hourly rate = lodestar), plus a risk factor multiplier. The court will assess the difficulty of the case a number of different ways and then decide if the lawyers deserve some multiple of their time in the case. Such a multiple can range from around three all the way down to a ‘negative multiplier’ (a fraction less than 1) if the court believes the requested fee to be excessive.
Can I sign up with more than one law firm?
Signing up with more than one law firm is unnecessary and is probably not a good idea, but there is certainly nothing prohibited about it. As a practical matter, applicable law requires all securities fraud class actions against the same defendant arising from the same conduct to be consolidated into a single case before a single judge.
The plaintiff or group of plaintiffs who have the largest aggregate damage claim will be appointed Lead Plaintiff. Their lawyers will then generally be appointed Lead Counsel. From that point forward, the Lead Plaintiff and Lead Counsel will prosecute the case. Counsel from other cases may or may not be called upon to assist Lead Counsel in the prosecution of the case.
Your claim will be adequately represented, regardless of which firm you originally signed up with. Your recovery will be the same regardless of which firm you sign up with, or if you choose not to sign up with any firm, provided you file a claim upon the conclusion of the case. If nothing else, signing up with a firm is a good way to make sure that you are included in the claims process and get help with the paperwork.
“Pennies for the shareholder, millions for the lawyers?”
Class action cases have generated a fair amount of controversy in the press over the years. Critics claim that the typical class member recovers pennies, while the typical class lawyer recovers millions in fees. The implication is that you should not participate and try to recover your loss, because you won’t get much back anyway, and besides, you’ll just be making some lawyer rich. This makes our blood boil. Here’s why:
The United States of America is one of the very few places in the world where the average citizen has access to the courts. In most countries, justice is for the rich. There are those in the U.S. who would like to reduce access to the courts by the average citizen. Typically, these are corporate interests or accounting professionals that would just as soon avoid liability, any liability, for their products and services, no matter what harm they have caused. They are well-funded and spend their money in Congress and the state legislatures, perpetually seeking to reduce their collective exposure.
The class action device is quintessentially democratic. The theory behind it is that, while a single individual’s claim may be too small to pursue in court, the same defendant may have wronged enough people in the same way so as to justify aggregating all the individual claims. The device answers the question: “Can I get away with stealing $50 million, just so long as I steal it from 10 million people just $5 at a time?” The answer is “No! You will be sued in a class action.” The name of the game is deterrence.
Securities fraud class action cases are high stakes, high risk contingent litigation. Damages in these cases can measure in the billions of dollars. They are fantastically expensive to prosecute, costing anywhere from hundreds of thousands to millions of dollars to take through the discovery process, trial and appeals. Every penny of that money comes from the lawyers, who must fund the case to its successful conclusion before they recover a nickel of their costs.
It can take four years or longer to resolve a securities fraud class action. During those years, the lawyers work thousands of hours, year after year, without bringing home a paycheck. They don’t get paid until you do, years later, at the end of the case.
Many securities fraud class action cases are dismissed by the courts, often well into the case. Because the defendants commonly control all of the important documents and knowledge in the case, it can be very difficult to prove the fraud and prevail in court. While you have already suffered your losses before the case is ever filed, your lawyers must risk millions of dollars of their own time and money before you can recover anything.
It is not difficult to see that the lawyers in securities fraud cases earn the fees they are paid. You may expect to recover your pro rata share of whatever funds or stock are actually available to fund a judgment or a settlement. It may be that you will only recover a portion of your loss. You may rest assured, however, that the lawyers will do their very best to ensure that the company and individuals who defrauded you will not keep the benefits of their wrongdoing.
At root, the securities laws in the United States are designed to deter misconduct. Class action cases have emerged as one of the most powerful deterrents to fraud in our securities markets. If you commit fraud on your shareholders, you will probably not be prosecuted by the Securities and Exchange Commission (after all, its resources are limited), but you may be sure that you will be sued by your shareholders. And if the SEC does prosecute, while it may punish the wrongdoers, it rarely recovers your losses. But a civil lawsuit, such as a securities fraud class action, can do that.
By suing those who have defrauded you, even if your own damages are modest, and even if you don’t recover every penny, you are helping to keep the market honest and make it a safer place to invest your money. By depriving wrongdoers of the proceeds of their frauds, you are deterring fraud and punishing those who commit fraud.
The result of this system of civil deterrence is manifest: the United States has the largest, safest, healthiest markets in the history of the world. Look abroad and all too often you will see turmoil in the markets, shoddy accounting practices, two sets of books, overvalued inventory and receivables that never quite turn into revenue. The securities fraud class action case is your weapon to see that it doesn’t happen here.
What is the difference between a securities class action and a shareholder derivative suit?
A securities fraud class action is brought by shareholders against the corporation, its officers and directors and others, seeking to recover money for persons who were defrauded into buying (or sometimes selling) their shares.
In contrast, a shareholder derivative action is brought on the corporation’s behalf against people who have damaged the corporation itself, to make the corporation whole. It is brought by a shareholder who ‘steps into the shoes’ of the corporation to assert a claim on the corporation’s behalf, usually against the officers and directors of the corporation, but sometimes against others, such as the corporation’s accountants. This is done when the corporation has been harmed, such as by being exposed to massive liability for securities fraud, or criminal penalties, and the wrongdoers are still in control of the corporation. They will not sue themselves, and the shareholders’ equity is put at risk. In this situation, the courts permit the shareholders to protect their equity by suing the officers and directors for breaching their fiduciary duties to the corporation and to the shareholders.