Wall Street Law Blog

Investment Losses? Learn how to opt out of class action.

Update of report originally published in or around May of 2008 (data is current to that time period).

SECURITITES FRAUD CLASS ACTIONS

Why Aggrieved Shareholders Should Strongly Consider Opting Out of Securities Fraud Class Action Lawsuits...

 

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Based on available data, state and federal statutes, and a well developed body of case law, The Sherman Law Firm recommends that current and former aggrieved shareholders of Wall Street financial institutions (i.e., Bear Stearns, Merrill Lynch, Bank of America, Citi, Lehman Brothers, Goldman Sachs) and other large corporations strongly consider "opting out" of any securities fraud class action litigation. 

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On average, investors stand to recover a far higher percentage of their losses by opting out of a securities fraud class action rather than participating as a class member plaintiff.

 

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A.  Class Action Overview      

A class action is a special type of lawsuit in which a group of plaintiffs that share substantially similar legal claims against one or more defendants band together in a single lawsuit.

 

Class actions lawsuits are classified as “representative actions” because one or more plaintiffs are actually named in the complaint as representative(s) of the entire class of aggrieved individuals and/or entities (in this instance a class might consist of one or more categories of former Bank of America shareholders). 

Investors must keep in mind that securities fraud class actions are frequently dismissed for failing to meet the strict pleading requirements of the Private Securities Litigation Act of 1995.

Most class action claims that survive dismissal motions settle. The end result, however, is that there often is not much money distributed to individual class members. In a 2006 article, Lawsuitssearch.com stated:

“Often being part of a class action lawsuit is not financially advantageous to an individual. Even though the defendant named in the case may be required to pay out a large sum of money, one individual who is part of the class action will only receive a small portion of that sum.” 

A study published by NERA Economic Consulting (NERA) supported the statements of Lawsuitsearch.com. NERA reported that the average settlement recovery in securities class actions in 2006 was only 2.2% of investor losses. 

B.  “Opt out” Cases: An Overview                                                                    

Opt out cases receive have received little attention from the press to-date.   For this reason, it is not surprising that many Bear Stearns employees are unaware of the right to opt out of any class action litigation. 

By opting out, shareholders elect not to be part of a class, not to be bound by rulings that affect the class, and not to be forced to accept any class action settlement.

Investors / shareholders that choose to opt out of securities fraud class action lawsuits generally hire their own lawyers and file their own independent claims against in an individual litigation. 

Research reveals very clearly that opt out plaintiffs can and often do fare much better than the 2.2 percent average securities class action settlement in 2006. 

A prominent opt out success story is the recent AOL Time Warner Class Action. In April 2007, Oakbridge Insurance Services wrote in its “Insights” report that AOL Time Warner opt-out plaintiffs reported recoveries that were between 6.5 and 50 times higher than amounts  plaintiffs received in the AOL class action settlement. Other sources indicated that the average AOL Time Warner opt-out investor recovered 20 times more than the average class action investor. 

It is too early to tell whether the huge advantage for AOL Time Warner opt out plaintiffs will prove to be high or typical. Still, Oakbridge noted that, as a whole, the “the elevated percentage of investment loss recoveries in the opt-out cases” is a concern to class action defendants and to D&O insurers. 

C.  Conclusion

 

Information in report is intended to illustrate the potential relative merits of class action litigation and opt out litigation for securities fraud plaintiffs. Based on statistical evidence from NERA and the outcomes of prominent securities class actions, our conclusion is that shareholders with substantial losses have a strong chance to recover a higher percentage of losses in individual opt out cases.

 

 

*All aggrieved investors should seek professional advice prior to selecting any course of action

Disclaimer

 

Because the report is largely statistically based, it does not take into account individual circumstances such as quality of counsel, and facts which may be unique to any institution or individual.

This report is solely for informational purposes. It is not legal advice.

Brett D. Sherman, Esq.

Managing Attorney

The Sherman Law Firm

Email:

Info@shermanlawyers.net

 web:  

www.shermanlawyers.net

blog:  

 The Wall Street Law Blog

Phone: 201-723-9470

Fax: 646-395-1438

Can't we all just get along?... In search of a uniform standard for risk management. (encore post)

What does risk really mean anyway?  

By Brett Sherman, The Sherman Law Firm

What the heck is risk?  It is hard to get the same definition from two dictionaries.  It can be even harder to elicit agreement between two economists.  Forget about any uniformity among financial institutions on the meaning of risk.  This, we submit, is a pretty big problem for an industry in need of significantly improved risk management systems.

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Here is a nice compact definition of risk:  "Risk equals the inherent chance of a bad result from a decision or course of action."
 

but...

Here is a bit more, umm, comprehensive definition: "Risk is a foreseeable possibility that an uncertain future will produce an unexpected negative outcome.  The more risk a given action carries, the greater the chance for unexpected negative consequences."  

and then...

The basic, cut to the chase definition... "Risk equals chance of loss."

One Supreme Court scholar even said this:  "I can't define risk, but I know it when I see it." Maybe not.

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There are plenty of other variations on the meaning of risk floating around the financial universe, and the differences aren't always subtle.

The most notable dispute regarding the definition of risk has to do with the relaionshio between risk and uncertainty.  Some "experts" insist that risk and uncertainty are inseparable.  They claim that the very nature of risk stems from the fact that outcomes are uncertain (i.e., that we can't predict the futre). This makes sense to us at the WSLB.

HOWEVER, other "experts" claim that risk and uncertainty are totally distinct concepts. The idea is that risk allegedly can be measured, while uncertainty cannot.  This position, which is surprisingly popular, feels wrong to us.  True, some risks can be measured (a good example being gambling odds), but even measurable risks seem to require large samples before statistical probabilities outweigh random chance.  

For example, you can flip a coin 30 times and very easily wind up with heads 21 times.  If you flip the coin 100 times, the results will probably be closer to even.  If you flip it 1000 times (this is a thought experiment, we don't have the patience for 1000 coin flips) then the probability of an outcome close to 50 percent heads / 50 percent tales is even more likely.       

At least to the lawyers here (if we were good at math, we would have been doctors), it seems more logical to include uncertainty in the definition of risk.  Separating the two concepts is counterintuitive, and it implies that statistical probability is an effective way to measure risk in finance.  If risk could be measured with anything close to precision, quants would be a lot more popular today, no?

In any event, the crucial point here is that the term risk management is thrown around an awful lot these days. To define risk management, and practice it effectively, it might be helpful to make agreement on the meaning of "risk" itself a priority.