Opt-outs and securities fraud litigation... Why some individual investors may be better off going it alone in securities fraud litigation or arbitration.
We originally wrote this piece in May 2008. While we have edited and updated the text, please note the following:
NERA has published more recent data that is NOT included in our post. However, NERA's updated statistics do not change our conclusions. Readers may review the most recent statistics by visiting the NERA website.
Based on research and experience, The Sherman Law Firm has concluded that any individual investor who-
(a) has suffered substantial stock losses, and
(b) is a class member in a securities fraud class action,
may ultimately recover a significantly higher percentage of the investor's stock losses by choosing to opt out of large class of anonymous plaintiffs. Thus, opting out of a class action and proceeding with individual claims in court or arbitration should receive careful consideration.
A class action is a special breed 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 are known as "representative actions," because one or more plaintiffs are actually named in the class action complaint. Along with their attorneys, these named plaintiffs pursue the case as representatives for the entire class. Class members who are not named do not actively participate in the lawsuit.
Most class action claims settle. The end result, however, is that - after attorney fees and expenses are deducted from the settlement amount - there often is not much money distributed to individual class members.
"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 statement of Lawsuitsearch.com. NERA's report included the following, rather shocking, statistic:
The average settlement recovery in securities fraud class actions was only 2.2% of total investor stock losses.
-What does it mean to "Opt out"?-
Our own experiences at The Sherman Law Firm and Wall Street Law Blog provide anecdotal evidence that many (if not most)investors who suffer stock losses do not even know that they are entitled to opt out of class action litigation.
A shareholder who chooses to opt out of a class action generally hires his or her own lawyer and proceeds against the company in an individual litigation. Assuming the case has merit, any recovery is likely to be substantially more than two percent of investor losses.
This post is intended to compare the relative merits of class action litigation versus opt out litigation in securities fraud cases.
Based on our research and experience, we believe that shareholders with substantial losses have a dramatically better chance to recover a higher percentage of losses in individual opt out cases rather than as participants in class actions.
Disclaimer (we know, we know... But we are lawyers) -
Every case is different. This post does not take into account unique circumstances such as quality of counsel or facts which may be unique to any individual. This post is information, not legal advice. Class members should consult with an attorney to make an informed decision about whether to pursue claims as part of a class action or through individual litigation.
THE SHERMAN LAW FIRM represents individuals and entities in securities litigation, and readers should consider this post as an advertisement for attorney services.
(Please note that Brett Sherman is not related to former Bear Stearns shareholder Bruce Sherman; Disclosure - The Sherman Law Firm represents former Bear Stearns shareholders with allegations and claims similar to those described below)
REPRESENTED BY DAVID BOIES' LAW FIRM, BIG SHAREHOLDER BRUCE SHERMAN SAYS BEAR STEARNS EXECUTIVES JIMMY CAYNE AND WARREN SPECTOR LIED TO HIM.
Bruce Sherman, formerly one of Bear Stearns' largest shareholders, is whistling a brand new tune.
Sherman used to openly heap praise on former Bear Stearns CEO Jimmy Cayne for producing record profits and growing Bear's stock price at an incredible rate during the housing bubble. Now, Sherman is the plaintiff in a new securities fraud lawsuit against Cayne, Bear Stearns, and others.
Boies, Schiller & Flexner, headed by renowned trial lawyer David Boies, represents Mr. Sherman. Boies is a formidable attorney. He is probably best known for representing Al Gore during the former VP's challenge to the legitimacy of the 2000 presidential election. Mr. Boies uses a tell it like it is style to simplify complex issues with plain English explanations and arguments. It is unclear at this time how much direct involvement David Boies will have in the litigation.
The complaint was filed in the the U.S. District Court for the Southern District of New York. Sherman asserts a cause of action for federal securities fraud and a host of similar claims.
Sherman's core allegations are that defendants knowingly (a) overstated the value of Bear Stearns' assets (particularly mortgage-backed securities and related instruments), and (b) vastly overstated the quality and integrity of Bear's risk management systems.
At one point, Bruce Sherman was Bear Stearns largest stockholder. Sherman owned a 5.9% stake, or 5.5 million shares. Sherman's stock previously was worth hundreds of millions of dollars. In March 2008, he suffered an immense financial loss when he sold his Bear stock holdings for a fraction of their former value after the investment bank collapsed.
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...
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.
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.
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.
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
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.