Shareholder Suits Reach New High

Apparently, 2005 was a record year for class-action securities settlements, (Patti Bond, “Class-Action Securities Settlements Set Record, Indianapolis Star, Feb 13)

If it has not become abundantly clear already, I am not a lawyer, so I can’t comment on the legal ins and outs. But from a philosophical standpoint, shareholder suits have never made much sense to me. While I can understand the shareholders of the company suing a minority shareholder who might be enriching themselves disproportionately (e.g. Rigas family at Adelphia), suits by shareholders against the company they own seem… crazy.

Any successful verdict for shareholders against the company would effectively come out of the pockets of the company’s owners who are.. the shareholders. So in effect, shareholders are suing themselves, and, win or lose, they as a group end up with less than if the suit had never been started, since a good chunk of the payout goes to the lawyers. The only way these suits make financial sense (except to the lawyers, like Bill Lerach) is if only a small subset of the shareholders participate, and then these are just vehicles for transferring money from half the shareholders to the other half, or in other words from one wronged party that does not engage in litigation to another wronged party who is aggressively litigious. Is there really justice here?

OK, you could argue that many of these shareholders are not suing themselves, because they are past shareholders that dumped their stock at a loss. But given these facts, these suits are even less fair. If these suits are made by past shareholders who held stock (ie, were the owners) at the time certain wrongs were committed, they are in fact paid by current and future shareholders who may well have not even owned the company at the time of the abuses, and who may in fact be participating in cleaning the company up. So these litigants are in effect making the argument that because the company was run unethically when they owned it, they are going to sue the people who bought it from them and cleaned it up? Shouldn’t the payment be the other way around, with past owners paying current owners for the mess they left?


  • Of course these lawsuits are nutty. So are class action lawsuits. The common thread, besides nuttiness, is that the only ones who are enriched are the attorneys. How ’bout that?

  • Yes, but what about where the shareholders are suing the directors. I think directors at the moment get a ridiculous free ride, they get fully insured and their interests are not aligned with the shareholders. Directors should be held accountable

  • If one or a small group of shareholders file against a company they have shares in they may well come out on top.
    Say total outstanding shares are worth $1 million, of which they claimants hold 1%. That’s $10.000.
    Total loss due to the suit is 50% (extreme), or $5.000 for the claimant.
    But they get a quarter million or so, minus maybe $50.000 lawyer fees, for a total of $200.000.
    In the end they’ve won $190.000 tax free, something they’d need decades to earn from the shares themselves (and that taxed).