Last year more than three hundred class actions were filed on behalf of investors
victimized by securities fraud. This represented a 60% increase over the number of filings from
the year before.2 In the wake of the Enron debacle and similar large scale securities frauds, class
action lawsuits have once again taken center stage as the primary vehicle for aggrieved investors
seeking remuneration for their losses. America’s mature adults control almost half of all the
country’s after-tax income, a good portion of which is invested in the securities markets.3 As
such, there is a good chance that you or someone you know has been or will be part of a
securities class action is significant.
The modern securities class action is a wonderful tool to adjudicate the rights of
aggrieved investors. Unfortunately, the recent promulgation of laws governing securities class
action lawsuits have created a great deal of confusion in the investing community. The purpose
of this article is to demystify the procedural aspects of a securities class action lawsuit so that
affected shareholders may better understand their rights and thereafter be able to make informed
decisions.
Using the class methodology, an individual securities holder may pursue litigation on
behalf of a group of similarly situated investors aggregating their losses and spreading the costs
of recovery. Generally, one or more members of a class may sue as representative parties if: (1)
the class is so numerous that joinder of all members is impracticable, (2) there are questions of
law or fact common to the class, (3) the claims or defenses of the representative parties are
typical of the claims or defenses of the class, and (4) the representative parties will fairly and
adequately protect the interests of the class. Most courts have concluded that a class proceeding
is the best method for the fair and efficient adjudication of securities fraud claims.
1
The author is securities law practitioner and principal of the Braun Law Group.
Questions or comments may be directed to info@braunlawgroup.com.
2
Stanford Law School Securities Class Action Clearinghouse
3
The Golden Age of the Web, Emarketer.com, January 25, 2001 by Darren Allen
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HOW DO I KNOW IF A CLASS ACTION HAS BEEN FILED?
Federal Rules require that the first plaintiff to file a securities class action must publish
notice in a widely circulated national business-oriented publication or wire service advising
members of the purported plaintiff class of the pendency of the action, the claims asserted
therein, and the purported class period. By checking recent news stories on companies you own,
you will quickly determine if a particular company is subject to a class actions suit. If you do
not have access to the Internet, it will be difficult for you to find this information.
In addition to information about the suit, the announcement will offer every class
member the opportunity to petition the court to become a “lead plaintiff.” by a certain date. To
do so, you will typically have to contact the law firm responsible for the announcement to get a
shareholder packet. The packet will include a copy of the complaint and a certification which
needs to be signed under penalty of perjury and returned. The certification will require a
declaration that you: (1) reviewed a version of the complaint; (2) did not purchase shares for the
purpose of suing the company; (3) are willing to serve as a representative party on behalf of the
class, including providing testimony at deposition and trial; (4) list transactions in the underlying
security; (5) attest that you are not a professional plaintiff (i.e. served or sought to serve as a
representative party on behalf of a securities class more than five times in the past three years);
and (6) will not accept any payment for serving as a representative party on behalf of the class
beyond plaintiff's pro rata share of any recovery, except as ordered or approved by the court.
Class members interested in becoming a lead plaintiff have 60 days from the date of the
first filed action to petition the court. The court will entertain all petitions and typically will
appoint the investor(s) with the largest financial interest (i.e. losses) in the litigation.
WHY ARE SO MANY DIFFERENT LAW FIRMS SUING THE SAME COMPANY?
Shareholders will often initiate suits with different counsel. Although only the first
plaintiff to file is required to publish notice, typically all counsel who file on behalf of a plaintiff
will publish notice. As a practical matter, most of these lawsuits assert substantially the same
claim and will ultimately be consolidated into a single action.
At the close of the sixty day window, the court will do the following: (1) appoint a lead
plaintiff; (2) appoint lead counsel; and (3) consolidated all related actions. Therefore, it does not
matter which law firm you choose to make your lead plaintiff petition to the court. However, by
choosing one law firm over an other, you are implicitly recommending to the court which firm
you believe is best capable of being lead counsel. Ultimately, it does not matter whether you or
your attorney are appointed lead plaintiff and counsel, respectively, because in a consolidated
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action, all class members are treated equally and will be entitled to a pro-rata share of any
remuneration.
WHAT ARE THE FEES AND EXPENSES ASSOCIATED WITH THE LAWSUIT?
Fortunately, most class actions attorneys operate on a continency fee basis. This means
that a shareholder does not have to pay for a lawyer out of his or her pocket, but rather,
attorneys’ fees are paid out of the resulting settlement or verdict. The exact amount of those fees
will be determined by the court at the end of the case. Attorneys’ fees typically range from 20-
33% depending on the amount and quality of the work done. If the class does not prevail on the
merits, the attorneys do not get paid and will typically assume all costs associated with the
litigation. Under any circumstances, if you choose to actively participate in a class action, make
sure to ask the attorney you retain to explain who will pay his fees and expenses.
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shareholders’ recoverable damages.
CONCLUSION
In the final analysis, the modern securities class action admirably serves a vital purpose
for the defrauded investor both as a vehicle to retrieve an investment loss and to punish a
company and its officers for wrongdoing. Whether or not you choose to participate in a class
action in the future, know your rights as an investor and take solace in the fact that there are
tools such as the class action to protect you.
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