When investors have purchased stock in a company and later discover that the company violated securities law, such as fraudulent reporting of financial data, one of their best recourses may be a securities class action lawsuit. These allow individual investors to consolidate their claims into a single legal action when they have all been similarly impacted by the alleged wrongdoing. Securities class action lawsuits can result in judgments or settlements worth millions of dollars or more.
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Why Individuals Pursue Class Actions
Companies that violate securities laws cause economic harm to many people at once, not just a single individual. A class action lawsuit allows a group of individuals who have suffered similar harm to pursue their claims in a single court action.
For example, a small investor may have purchased $1000 of stock in a corporation that was fraudulently reporting its financial data. When the fraud was discovered, that $1000 in stock dropped in value to only $500. The investor has lost half of her investment because of the company's fraud.
For an individual, this loss can be significant, but is often too small to justify suing a company on one's own. A class action allows investors to join together in order to pursue recovery.
Types of Securities Class Action Claims
Though the specifics of every lawsuit differ, most securities class actions pursue similar legal claims. Some of the most common violations claimed are:
Fraud or Deceit
These claims argue that a defendant engaged in fraud or deceit in connection to the purchase or sale of securities. The fraud or deceit can be active, as when a company lies about its earnings, or it can be through omission, such as when a company fails to report potential liabilities. These claims are referred to as Rule 10b-5 claims, after the Securities and Exchange Commission rule which prohibits such fraud and deceit.
False Forward-Looking Statements
These claims revolve around an issuer's predictions and projections regarding future corporate actions and performance. These claims allege intentional misrepresentations in documents such as earning estimates, projected expenditures, expected growth, and future cash flow.
Other Common Securities Class Action Claims
Other claims revolve around insider trading, poor governance, and deficient accounting. Insider trading claims argue that traders acted on important, non-public knowledge in buying or selling securities. An insider trading claim may be made, for example, when a corporate officer sells all her stock immediately before corporate fraud is reported. Poor governance claims allege that the company lacked proper internal controls to protect against fraud or other damaging actions. Finally, claims regarding accounting accuse a corporation of failing to follow generally accepted accounting procedures.
Securities Class Action Procedure
When an investor or investors begin a class action lawsuit, they must identify who qualifies as a member of the class. Often, an attorney for the class will begin by determining the "class period." This is the time during which the violation occurred. For example, if the class action accuses a corporation of fraudulently inflating its stock price over a two-year period, the class period would be the two years during which the fraud occurred. Anyone who purchased stock during that class period would be eligible to become a member of the class. So that potential class members will know about the suit, attorneys must take action to notify the public, often through publication of a notice in newspapers or magazines.
Once a class is formed, the lawsuit proceeds much like any other. Little is required from most class action members once they have been approved as a member of the class. They are not expected to be significantly involved in the litigation.
Few class actions actually make it to trial. Many are dismissed by the court. Since those that do go to trial can cost corporations billions of dollars, many companies choose to settle class actions. When a settlement or final judgment is made, the money awarded (after attorneys' fees) is divided among the members of the class action in proportion to the harm they suffered.
When to Contact an Attorney
If you believe you have experienced securities fraud and have a claim that might be shared by others, consider contacting a qualified class action attorney. An attorney can discuss your situation, help explain the applicable laws, and investigate whether a securities class action may be appropriate. If you believe you qualify as a member of an existing class, the notice of class action lawsuit should provide information on how to join.
Contact a securities lawyer to assist with any issues related to securities laws and financial instruments.