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The right to sue? Supreme Court hears cases on shareholder lawsuits
Posted Apr 11th 2007 7:00PM by Zac Bissonnette
Filed under: Management, Insiders, Law, Newspapers, Scandals, Columns


The Supreme Court is considering or will consider several cases that may effect the ability of investors to file class-action lawsuits against companies to recoup losses from their stock investments. A case involing Telabs will determine to what extend it must be proven that a company's management was involved in deliberate deception. According to Jurist:

Tellabs, Inc. allegedly made predictions about its future sales that turned out to be incorrect, ultimately costing its shareholders millions of dollars. The company's attorney argued that the lower court's ruling that shareholders must show a "strong inference" of wrongdoing means shareholders must prove with a certainty of over fifty percent that the company intended to deceive the public. Opposing counsel argued that the court should be able to infer more easily, at a burden of forty percent, an intent to deceive based on the company's actions and words.

While the right to sue companies might seem like an important thing for shareholder rights, in reality, I think it is anything but. It seems that every single time a stock experiences a large drop, a bunch of class-action lawsuits are filed.

So what is the point of these lawsuits? First of all, the vast majority never lead anywhere and, even when they do, the vast majority of any awards are eaten up in legal fees and investors recoup almost nothing. So these lawsuits tend to have very little upside.

On the downside, the companies have to spend large amounts of money defending against the suits. Guess where that money comes from? The current shareholders. So what these class action lawsuits do, in my opinion, is eat up the equity of the current shareholders to pursue awards for previous shareholders which they will never receive. This is not, in aggregate a good deal.

In cases where securities fraud really is committed (Enron, Worldcom, etc.), of course shareholders should be able to sue to recoup. But it seems that a lawsuit seems to be the answer to every investment gone south.