SEC mulls shareholder lawsuits

Posted Sep 23rd 2007 5:10PM by Zac Bissonnette
Filed under: Law, Conventions and Conferences

This spring, the SEC will be holding a round-table discussion on shareholder litigation. Observers have been arguing for years that shareholder litigation is a burden to corporate America, putting our financial markets at a competitive disadvantage.

A few weeks ago, I wrote about the class-action lawsuits being filed against Heelys Inc. (NASDAQ: HLYS):

I could swear securities lawyers have invented a sophisticated computer program capable of seeking out public companies to target with class-action lawsuits. A company reports a bad quarter, the stock tanks, and then for the next few weeks, press releases seem to come out daily announcing a class-action lawsuit "commenced ... on behalf of purchasers of ... stock issued pursuant or traceable to the false and misleading Registration Statement filed with the Securities and Exchange Commission in connection with the Company's ... initial public stock offering.

While I certainly support the right of shareholders to collect damages in instances of real fraud, it seems that every time a stock price drops, multiple firms file lawsuits. These suits divert management's attention from the business and burn up resources on legal fees. All of this would be fine, except that these suits very rarely go anywhere. And even when they do, shareholders rarely collect anything.

I'm not sure what the solution to this situation is, or even if there is one, but it's an important issue for the SEC to be looking at.

Tags: class-action lawsuits, Heelys, HLYS, Lawsuit, SEC, shareholder litigation

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Reader Comments (Page 1 of 1)

9-24-2007 @ 1:48AM

scooperson said...

Confession: I am an attorney.

I believe that all people need access to the courts and trial lawyers over the long term have done more good than harm. example: smoking industry, lung cancer! safer cars!
Falsely Blocking access to the courts is like censorship. Profit motives sometimes do conflict with human safety and there needs to be a forum to play the balance out.

I do have a problem however, with securities class actions. I rarely see any benefit to the shareholder and the class action attorney seems to be unjustly awarded. Maybe the answer is that before any attorney fees can be collected, the shareholder needs to be fully compensated, or the fees need to be adjusted relative to the shareholder compensation. This and also in other types of consumer litigation, I sometimes see attorney fee awards that are more than 10 times the actual damage award. Attorney fees should not be a form of "punitive damages." This is a delicate balance and hopefully, a reasonable solution will be reached. I know for one thing, that business and corporations cannot be allowed to go unchecked, but at the same time, honest business should not be subject to extortion in the form of a lawsuit..

sc