Perilous Securities Class Action Lawsuits

By Christine, Brian | Risk Management, July 1994 | Go to article overview

Perilous Securities Class Action Lawsuits


Christine, Brian, Risk Management


The news struck like a thunderbolt A minority shareholder, unhappy with the drop in the company's stock price, retained a law firm and filed a class action lawsuit. The allegation was that senior management withheld information that the company's stock price would fall -- an accusation that the firm vigorously denied. "Stock prices drop as a matter of course; it's an intrinsic risk of the market," lamented one of the company's senior officers at a hastily convened meeting. But no matter: The lawsuit forced the company to prepare a legal response.

Shareholder-led class action securities lawsuits are a growing threat to public corporations and their chief executives, says Philip Rotner, partner at McCutchen, Doyle, Brown Enersen in San Francisco. "It's an insidious process," says Louis M. Thompson, jr., president and chief operating officer of the National Investor Relations Institute in Washington, D.C. "Ninety percent of these suits are without merit, but because of the way the law is structured, plaintiffs' attorneys are not required to prove what a company did that caused the stock price to drop."

Once a case goes to trial, the plaintiffs' attorneys argue that the stock price drop was foreseeable, and that management failed to alert investors. Under securities laws, the burden of proof for plaintiffs is relatively minimal. For example, under the Securities Act of 1933, a plaintiff need not prove fraud, but only that the company or its officers committed a "material misrepresentation" or omission regarding the factors affecting the stock's price. These omissions can include failure to disclose officers' lack of business experience; failure to indicate the limited market for the product or the level of competitiveness in the industry and exaggeration of unaudited earnings for the most recent quarter.

Defending the firm can be onerous, with discovery often stretching out for more than a year. The plaintiffs may request every document a company produced. Consequently, the defendant corporation, even if innocent, faces defense costs that can escalate into millions. As a result, most corporations settle out of court -- at an average of $14.1 million, according to the National Economic Research Associates, Inc. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Perilous Securities Class Action Lawsuits
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.