Fixing Stock Fraud: Shareholder Opt-Out Actions

How Class Actions Work

In a typical shareholder lawsuit for violations of the federal securities laws, one or more institutional plaintiffs (like a pension fund) is appointed to represent an entire class of all similarly situated plaintiffs.  The lawyer(s) for that institutional plaintiff will also be appointed to be the lawyer for the entire class.

For example, in the case of the Facebook class action, the class might consist of all shareholders who bought shares in the Facebook IPO at a price of $38 per share.  The lawyer(s) appointed to represent such a Facebook class will then conduct litigation on behalf of all shareholders in the class, without any input from the shareholders, except the lawyer’s immediate client who has been appointed class representative.

Disadvantages of Class Actions

Class actions do not require any action on the part of shareholders, and thus are best situated for shareholders who have suffered small losses (and cannot afford their own attorney) or shareholders who prefer to be passive to let others make the critical litigation decisions.

However, there are significant disadvantages to being a passive member of a class.  The most serious disadvantage is that recoveries in class actions are extremely poor.  According to one study published by NERA Economic Consulting (“NERA”), the average settlement recovery in securities fraud class actions was only 2.2% of total investor stock losses.  In addition, a shareholder who remains in a class cannot tell the class action lawyers how to conduct the litigation or what arguments to make.  The class action shareholder is bound by the decisions of the class representative.

Individualized, Opt-Out Actions

At this firm, we represent individual shareholders who choose not to remain in a class, but instead prefer to have personal representation and to pursue their own individualized “opt-out” action.  An opt-out action is, as the name suggests, an action by an individual investor or group of investors who prefer not to stay in the class action, but to opt out of the class action.  By bringing their own action, these opt-out plaintiffs have a direct relationship with their lawyer, and call the shots as to how to pursue their litigation, whether or not to settle and on what terms, and so forth.

Apart from the ability to control the litigation, the biggest advantage for opt-out plaintiffs is the ability to recover more than by remaining in the class action.  Based on empirical data, investors who choose to opt out of securities class actions have successfully recovered multiples over what they would have received had they remained members of the class.

In 2004, for example, three California state pension funds and five New York City pension funds opted out of the WorldCom securities class action and reported that they recovered approximately 3 times more than if they had remained in the class. In the AOL Time Warner securities litigation, the State of Alaska settled its $60 million opt-out claim in 2007 for $50 million, which they announced was “50 times what we would have recovered from the class.” In the Qwest securities class action, the Teachers Retirement System of Texas announced that it recovered $61.6 million, which contrasted with an estimated $1.4 million it would have received as a passive member of the class.

According to John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School, “[I]nvestors have seen that large recoveries are possible in individual suits and are now prepared to sue. … [When they] sue individually, they appear to do dramatically better – by an order of magnitude.”  Accountability and Competition in Securities Class Actions: Why “Exit” Works Better Than “Voice”, 30:2 Cardozo L. Rev. 407 (2008).

When Does An Opt-Out Action Make Sense?

Opt-out actions make the most sense for investors who have suffered a large, individualized loss, such as institutional pension funds or large retail investors or high net worth individuals.  These investors should always ask their attorney whether it is possible to pursue an opt-out action to recover for that specific investor’s losses, as opposed to simply staying in a class action.

If you are an investor who has suffered large losses on your securities and  would like to inquire about the possibility of an opt-out action, please contact us on (212) 572-6434 or at info@hgtlaw.com for a free consultation regarding your available options.

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