Have Investors had Luck Suing Companies for Their Losses?
Some companies attracted more investor lawsuits than others in 2011.
Dec. 31, 2011 — -- Q: Have investors had any luck suing companies for their losses in 2011?
A: When some investors lose money, they get mad. Others try to get even.
Investors who feel like they've been wronged by a company they bet on will periodically turn to the courts for help. Investors may try to use the legal system to show the management of a company tricked them in a way that led to losses. This process is known as shareholder securities class action lawsuits.
The number of such suits has been stable. Last year, there were 232 shareholder security class action lawsuits filed, says NERA Economic Consulting. That's roughly equal to past years. There were 241 such suits filed in 2010, 218 in 2009 and 245 in 2008.
The biggest reason behind the class action activity in 2011 was investors' growing ire with Chinese companies. Of the 232 security class action suits, 39 were against Chinese companies, NERA says.
Overall, investors saw their winnings from such suits decline. During 2011, the average settlement fell to $31 million, down from the average of $108 million in 2010. Much of the decline was due to several outliers that were particularly large and small.
Adjusting for the settlements worth more than $1 billion and smaller cases, the average of $31 million in 2011 was still well below the adjusted average of $40 million in 2010, NERA says. The median of $8.7 million in 2011 was below the median of $11 million in 2010, but still the third highest year on record.
And just 6% of 2011 settlements were for more than $100 million down from the 8% that exceeded that threshold in 2010.
There's no question that investors' flame-out love affair with Chinese stocks led to all sorts of court activity in 2011. And clearly, some investors have had luck in the courts getting a bit of restitution.
But for most investors, it's a much better idea to be out of a stock long before things deteriorate to this magnitude. Despite the settlement sums, remember that in most of these cases the wronged investor tends to get very little of the money back. The most money goes to the lawyers.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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