Mellody's Math: Can You Sue Over Your Losses?

ByMellody Hobson

May 8, 2002 -- What can investors do to help recoup their stock market losses? This being America, one thing they can do is sue.

The door to shareholder class-action suits was opened way back in the early 1930s, when public companies were required by law to publicize their financial information, leaving shareholders free to dispute that information's accuracy and completeness.

In 1995, Congress passed legislation designed to curb frivolous suits. But shareholders looking to the justice system to help recoup their investment losses have since responded with numerous securities-related class actions.

In 2001 alone, 327 shareholder class actions were filed — representing a 60 percent increase from 2000. Moreover, already this year, U.S. companies have paid out more than $1 billion in shareholder lawsuit settlements.

Enter the Attorneys

Shareholders who purchase securities and suffer losses do have recovery rights if they can prove corporate disclosures were inappropriate or incorrect. And big investors are no longer the only plaintiffs seeking reparations through the justice system. These days, the courts are becoming increasingly filled with investors big and small.

If you are one of these small investors with a claim against a corporation and feel like David taking on Goliath, here are a few stones to keep in your back pocket:

Arm Yourself with Information: Often, it is already too late for an investor to take action once information about a pending lawsuit becomes common knowledge. As such, shareholders need to stay aware of the ongoing business activities of companies in which they invest. This includes reading all shareholder information as well as scanning the business section daily to see if any personal holdings are front-page news. The Internet has made it possible for investors to access Web sites with basic information about ongoing lawsuits. For example, sites run by Stanford University's law school and private plaintiffs' firms offer comprehensive information about ongoing shareholder lawsuits.

Stay with the Class: For an everyday investor, it is very difficult to pursue a case outside of a class action suit. In fact, unless an investor has losses of at least $100,000 in a single stock, it is not economically sensible to make an individual claim. Given the time and legal expenses incurred, individual investors are best served joining an existing class action claim as opposed to initiating a suit of their own.

Follow the Paper Trail: In order to be a part of a class action suit, you need to be able to prove your stock ownership. To prove a claim, you must submit trade-confirmation slips or brokerage statements which evidence your ownership of the stock during the period covered by the settlement. Investors typically collect 8 to 15 cents for each dollar they lose at the hands of the defendant. While these sums may seem paltry, they can cushion the financial blow of a large investment loss.

Investigate, don't Litigate

The fundamental lesson is not necessarily to litigate, but to investigate.

As a steadfast investment rule, make sure the initial reason you invest in any company remains consistent. For example, you should believe a company provides a quality service or product, and should take pause if the company abruptly changes its focus from its core competency.

When considering investing in a new security, one of the first steps you should take is to visit the company's Web site and read their last three annual reports. The last three years of a company's history represent a solid indication of its progress, direction and follow-through. Reading annual reports and proxy statements does not require an accounting degree.

One final note: Bad results or even bad management alone are not grounds for shareholder lawsuits. The bottom line is to remain active in your investment management but also remember your rights as a shareholder.

Mellody Hobson, president of Ariel Capital Management in Chicago, is GoodMorning America's personal finance expert. Click here to visit her Web site, ArielMutual Funds.com. Ariel associates Matthew Yale and Anne Roche contributedto this report.

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