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Taking (Class) Action

Aug 12, 2002 | The Christian Science Monitor

Conrad Hahn is not your typical stockholder in Martha Stewart Living Omnimedia. While tens of thousands of stockholders in the company have seen MSO shares drop more than 50 percent since the beginning of April, Mr. Hahn decided to do something about it – sue.
On Aug. 2, the North Port, Fla., resident, with the help of a Tampa attorney, filed a class-action suit against chief executive Martha Stewart, blaming her for the recent drop in the company's share price.

In a 13-page complaint, Hahn alleges that he suffered damages of at least $75,000 as a result of Ms. Stewart becoming embroiled in an insider-trading scandal.

"It's obvious that those practices which she was involved in with this insider trading affected her reputation, and consequently the value of the stock," says Hahn.

Lawyers for Martha Stewart Living Omnimedia called the suit "totally without merit." But that's not dissuading Hahn's attorney, Guy Burns, from pressing ahead with his lawsuit. He predicts the action will eventually have tens of thousands of class members.

Hahn is far from alone in turning to the courts – and specifically class-action lawsuits – in trying to recover losses from companies or brokerage firms because of alleged securities fraud.

In 2001, according to a Stanford University study, 327 stock-fraud suits were filed nationwide against corporations ranging from Cisco Systems to eBay, compared with 204 cases the previous year. And securities lawyers acknowledge that the suits are getting a lot more attention since the recent failures of Global Crossing, Enron, and WorldCom. And that, according to legal analysts, has led to larger classes filing claims.

"Shareholders who have had losses are much more likely to join a class action, particularly with the publicity they are getting on CNBC and CNN," says Lawrence Mitchell, a professor of law at George Washington University and the author of "Corporate Irresponsibility." "It's like throwing spaghetti at the wall and seeing what sticks. Many people feel they have nothing to lose in trying to cover some of their losses."

The Web is boosting class-action activity, as more individuals join suits already under way or become aware of suits to which they are automatically a party.

Investors who feel cheated usually file lawsuits against the company in which they invested, rather than against a brokerage firm that helped them invest in the company's stock.

"Don't blame your broker because the company 'cooked the books,' " says Marvin McIntyre, a prominent stockbroker for Legg Mason, in Washington. "Your broker, except in extremely rare circumstances, had nothing to do with the financial irregularities that are now coming to light. The company defrauded the entire market, including the very best analysts and the very best brokers."

Except for a few institutional investors that may have losses in the millions, it is not practical or economically feasible for small investors to sue a company individually. As a result, many who feel defrauded join class-action suits.

James Tullman is a securities lawyer with the Manhattan firm of Weiss & Yourman, which filed a class-action suit July 25 against Vivendi. The suit alleges that the company issued materially false and misleading statements that ultimately helped to artificially inflate Vivendi's stock price. Mr. Tullman says while the standards for a corporate fraud class-action case are high, a number of circumstances may raise a red flag. They include:

• A company revising its earnings downward for a previous period.

• Corporate insiders selling their shares when the stock price was high.

• A resignation or change of auditors associated with a big stock-price drop.

• Regulatory or criminal actions taken against a company or corporate insiders.

Even investors who do nothing can get something if they fall victim to securities fraud. If a class-action lawsuit filed against a firm is successful, aggrieved individuals are able to recover under terms of the settlement or judgment whether or not they are listed as part of the class.

Whether you do nothing, join an existing suit, or take action yourself, it could be months, if not years, before you see any restitution. But the wait may be worth it. "Plaintiffs are starting to recover more than they ever have," says Professor Mitchell. "A recovery of 30 to 40 cents on the dollar is not uncommon."

The cost of pursuing a class-action securities-fraud case is quite high. That's why most law firms specializing in this area work on a contingency basis. Still, all legal fees are closely scrutinized by judges, and ultimately judges assigned to the cases determine what percentage of the recovery goes to shareholders and to the attorneys filing the lawsuit.

If court dockets are any indication, corporate fraud in America is rampant. In the past month alone, class-action suits alleging corporate fraud have been filed against AOL Time Warner, Enron, Citigroup, Capital One, and Tyco.

In addition, several class action securities-fraud suits have been filed against Merrill Lynch. As is well known by now, the firm's stock analysts have been accused of touting stocks to investors and Merrill's own brokers while denigrating those equities in internal e-mails. In May, Merrill agreed to pay $100 million to settle an investigation by the New York State attorney general into charges it tailored its research to win investment-banking business.

Securities lawyers are now paying special attention to Aug. 14, the deadline set by the Securities and Exchange Commission for public firms to certify that their reported financial results are accurate.

"There's a lot of trepidation in the market right now," says Mr. McIntyre. "There's been this uncertainty among investors about which companies are being forthright and truthful about their financials."

Still, investors who sue a corporation just because its stock plunged or its financial estimates were off track are unlikely to succeed.

"A company has to be able to make an occasional mistake. And even if you do this every day, you're bound to have losses," says McIntyre.

But those losses in Martha Stewart Living Omnimedia are not sitting well with Conrad Hahn. "My goal is to be made whole," he says, "and by suing Ms. Stewart in a class-action suit, [to] do something for the common good."

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