Have you ever wondered what options are available to shareholders damaged by corporate misconduct?

When you invest in the stock market, you assume a certain amount of risk.  There are no guarantees. Your investment is not backed by the FDIC, and if your stocks, mutual funds, or bonds decline, you are simply at a loss.  You may pull your money out of a particular investment, or you may be in it for the long-term and look at it from the perspective that the market is cyclical and it will come back up.  Your risk threshold will dictate your actions. Are you risk adverse - investing in blue chip companies and mutual funds? Or, are you a gambler - investing in the newest and hottest IPOs looking to make a quick dollar and get out?  Like most of us these days, your investment portfolio is probably somewhere in between.  

Investing is easier than ever with the advent of accessible trading platforms, such as Robinhood and Stash.  More investors are entering the market than ever before.  More companies are also entering the market.  In 2020, 431 companies conducted initial public offerings, more than twice as many as in the previous year, and 1,000 companies went public in 2021.

What can you do if your investment declines?

When you want to recoup your losses, you first have to evaluate why it declined.  Was it the result of an overall market correction where the whole market or a specific industry declined based on changes in the economy or geopolitical events?  Was it due to weak business fundamentals, resulting in decreased revenue and profit margins?  Or, was it due to secret manipulation by company insiders to which the investing public was finally alerted?   

The first two scenarios are expected risks of investing.  However, investors should not be subjected to the third scenario, though they are time and time again.  Board members and corporate executives owe shareholders a fiduciary duty to manage the company honestly and in the best interests of shareholders - the true owners of the company.  Unfortunately, we see all too often corporate insiders acting in their own best interests to the detriment of shareholders.  When a stock declines as a result of failures by executives, there are certain actions shareholders can take to remedy this wrongdoing. 

Securities Fraud Class Actions

The most familiar of these actions is the typical securities fraud class action.  The Securities Exchange Act of 1934 and Securities Act of 1933 provide shareholders with legal recourse against the company, its executives, and board members.  In a securities fraud class action, a single shareholder will file a complaint alleging fraudulent misconduct, which can include misstatements of fact, accounting fraud, insider trading, and conflicts of interest.  The shareholder who files this case is required to inform the other shareholders that the complaint was filed.  This notice gives the other shareholders of the company 60 days to determine if they want to move to be the lead plaintiff.  If you have recently lost money due to some form of fraudulent misconduct, you may have seen the plethora of press releases issued by all the law firms announcing the filing of the complaint and asking to be contacted by shareholders with significant losses in the company.  This happens because a court is required to appoint as lead plaintiff the shareholder or group of shareholders who represent they incurred the greatest loss from among the other shareholders asking the court to be appointed lead plaintiff.  The belief is that the shareholder who lost the most money has the greatest interest in the case and will do the best job in representing all the company’s shareholders.  

This type of case seeks to recover investment losses for the benefit of the shareholders. If successful, the shareholders will receive a specific amount of money for each share of stock they held during the time of the wrongdoing.  In this type of case, 

• Shareholders need not do anything to be a part of the class.  The lead plaintiff represents their interests, and they do not need to take action until there is a settlement, at which time, they can submit a claim form.
• Shareholders do not need to own the stock during the litigation to submit a claim upon settlement.
• Shareholders will receive money to compensate them for their losses due to the fraudulent misconduct.

Shareholder Derivative Actions 

Shareholder derivative actions are brought by a shareholder for the benefit of the company.   This type of case is often filed in tandem with a securities fraud class action because the class action will end up harming the company through the depletion of its assets necessary to pay out shareholders.  The end goal of the shareholder derivative action is to implement corporate governance measures to prevent similar future wrongdoing and to hold the individual wrongdoers accountable for their misconduct.  This may include removing corporate executives from their posts and recovering any money they may have obtained through insider trading.  A shareholder derivative action is important for the long-term investor who wants to continue investing in the company and set it on a course through which it will improve its value and the benefit it brings its shareholders.  The shareholder who brings this case must have held the company’s stock prior to the time of the fraudulent misconduct and must continue to hold the stock throughout the duration of the litigation.           

Shareholder Inspection Demand

Shareholders have the right to inspect a company’s books and records.  Shareholder inspection demands are a great way to investigate the alleged wrongdoing and obtain documentation that can support an eventual complaint.  Similar to a shareholder derivative action, the shareholder sending the letter must have held the company’s stock prior to the time of the fraudulent misconduct and must continue to hold the stock throughout the duration of the matter.  That means, either until the completion of the document review or until the end of the litigation of a shareholder derivative action, if that is the chosen path.  

Shareholder Litigation Demand 

By sending a litigation demand to a company, the shareholder asks the board of directors to file legal action against the officers or directors who allegedly harmed the company.  There are three possible outcomes to this situation.

1. The board grants the shareholder's request and files legal action. In this case, the shareholder takes no further action.
2. The board rejects the shareholder demand as "not being in the best interest of the company." This decision will stand unless the shareholder can demonstrate the board is biased, not acting in good faith, acting recklessly, or intentionally harming the company. If one of the above applies, the shareholder will file a shareholder derivative complaint asserting that the board was in some way compromised in its decision making process.
3. The board appoints a special litigation committee (SLC) of disinterested directors to evaluate the allegations. Typically, the SLC will determine there was no wrongdoing. Such a decision is hard to overcome, precluding further action by the shareholder.

In some states, shareholder litigation demands are a prerequisite to filing a shareholder derivative lawsuit.  Where demand on the board would be futile, such as in the instance where the board members are responsible for the harm to the company, a shareholder can file a shareholder derivative action alleging demand futility.

How do you stay ahead of the game?

With all these options available, how do you know which one is best for you? That's where Stock Watch comes in.  Through Stock Watch, Robbins LLP monitors its shareholders' investments.  When we identify corporate wrongdoing we alert our shareholder members of the legal options available and guide them through the litigation process that will best serve their interests and hold the corporate actors accountable for their malfeasance.  

Not every option is available to every shareholder.  We have to evaluate the timing of the wrongdoing and shareholder purchase dates, and assess the amount of the shareholders' loss, among other things.  However, whichever path we settle on, Robbins LLP's experienced attorneys will be with you along the way, advocating for your and your fellow shareholders' interests. 

You get the most out of Stock Watch when you keep us informed of your updated holdings.  Your most accurate information is our best defense in protecting your hard-earned assets.  As we turn into the New Year, make it a resolution to update your Stock Watch holdings this month and regularly apprise us of your transaction history.