Time is Money
By Steve W. Berman
Last July, attorneys representing a large national bank’s shareholders announced a tentative settlement to recover a portion of investors’ losses after the bank’s collapse in 2008.
The deal still awaits final approval from a judge, but in the best of circumstances, investors will likely only receive about five cents on the dollar for their losses.
Unfortunately, these small shareholder settlements have become the norm, and to the detriment of investors, the trend toward smaller settlements is accelerating. An accepted way to gauge this trend is to compare the median settlement across all settled cases as a percentage of median losses. On a national level, that number for 2010 was 3 percent, an abominably low number that should disgust shareholders and shame the attorneys presenting them to judges for approval.
Why is that number so low? From what we can see of this case, attorneys representing shareholders settled early because it would prove very difficult and time consuming to achieve a larger recovery. These cases take a tremendous amount of legal work and often require significant investments for expert witnesses and forensic accountants. Perhaps more important, they require a special set of legal skills to face up to legions of corporate defense attorneys in a court system that is increasingly pro-business.
These cases are also tough to litigate because the defendants often hide their tracks so well. Today, corporate miscreants who intentionally dupe investors have learned from the likes of Enron’s Skilling and Ebbers of WorldCom; they’ve gotten very good at keeping their conspiracies well-hidden from investors and regulators. Despite these challenges, when done properly, shareholder cases can provide significant, meaningful relief for investors.
Our firm has worked to achieve such results. Recently, we pursued a case against Charles Schwab, alleging the company deceived investors when it changed the composition of one of its funds without disclosing the change to investors. Schwab marketed the funds as an alternative to cash, but we demonstrated that the funds were very speculative and included risky mortgage-related debt. When the housing market imploded, the value of the funds plummeted. The court ultimately estimated that investors lost about $439 million.
In April 2010, we reached an agreement with Schwab to restore more than $200 million to investors. Unlike the proposed settlement mentioned earlier, this will recover about 45 percent of investors’ losses.
What would give investors more protection? In the best world, the SEC and Department of Justice would be much more aggressive, holding corporate executives accountable for their actions, including criminal prosecution. We hold little hope of this happening because of budget limitations, among other reasons. Instead, investors will have to become much more aggressive in protecting their own interests, often through private litigation. Those investors should be able and willing to hold their counsel accountable for delivering meaningful results, rather than a quick resolution.