Risk Management

So Sue Me! Shareholder Litigation Hits An All-Time High

Corporations have been slapped with 263 shareholder lawsuits so far this year.
Roy HarrisAugust 22, 2001

If you need further proof of just how ugly it’s gotten in the equities world, consider this: so far this year, corporations have been slapped with 263 shareholder lawsuits. Even in the US — where suing is practically the national pasttime — that’s a whole lot of lawsuits. In fact, according to PricewaterhouseCoopers, it’s almost a third more lawsuits than shareholders filed in all of 2000. And we’ve still got over four months to go.

Securities firms have been on the other end of much of this shareholder venting. A staggering 143 of the cases allege misconduct by investment houses and brokerages when taking companies public. Indeed, many of the suits mirror investigations by the SEC, which has been looking into allegations that some underwriters and brokers took kickbacks in exchange for shares of hot initial public offerings.

PwC says the previous record for shareholder torts was 260, set in 1998. Of course, it’s far from shocking that stockholder suits are on the rise, considering share prices are on the fall. ”There’s nothing like losing money to inspire people to sue,” securities-law expert Alan Bromberg, at Southern Methodist University, tells the Los Angeles Times. Investors, for example, are expected to file more than 6,700 arbitration cases against brokerage houses this year, breaking the previous record of 6,058. The earlier record was set in 1994 — you guessed, it the year after a substantial market fall-off.

There’s a new wrinkle to some of this year’s suits, too. Jay Ritter, a University of Florida finance professor, tells The Deal.com that some shareholders have sued over the alleged practice of ”laddering.” With laddering, investors are required to accept shares at higher prices in the aftermarket as a condition for receiving shares in earlier allotments. ”That type of practice has occurred with penny stock underwriters,” Ritter notes, but generally hasn’t been ”a focus of allegations against prestigious underwriters until recently.”

James Spellman, spokesman for the Securities Industry Association, says that ”when the Internet bubble burst it caused a lot of people to look for a scapegoat.” Apparently, so. Of the largest 100 tech IPOs since 1998, 31 of the issuers have been hit with shareholder lawsuits. For his part, Spellman defends IPO share allotments, saying their numbers are small compared to the large number of IPOs done in the late 1990s.

Of course, all this suing has some observers wondering about the legislation Congress passed (most recently in 1998) trying to limit frivolous investor suits. But experts say the media attention given to government investigations — along with the billions lost in the market downturn — have led many shareholders to dismiss worries that their suits would be, well… dismissed.

This might be a slight miscalculation. Yesterday, in a victory for Morgan Stanley Dean Witter and analyst Mary Meeker, a federal judge dismissed shareholder complaints as ”an entangled mass of verbiage” filled with ”market gossip.” The lawsuits, filed in Manhattan August 1, had accused Meeker of offering biased research and slanted investment advice about eBay and Amazon.com to win banking business for Morgan Stanley. Stay tuned.