At 5:30 p.m. this coming Friday, November 21st, there will be held in the federal district court in New York City a settlement hearing in a class action securities lawsuit bearing the name Monster Worldwide, Inc. Securities Litigation (http://www.berdonclaims.com/cases/details.asp?p=Main&CaseID=246). The lead plaintiff in this class action against Monster is Middlesex County Retirement System of Massachusetts.
The Monster case is cookie cutter litigation that the plaintiffs’ lawyers have been trotting around the country in recent years. In these cases, there are shareholders with real financial losses; there are also persons who are lucky and by chance walk away with windfall gains corresponding to those shareholder losses; and the plaintiffs lawyers have the shareholders with the losses sue the corporation for their losses. In the end, windfall gains remain in the hands of parties who are not before the court, and the lawsuit generates a circular payment that accomplishes a shuffling around of the losses among the shareholders who experienced the losses and also shifting a part of the losses to other shareholders who did not have losses (or windfall gain), and also shifts a part to some of the lucky persons who had windfall gains and who, by chance, are subject to a some partial reclamation of their windfall gains. In addition, the shareholder losses in question are more than just shuffled around; they are increased in total by the huge cut taken by the plaintiffs’ lawyers and also by very sizable fees of the lawyers who have to be hired to defend the corporation in the lawsuit.
Does the foregoing sound crazy? It is crazy, and you would think that, instead of aiding and abetting the plaintiffs’ lawyers in this type of litigation, Middlesex County Retirement System, as well as every other governmental retirement system and corporate retirement plan trustee in the country, would be screaming bloody murder about such craziness. Maybe the reason they have not done so is that they have just been plain snookered by a plaintiffs’ lawyers’ sleight of hand.
Some further detail is needed to explain this.
These class action lawsuits occur in the context of an accounting or other stock price related fraud that has occurred (or allegedly occurred).
If there has been such fraud, accountants, and officers and directors and others, who participated in the fraud should be held liable for damages, fines and imprisonment under applicable civil and criminal securities fraud laws. Also if the corporation sold stock and received the proceeds in connection with the fraud, there is a legitimate claim for recovery against the corporation. Neither persons such as officers, directors or accountants, nor proceeds received by the corporation, are the crux of the cookie cutter litigation exemplified by the Monster lawsuit. The crux is a tricky sleight of hand by the plaintiff’s lawyers.
The plaintiffs’ lawyers sue the corporation and third parties such as officers and directors and accountants. They allege that the defendants perpetrated the accounting or other fraud that resulted in the price of the corporation’s stock being artificially inflated during a period of time starting when the fraud began and ending when the fraud became publicly known, thereby causing the stock price to no longer be artificially inflated by reason of the fraud.
Now comes the sleight of hand by the plaintiffs’ lawyers. If there was fraud and the stock price was artificially inflated for a period of time, some persons (let’s call them the “unlucky” shareholders) who bought shares in the marketplace during that period will indeed experience losses from the fraud. The problems is, for every unlucky shareholder who bought shares and paid an artificially inflated price, the seller of those shares in the marketplace (let’s call these shareholders the “lucky” shareholders) got a windfall gain of receiving an artificially inflated price and that windfall gain is then in their pockets. The situation is thus that there are unlucky shareholders who have real financial losses from the fraud, there are the lucky shareholders who got windfall gains equal to the losses, and there are innocent bystander shareholders who did not receive any windfall gain but who also did not experience any losses (such as shareholders who bought before the start of the artificially inflated period and did not sell before the end of the period, or shareholders who bought after the end of the inflation period) .The sleight of hand of the plaintiffs lawyers is to keep mum about the fact that there will not be recovery from the lucky shareholders the windfall gains that they got by chance as a result of the fraud and who have walked away with such gains, and instead the plaintiffs lawyers will shuffle the losses around by having the shareholders who experienced the losses sue the corporation that generates a big payment from the corporation which is divvied up among unlucky shareholders who had losses from the fraud in proportion to the amount of their losses from the fraud.
How does this shake out? The burden of the big payment from the corporation is shared on an equal share basis by all current shareholders. The “lucky” shareholders who are no longer shareholders and have walked away with their windfall gains will bear no burden of the corporation’s big payment and their windfall gains will be completely untouched. “Lucky” shareholders who sold shares at an inflated price and got a windfall gain and who are still shareholders at the end of the inflation period because they did not sell all their shares or because they bought back shares at a lesser price will bear a burden of the corporation’s big payment in proportion to the shares they own at the end of the period, they will not get any share of the big corporate payment, and hence they have their windfall gain reduced to some extent. Innocent bystander shareholders (such as those who bought before the beginning of the artificial inflation period and held their shares throughout the period) have a share of the losses shifted onto them through their share of the burden of the big corporate payment. As to “unlucky” shareholders, some may no longer be shareholders, bear no burden of the corporation’s big payment, and will have their losses reduced by receiving their share of the big payment. Of the “unlucky” shareholders who are current shareholders, some will have their loss reduced on a net basis because their share of the burden of the big corporate payment by the corporation will be less than the share of the payment they receive based on the amount of their losses; for other “unlucky” shareholders, the burden of the corporation’s big payment on them will be greater than the share of the corporation’s big payment that they receive based on their amount of losses, so, on a net basis, their loss will be increased as a result of the litigation.
The plaintiffs’ lawyers big fee will come out of the corporation’s big payment, and the corporation will also pay sizable attorney fees to the corporation’s lawyers representing it in the class action lawsuit. All of these legal fees will increase the aggregate loss ultimately borne by the “unlucky” shareholders and by the innocent bystander shareholders.
In the Monster class action, the amount of the big corporate payment (the burden of which is borne by all current shareholders on an equal per share basis) will be $47,500,000. Presumably. the lucky shareholders in Monster obtained total windfall gains of at least that amount (and perhaps many times that amount). To an unknown extent there will be lucky shareholders who have walked away with their windfall gains and these windfall gains will be completely untouched by the litigation. The plaintiffs lawyers will take 25% of the $47,500,000, and the balance will be distributed among shareholders who had losses from the fraud. The net effect of this increases total losses by the aggregate of all attorney fees (25% of $47,500,000 for the plaintiffs attorneys plus whatever fees Monster has to pay to its lawyers) and shuffles $47,500,000 of the losses around as previously described, i.e., some “unlucky” shareholders effectively have their losses decreased, some "unlucky" shareholders have their losses increased, some of the losses get shuffled onto innocent bystander shareholders, and some “lucky” shareholders have their windfall gains reduced.
In 2007 there was consummated a cookie cutter class action involving Tyco Corporation (see http://blogs.wsj.com/law/2007/11/01/three-plaintiffs-firms-to-ask-for-460-million-in-tyco-suit/?mod=WSJBlog#commentsThe) that had much more eye popping numbers. In that case, the big corporate payment from Tyco was $2,975,000,000 (total windfall gains of lucky Tyco stockholders presumably being at least that much, and possibly many times more), and the plaintiffs’ lawyers claimed $460,000,000 in attorneys fees for their services. Those services increased total losses by the amount of the fee plus the amount of legal fees of Tyco’s lawyers and shifted otherwise shifted around $2,975,000,000 in losses among the shareholders who had losses from the fraud and shuffling some of the losses onto innocent bystander shareholders of Tyco, to some chance extent reduced some of the windfall gains of some of the lucky Tyco stockholders in Tyco. In a further cookie cutterclass action that is currently being finalized involving Xerox Corporation (http://www.gilardi.com/xeroxsettlement), the amount of the big circular corporate payment will be $670,000,000, and the cut of the plaintiffs' lawyers will be 20%, or $134,000,000.
To repeat,you would think that, instead of aiding and abetting the plaintiffs lawyers in the Monster class action, Middlesex County Retirement System, as well as every other governmental retirement system and corporate retirement plan trustee in the country, would be screaming bloody murder about the craziness their stock investments are being subjected to by these kinds of lawsuits. Maybe the reason they have not so is that they have been just plain snookered by the plaintiffs’’ lawyers’ sleight of hand.
Our country is on the brink of its worst economic crisis in decades, and our country's huge governmental retirement systems, as well as thousands of private pension plans, and millions of 401(k) owners, have now collectively experienced trillions of dollars of losses in the financial markets. Maybe governmental retirement systems and corporate retirement plan trustees will stop being snookered and start screaming bloody murder about what the plaintiffs lawyers have been doing in order for the lawyers to enrich themselves by possibly billions of dollars and thereby pile on further reductions in the value of stock investments of the retirement plans. (For further commentary on plaintiff lawyers' predations on innocent bystander shareholder value, go here.)