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What’s a Legitimate Securities Fraud Lawsuit?

Earlier today, we asked whether a decades-old law sets too high a bar for investors to sue companies for securities fraud, filtering out legitimate lawsuits as well as the frivolous ones. So what exactly qualifies as a frivolous lawsuit?

We asked Darren McKinney, spokesperson for the American Tort Reform Association, and Blair Nicholas, a partner in a law firm known for securing a $2.65 billion settlement in a WorldCom lawsuit, to tell us their opinions on the difference between worthy and worthless lawsuits. You may not be shocked to know that they disagree.

What defines a legitimate securities fraud lawsuit?

McKinney: A good lawsuit from Bill Lerach’s perspective is one where he gets paid. I don’t think there’s any such thing as a good lawsuit. A righteous lawsuit has a legitimate allegation to make and can demonstrate actual injury. That’s a potentially righteous lawsuit. There should be provable fraud for one thing, rather than someone making a stupid business decision. You should stay out of the equities market if you think you’re guaranteed to make money.

Nicholas:  I can tell you, there are a wide variety of these cases, many of which involve admitted fraud. Even in those cases, the defense counsel argues that there’s no securities fraud. I don’t think I’ve ever been in a case where the defendant hasn’t filed a motion to dismiss even in the most egregious of circumstances. What you’re seeing is cases with the re-statement of financial results, firings and terminations of top officers for intentional wrongdoing, companies that are collapsing overnight, when just days before they were making optimistic statements about their business.

What constitutes a frivolous lawsuit?

McKinney: Most securities lawsuits are inherently frivolous in that they seem to ignore the basic notions of caveat emptor. If you’re going to place your money somewhere, you have to be engaged. Lerach and [jailed plaintiffs’ attorney Mel] Weiss were literally filing lawsuits within hours of stocks dropping, and they didn’t necessarily wait to see whether stocks went up the next day or the next week or the next month. It’s ludicrous, yet it was a bonanza of an industry for a significant portion of the plaintiffs’ bar … their behavior is not any less fraudulent or justifiable than Ken Lay or Jeff Skilling. This is a moment in society we’ve come to where we think anything bad that happens warrants a lawsuit, and that’s just crazy.

Nicholas: To suggest that securities fraud lawsuits are frivolous at a time when our system is melting down due to greed and misconduct by corporate executives is frivolous in of itself. … I honestly don’t know of any examples, I may have read one or two. … By and large, 99.9% of these cases are not frivolous.  If they were, you would see additional reforms, and you’re not.

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