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Securities class actions: The basics

Investors who may be eligible to take part in securities class actions can benefit from learning more about these legal actions. To help provide the proper foundation, this article presents the basics of these lawsuits.

What is a class action?
One good place to start is defining class action. A class action is a representative action that permits a person or entity to commence a lawsuit representing other individuals or organizations who are in the same situation.

Shareholders can potentially benefit from learning about securities class actions. Shareholders can potentially benefit from learning about securities class actions.

When a group of the aforementioned have suffered some adverse impact in a similar matter stemming from some unlawful activity, the situation makes one of these lawsuits appropriate. When pursuing individual claims is overly costly or impractical in some other way, harnessing a class action will allow a representative individual or organization to seek compensation.

What is a securities class action?
Now that we have defined class action, the next step is to show what else is needed to make one of these a securities class action. Before an individual or organization files one of these lawsuits, they must first purchase a company’s securities and then incur some loss as a result of the business providing information in a way that breaches existing securities laws.

Usually, shareholders file these lawsuits seeking compensation under federal securities laws containing anti-fraud provisions, including the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934.

“Shareholders file these lawsuits seeking compensation under federal securities laws.”

While class actions permit individuals and organizations to seek remuneration by bringing forth lawsuits when it would otherwise not make sense to do so, securities class actions allow investors who have incurred losses to file suit collectively when doing so individually would either cost too much or not make sense.

For example, if a retail investor buys 100 shares of ABC stock for $5 each and then these securities plunge to $2 each because of ABC’s misleading statements that harmed shareholders, the individual has suffered a loss of $300.

Because the individual only lost $300, hiring a lawyer might not make sense. However, if several thousands shareholders suffer the same loss, they could sue as a class and make the expenses – including the money and time associated with mounting a lawsuit – more practical.

Class member/class period
If an investor is wondering whether they are eligible to participate in a specific class action representing shareholders, they must first determine the class period, which is the time frame during which the defendants in a suit allegedly engaged in actions that harmed investors.

A law firm will determine the exact dates involved in a class period after investigating available information. After an individual or organization files one of these legal actions, they disclose the class period in both the initial complaint and the subsequent notice. If an investor bought the company’s securities during the specified class period, the person or entity is automatically considered a member of the class, whether they obtain legal representation or not.

Interested investors must keep in mind that once an initial complaint is filed, class periods can be lengthened or shortened. The decision to take either of these actions will hinge on the specific circumstances of the case.

Security ownership concerns
Shareholders should know that if they purchased company securities during the class period, incurred an economic loss stemming from unlawful activity and then sold these financial instruments before the securities class action begins, they still have a valid legal claim.

However, if they bought a company’s financial instruments before or after the class period, they lack these rights.

Forming the shareholder class
When the plaintiff brings forth a securities class action, the law firm representing the individual or entity will publish a notice announcing the claim and the formation of the class. The law firm may opt to send notices to shareholders who may be eligible to participate or may alternatively publish it in a newspaper or magazine.

To join the class, people or organizations are required to furnish proof they own the affected security, including when they bought it and what they paid. Generally, they can provide documentation such as brokerage statements or confirmation slips to prove they hold these financial instruments.

Potential for recovery
Determining the damages the class will receive because of a successful securities class action is a complicated matter. The number of investors submitting claims, the size of the recovery, the insurance defendants carry and their ability to pay all factor into the equation. To figure this matter out, law firms will employ experts to calculate how much artificial inflation securities incurred during the class period.

“Class periods can be lengthened or shortened.”

Once a lawsuit has produced a recovery, the court will determine what percentage of this amount will be used for legal fees. To ensure they get their share of the recovery, shareholders should be sure to retain the confirmation slip they received when buying company securities or the brokerage statement indicating these transactions. Investors may be required to provide these documents to the claims administrator once the case is resolved.

After the securities class action is resolved, class members are informed of this outcome and proofs of claim are both sent in and processed, individual shareholders will receive their share of the recovery.

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