History of Notable Securities Class Actions

  • April 1, 2024

Understanding Securities Class Actions

Securities class actions are lawsuits filed by investors who purchased shares of a public company during a specific period (class period). These actions are primarily brought under federal securities laws. The cornerstone of these suits is that the company and its executives made materially false or misleading statements that artificially inflated the company’s share price. When the truth is revealed, the share price drops which results in significant losses for shareholders.

Class action lawsuits can be filed by any shareholder who suffered losses. However, usually, larger shareholders with significant losses are appointed as lead plaintiffs. The reason behind this is that those with larger losses are presumed to have a higher incentive to vigorously prosecute the case. Now that we have a basic understanding of securities class actions, let’s delve into some historical cases to understand this concept better.

The Role and Importance of Securities Class Actions

Securities class actions play a significant role in the investment world. They serve to hold corporations and their management accountable for their actions. This ultimately promotes transparency, responsibility, and honesty among publicly traded corporations. Actions are critical in deterring unethical corporate behavior, preserving market integrity, and maintaining investor confidence.

Also, from an investor perspective, these actions serve as the main avenue to recover losses arising from corporate misconduct. Sometimes, these losses can run into millions or even billions of dollars. Through class actions, even small retail investors can have their day in court – something they could not afford on their own.

A Glimpse Into the First Securities Class Actions

There is some debate about when the first securities class action emerged. One of the earliest known cases is a lawsuit filed against McKesson & Robbins in 1948. The lawsuit came on the heels of one of the most dramatic corporate frauds of the time. A group of stockholders filed this class action to recover damages resulting from misleading financial statements.

However, it wasn’t until the 1960s and 1970s that securities class actions really started to gain prominence in the US. This was during a period marked by a more active plaintiff’s bar and increased judicial acceptance of class actions.

The Enron Scandal: A Hallmark of Securities Class Actions

The collapse of Enron in 2001 precipitated one of the largest and most high-profile securities class actions in history. The company had advanced a pervasive corporate culture of corporate recklessness and conscious disregard for standard accounting practices. When the truth eventually emerged, shareholders suffered tremendous losses. This was a great example of what can happen when a company and its executives prioritise short-term profits at the expense of long-term stability.

The aftermath of the Enron case had a significant impact on securities law and corporate governance. It resulted in increased regulatory oversight and reform, notably the Sarbanes-Oxley Act of 2002.

WorldCom: Another Major Securities Class Action

In the early 2000s, WorldCom was another landmark case in the history of securities class actions. WorldCom had been involved in a massive accounting fraud that resulted in over $11 billion in financial misstatements. Shareholders took steps to recover some of their losses through one of the biggest securities class actions ever.

Just like the Enron case, the fall of WorldCom had profound consequences for securities law, leading to further regulatory scrutiny and reforms. It also cemented the status of securities class actions as integral to protecting investor rights.

Tyco International: A Case Study of Securities Class Actions

Around the same time, Tyco International was another case that grabbed headlines. Tyco was involved in a multi-billion dollar corporate fraud. Shareholders united in a securities class action to recover their losses.

The Tyco case demonstrated the importance of securities class actions in enforcing corporate accountability. As part of the settlement, significant corporate governance reforms were implemented, demonstrating the broad impact these sorts of actions can have.

The Global Financial Crisis and Subsequent Class Actions

The 2008 global financial crisis was another pivotal moment. Several corporations faced securities class actions following the collapse of the sub-prime mortgage market. These companies had been involved in activities relating to mortgage-backed securities, collateralised debt obligations (CDOs), and credit default swaps which were key drivers of the financial crisis.

These class actions were critical in helping shareholders recover billions of dollars in losses. They also led to further reforms and heightened regulatory scrutiny.

Recent Noteworthy Securities Class Actions

There have been several noteworthy securities class actions in the more recent past. For instance, the Petrobras case, following the ‘Lava Jato’ or ‘Car Wash’ scandal, resulted in a substantial settlement for investors. Volkswagen also faced numerous securities class actions in multiple jurisdictions following the ‘Dieselgate’ scandal.

These and other ongoing cases highlight the continuous importance of securities class actions in our present financial markets.

Lessons Learned from Past Securities Class Actions

Past securities class actions have taught us several key lessons. Among the most important are the need for transparency and honesty in the corporate world. Corporate executives must be held accountable for their actions; fraud and deceit can only provide so-called success in the short term. In the long run, such behaviour is detrimental to the company and its shareholders.

These cases also taught us the importance of regulatory oversight and corporate governance. Regulations can act as a deterrent, preventing potential fraud and unethical corporate behaviour. When enforced correctly, they can help maintain market integrity and preserve investor trust.

The Future Landscape of Securities Class Actions

As we look to the future, one thing is clear: Securities class actions are here to stay. With the rise of new technologies and complex financial products, there are new challenges and risks for investors. This means that securities class actions will likely continue to play an essential role in protecting investors and maintaining market integrity.

Moreover, while the US has been the epicentre of securities class actions, these types of lawsuits are being increasingly recognised and utilised internationally. This is indicative of the increasing globalisation of securities class actions movement. Despite the various hurdles and criticisms faced, securities class actions remain a vital tool in the global fight against corporate fraud and misconduct.


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