CLASS ACTION SUITS–THE LAWYERS ALWAYS WIN!

When I worked as a Financial Advisor, I occasionally had clients ask me about “Class Action” (shareholders) Suits, where they could receive money as compensation on a Lawsuit against a corporation that they own stock in.  Generally, prior to receiving the legal documents, they did not necessarily have a complaint against the company.  I usually cautioned them that they may never see any money from the Suit.   Oh, and the shareholders’ suit had to win in Court!

The case in point here is Hewlett-Packard’s acquisition of Autonomy, a British Company, for $11 Billion, in 2011.  Over the next couple of years, H-P wrote down $9 Billion, or 82% of the acquisition price.  Many other companies had allegedly passed on buying Autonomy; so, was this a case of Corporate Malfeasance on H-P’s part, or Fraud by Autonomy–or perhaps some of both?  The linked article, from the International NY Times, provides more detail:  http://www.nytimes.com/2014/08/23/business/possible-deal-in-hp-suit-may-mean-big-payoffs-for-the-lawyers.html?_r=0.

As it turns out, the long-suffering H-P shareholders, having seen the value of their shares continually declining for several years, now see their lawyers appearing to switch sides.  Led by a well-respected San Francisco law firm, the Plaintiff’s lawyers are recommending that the Suit be settled, and H-P pursue Autonomy.  One of the Law Professors, who are cited in the article, doubts that the shareholders would receive any compensation; however, their lawyers would receive an $18 Million retainer, and up to $48 Million in legal fees.

If the shareholders follow the advice of counsel, Hewlett-Packard directors and officers would not pay anything personally, and they would be absolved of all wrongdoing.  The shareholders’ lawyers suggest that they (the law firm) could add value to HP’s derivative suit against Autonomy since they have been working on the shareholders’ suit for several years.

That law firm further claims that the shareholders would benefit from corporate governance reforms, which would improve the company’s merger and acquisition process.  As one of the cited law professors suggests, such reforms are mostly cosmetic.  The value of the American law firm would definitely be suspect in British Courts, however, since it is not even licensed to practice there.

There are some other twists and turns, which are discussed in the linked article.  Two shareholders will separately sue H-P, including Sushovan Hussain, the former Chief Financial Officer of Autonomy.  Both Mr. Hussain and the other (separate) shareholder have a common accusation that H-P insiders paying nothing, and being absolved of all wrongdoing sounds like the law firm is engaging in “alchemy”.  Mr. Hussain would also probably be a defendant if H-P sues Autonomy..

Shareholders of corporations in the United States have virtually no rights. Most of the time, the Chief Executive Officer (who represents the corporation) and the Chairman of the Board (who supposedly represents the shareholders) are one and the same person.  CEOs frequently appoint their friends–other CEOs to their Board–and, oftentimes, they join the other’s board.  The most senior executives receive exorbitant salaries and outlandish bonuses–in many cases for taking undue risks.  Losses and legal fees and fines are absorbed by the shareholders.

If you own stock and receive documentation for a class action suit, by all means read through it.  Now, it’ll all be in “Legalese”, which may seem unintelligible to even the average financially-astute investor.  There generally is a telephone number, and perhaps an Email address, where you can direct questions.  Generally, however, the responder will be a clerical person, rather than someone who actually understands the issues any more than you do.   So, don’t expect much transparency.

About eight years ago, I met with two clients (who were friends), and reviewed the paperwork regarding a suit against one of the largest American corporations with them.  They promised to take me and my Wife to dinner when they received their payments. We’re still waiting!

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