Upper-Class Action

There’s always been something slightly déclassé about class-action lawsuits: sub-prime borrowers, Love Canal residents, investors who foolishly plunged on dodgy penny stocks. Movie versions star feisty plaintiffs’ lawyers and working-class heroes with poor taste in clothes—think Erin Brockovich and A Civil Action.

But when fraud infected several S&P 500 stocks a few years ago, the first truly upper-middle-class-action lawsuits were created. And even though participating in them forces investors to get in touch with their inner American Sucker, it’s worth the hassle. The financial payoff for sheepish investors in turkeys like Lucent and WorldCom may be minuscule. But so is the investment of time. And the psychological return can be significant.

Many of the giant companies with accounting issues have lived to make large settlements. In December 2003, Lucent ponied up more than $500 million in cash and securities. In May, Citigroup, WorldCom’s main Wall Street sponsor, settled a class-action suit led by New York State Comptroller Alan Hevesi, agreeing to pay $2.65 billion to the unfortunates who bought WorldCom’s stock or bonds between April 1999 and June 2002. More are sure to follow.

But many of the victims won’t even try to recover their losses. “Statistically, somewhere between 30 to 50 percent of those eligible don’t file claims,” says Max Berger, an attorney at Bernstein, Litowitz, Berger & Grossmann, who helped negotiate the WorldCom deal. Assuming that recoveries typically amount to pennies on the dollar, many investors don’t bother filling out the proof-of-claim form. Some simply won’t deign to have anything to do with plaintiffs’ lawyers. (Not quite our class action, dear!) Others fall between the cracks. Brokerage firms are supposed to notify affected clients when classes are created and actions are settled. But people move, or close accounts. Or they simply chuck the notices, which look like junk mail.

Most large class actions today have their own Websites—like lucentsecuritieslitigation.com, or worldcomlitigation.com—where investors can download proof-of-claim forms. (The WorldCom forms became available on August 2 and must be filed by March 4, 2005.) The form is simple: some personal information, when you bought and sold, how much you lost. Gathering the data is likewise easy: The attendant at my brokerage firm pulled it up in a few seconds. “You bought 50 shares of WorldCom at $36.76 in August 2000,” came the nonjudgmental response. (Loud palm-to-forehead smack.) “In September 2000, you bought another 50 shares at $27.50.” (Loud forehead-to-desk smack.) “You sold them all at the end of 2001 at $14.33.” (Sigh.) Total loss: $1,780.

After attorneys’ fees, there’s likely to be about $1.05 billion for erstwhile WorldCom shareholders to divvy up. That translates into an average recovery of 48 cents per share. My prospective haul: $48, likely delivered in 2005.

Sounds like bupkes. That’s no reason to boycott the process entirely. Recouping even a tiny fraction of a loss can bolster self-esteem. Baseball players take pride in busting up a no-hitter in the bottom of the ninth inning. So should investors. Getting on the scoreboard always looks better, no matter how thorough the drubbing.

And—here’s the clincher—as with so many other things on Wall Street, these settlements are a zero-sum game. Because the amount is distributed by the claims administrator after all claims arrive, every dime left on the table is one another investor will definitely take. The only thing worse than being burned on a bad stock is being burned on a bad stock twice.

Upper-Class Action