Sue ‘Em for Fraud?

Even in a bull market, individual stocks can tank and leave small shareholders devastated. Recent examples include the staggering 84% decline at small-appliance maker Sunbeam and a 66% drop at franchise operator Cendant, where just last week chairman Walter Forbes resigned under pressure. Both are widely held stocks, and, predictably, both now face scores of lawsuits that allege accounting fraud. Ultimately, the cases against both will become class-action affairs and so serve all who owned the stocks before their meltdown. But even if the suits succeed, the overwhelming odds–and this is true in any suit over a stock gone bad–are that no money will change hands for years and the payments will amount to just pennies on the dollar.

So don’t let your broker, barber or brother off the hook for that lousy stock tip just yet. But don’t dismiss the value of being part of the lawsuit either. After all, the money you lost is gone. Whatever you recover is better than nothing, and it won’t cost you a cent to collect. The tricks are staying informed so that you know when to file a claim and being able to lay your hands on the needed documents when judgment day finally arrives. If you were pummeled in any of the recent debacles–recall the collapse of HMO company Oxford Health late last year–put in a little time now and think of any damage award later as an unexpected bonus.

What should you expect if it’s proved that you were defrauded as a shareholder? For starters, it rarely gets that far. Only 2% of those cases get to trial. Some 20% get dismissed. The rest get settled, and the lawyers get way more than the wronged shareholders. Sorry. Lawyers typically get 30% of any award. Last year 168 shareholder suits were settled for $1.3 billion, an average of $7.5 million each, according to Jim Newman, publisher of Securities Class-Action Alert, a newsletter in Upper Saddle River, N.J. So in the average case, a handful of lawyers got roughly $2.3 million to share, leaving $5.2 million to be divvied among, potentially, millions of shareholders.

Many of the suits, though, involve small companies with relatively few shareholders, and many of them never file a claim, leaving more in the pot for those who do. Newman estimates that the average investor who persists will recover 16[cents] on the dollar.

That will take three to four years. And a 1995 law, intended to cut down on frivolous class-action suits, stacks the deck against you. But in cases in which there’s serious evidence of fraud–not just bad luck or bad investing–there are some things to consider. Don’t hang on to the losing stock unless you believe it will rebound. Your loss is calculated from the date when any alleged shenanigans become known.

Most important, gather records of your stock purchases and stow them. Digging up brokerage statements years after the fact is never easy and is the main reason more shareholders don’t file claims. Another reason is simply not knowing about a settlement. If you move or change your name or account, the courts may not find you. So call your broker, the company’s investor-relations department or the lead attorneys in the case every six months for an update. Sure, it’s a hassle. But even in a bull market, you have to work a little.