By far, the most valuable commodity in an investor’s portfolio is trust. All successful investors trade in it. Trust in company financial reporting, executive statements, brokerage advice, and other public sources of information underlies every purchase, sale, and exchange. Any party with first-hand, confidential knowledge of a company’s workings is barred from trading in its stock or securities due to the unfair competitive advantage such insider knowledge provides; instead, they, like all investors, must rely on the even playing field of public information provided by others. As a result, executives and those in positions of authority can do a great deal of damage when they breach that trust by engaging in unscrupulous practices such as giving investors misleading or outright false information, exploiting inside trading, or even embezzling funds.
Also known as securities fraud or stock fraud, investment fraud is estimated to deprive investors of between $10 to $40 billion each year. Last year saw an 86-percent increase in the annual Disclosure Dollar Loss (DDL) IndexTM, an index measuring investor losses when alleged fraud is revealed publicly. This represented a jump from $57 billion to $106 billion in total losses, the largest increase since the 2008 financial crisis. Yet among those victimized, only a fraction ultimately seek damages in a court of law; fewer still actually obtain redress. Despite this, the total settlement dollars in 2015 increased a staggering 184 percent over 2014, totaling more than $3 billion. In turn, the average settlement size increased 123 percent over the same period, from $17 million to $37.9 million.
These recent statistics underscore a trend toward stronger cases with more substantial alleged damages. In these high-stakes situations, ready access to premier legal representation, persuasive testimony, and other litigation resources can make all the difference. This becomes all the more true where plaintiffs often serve as representatives for an sizable class, and defendants are likely to be colossal financial institutions with nearly limitless resources and top-tier legal counsel.
The Enron scandal rocked the financial world at the turn of the century. A shell game of complex and confusing financial reporting, careful exploitation of accounting limitations, and outright feats of corporate prestidigitation, which combined to bolster the energy company’s stock to a soaring high of $90.25 per share in August 2000, finally came to light in October 2001. The revelation and surrounding controversies tanked its share price to $0.26 by December 2001, costing unsuspecting investors, employees, and retirement pension systems billions of dollars. Congressional inquiry into the scandal gave rise to the Sarbanes-Oxley Act, which was enacted specifically to preempt the accounting and reporting abuses that led to Enron’s meteoric fall. Spearheaded by the University of California, Enron’s shareholders filed a $40 billion class-action lawsuit in Fall 2001, which sought to hold banks like Merrill Lynch, Credit Suisse, and Barclays equally liable for Enron’s fraudulent acts. The protracted, seven-year legal battle ultimately culminated in a $7.2 billion settlement.
The measured success of the Enron investors’ lawsuit could be attributed to both the leadership of the University of California and the backing of a well-capitalized law firm specializing in complex litigation and class action cases. But not all investment fraud claims benefit from these advantages, and certainly not all end in a successful recovery. In a cautionary tale where the claimants’ decision to begin by seeking redress outside of the legal system nevertheless ended in a courtroom, father and son Richard and Jason Gilliam created a website called MonexFRAUD to lambast precious-metals dealer Monex after losing a $32,000 investment with the company. This allowed Monex to fire the first legal shot by suing the pair for extortion in March 2009, after they offered to take down the website for $20 million. While Jason Gilliam subsequently filed a counterclaim against Monex, he did so in pro per and evidently without legal counsel, and Monex ultimately prevailed in its suit, ending with the court ordering a permanent injunction that shut down the Gilliams’ website and prevented them from making “any negative statement about Monex of any kind, without regard to whether the statement is true or false.” When interviewed by Forbes following the court’s decision, Jason Gilliam said that “Our mistake was in not first filing a lawsuit.”
In full hindsight, he may not have been wrong. Had the Gilliams not only filed a lawsuit prior to attempting extra-legal—and potentially illegal—measures, but consulted with and retained counsel experienced with investment fraud claims, it is likely their courtroom experience could have been markedly different. It is unclear to what extent, if any, the potential cost of litigation or legal representation may have influenced the Gilliams’ decision to go it alone, both in their online activities and in Jason Gilliam’s counterclaim. But as the Gilliams’ example demonstrates, measures poised to penny-pinch and undertaken without the benefit of effective counsel can negatively impact what otherwise might be a viable investment fraud claim, and in that way, only serve to beggar the outcome. In the end, willingness and ability to retain industry-leading legal talent, expert witness testimony, and to thoroughly vet courtroom strategies through mock trials and simulations can make all the difference when so much is on the line.
Where an investment fraud plaintiff’s resources might otherwise fall short, funding sources like litigation finance can help close the gap. Also called litigation funding or lawsuit funding, it enables third-party investors to help fund the expenses related to a case in exchange for a portion of the recovery should the lawsuit succeed. Even then, the process of seeking out and acquiring litigation finance can itself be an onerous task, especially for plaintiffs already strained to the breaking point by the demands of ongoing litigation. This is where innovative online platforms like LexShares can make the process of bringing meritorious plaintiffs and accredited investors together simpler and more efficient for both.
By their very nature, investment fraud lawsuits can be David-versus-Goliath affairs. Despite the fact that they are likely representatives for a larger class of victims, such plaintiffs tend to be dwarfed by defendants in both size and resources, which can lead them to feel marginalized, alone, and unsure of who to turn to for help with mounting litigation costs. LexShares and its base of accredited investors can ensure plaintiffs’ equal access to the resources, expertise, and support they need to even the legal playing field and see that their day in court yields the just outcome they—and all litigants—deserve.
Securities Investor Protection Corp. ("SIPC"), News Release, In "Most Expensive" Case in Its History, SIPC Returns Funds to Nearly 10,000 Investors
Cornerstone Research, News Release, Securities Class Action Filings Rebound to Highest Levels Since 2008.
New York Times, Enron shareholders look to SEC for support in court.
Ilana DeBare, SFGate, Billions to be shared by Enron stockholders, Sept. 10, 2008.
William P. Barrett, Forbes.com, Silver Investors Ordered To Keep Gripes Off Web.
Counterclaim By Jason Gilliam for Legal and Equitable Relief.