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Stocks & Bonds

Mad as Hell, More Investors File Suit

The credit debacle has fueled a surge in class actions, but settlements won't make you rich.

Dr. Stephanie Plancich tracks securities class-action suits for NERA, an international economics consulting firm.

How has the credit crisis affected class actions? The big story is the upswing in filings: 268 securities class-action suits were filed in 2008, up from a 12-year low of 131 in 2006 and 195 in 2007. Some 115 of the filings were related to the credit crisis. The median total for investor losses in such cases was $3.5 billion, compared with only $387 million for cases unrelated to the credit crisis.

What's the most common complaint? The first wave of cases were against banks and brokers that structured and sold products now alleged to have been defective. For example, some suits have alleged that the quality of a mortgage underlying a security was not as high as indicated. Now, a second wave of suits is being filed against non-financial companies just for holding these "toxic assets." A suit against NextWave Wireless, for instance, claims in part that the company didn't disclose risky investments in auction-rate securities. Pension funds may face suits for investing in those types of securities; litigation under labor laws is definitely on the horizon.

What must you do to join a class action? Nothing. The lead plaintiff often ends up being an institutional investor. But once the class is certified, anyone who bought shares during the class period is a de facto member of the class. Typically, about one-third of cases are dismissed and about two-thirds settle -- almost none go to court. By the time a case settles, a notice goes out to all shareholders, who send back materials to participate in the settlement.

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How much can people expect to get? These credit-crisis cases are huge, which historically means big settlements. The flip side is that bankrupt companies don't pay much. A lot of the major first-round defendants are bankrupt or don't exist anymore.

Doesn't seem worth the effort, then. The portion of any settlement you're entitled to may be a small monetary amount that requires paperwork and time to collect. But the paperwork isn't incredibly complex -- your broker or investment adviser will help -- and it doesn't cost you anything. No one leaves money on the table these days. The economy just won't let you.