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Sometimes, after I sell a stock at a loss, I'm invited to participate in a class-action lawsuit against the company. Should I get involved in the suit?

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Real Questions from Real Subscribers

Q: Sometimes, after I sell a stock at a loss, I’m invited to participate in a class-action lawsuit against the company. Should I get involved in the suit?

A: Dear Subscriber,

We at the Forecasts take no official position on such class-action lawsuits. Most of those lawsuits have little legal merit and seem like shakedowns, though some make a stronger case. We’re not lawyers and wouldn’t presume to judge the merits of any specific suit.

Regardless, these lawsuits tend to end up enriching the lawyers a lot and the plaintiffs a little. Take for example the $7.2 billion settlement of the lawsuit against Enron, the utility and energy trader that defrauded investors back in the late 1990s and early 2000s. On average, owners of Enron common stock received $6.79 per share, while the law firm earned $688 million. Of course, $6.79 per share isn’t bad, but shareholders don’t always do that well. The $6.1 billion WorldCom settlement in 2005 netted shareholders an average of 56 cents per share.

Some investors don’t feel comfortable participating in such lawsuits for ethical or moral reasons, and we wouldn’t presume to argue with your personal convictions on that front. Whether you believe the potential payoff is worth the hassle, only you can decide.

Thanks for your interest,

Bob Sweet, CFA
Managing Editor, Dow Theory Forecasts

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