How will a class action lawsuit affect my investment?

There’s a class action lawsuit being filed against a company I own or am watching. On a scale of total serenity to surrounded by hyenas, how much should I panic?

The answer: Remain calm.

You’ll always need to do your due diligence, but as a Motley Fool member writes on our discussion boards, “This has become a stock-in-trade suit for some law firms. When a company’s shares trade lower, they look for some reason to drum up a class action lawsuit. Why? Because the only real winners in a class action lawsuit are the lawyers.

Big money … but not for individual investors

There’s big money in it for the lawyers behind these suits. The “injured” parties get just about nothing, but the law firms that bring the suit can get paid tons of money for their “time and costs.”

“What they do is beat the bushes for someone — anyone — to come forth and be the lead plaintiff so they can get the ball rolling,” writes Motley Fool member Kathie Ridgeway (user name: havefunsaving). “Once they have a lead plaintiff, they’re off to the races, creating billable hours for which they can be paid when they settle the case.”

Unfortunately, many companies decide it’s easier to settle rather than spend the time and money on costly litigation, earning law firms millions in legal fees. So while it’s an expensive (and somewhat nauseating) suck on a company’s resources, a class-action lawsuit like this is usually nothing to be concerned about in terms of a company’s future.

‘It’s a Milberg’

Incidentally, you might hear experienced investors say dismissively in response to such a suit, “It’s a Milberg.” That’s in (dis)honor of the firm of Milberg Weiss, whose partners became wildly wealthy by casting themselves as the champion of the little guy. As Fortune wrote in a 2006 article about Milberg, the men behind the ploy have “spoken evocatively about fighting for the honest, struggling blue-collar worker who, through no fault of his own, had lost his hard-earned savings to corporate perfidy.”

But that started to ring a bit hollow after the firm was busted by federal prosecutors for all sorts of shenanigans – including kickbacks, racketeering, and bribery – from its days as a “veritable lawsuit factory,” according to Fortune, when it averaged more than a case a week in the mid 2000s.

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