On this segment of Industry Focus: Consumer Goods, Vincent Shen is joined by Fool.com contributor Danny Vena to discuss iRobot (NASDAQ:IRBT) and specifically, the multiple law firms that announced investigations of the company earlier this summer.
As it turns out, the resulting shareholder settlements tend to benefit the lawyers more than anyone else. Tune in to learn more.
A full transcript follows the video.
This video was recorded on Aug. 29, 2017.
Vincent Shen: Our first question comes from Tom Gaffner. He asked early last month, "What's going on with iRobot, ticker IRBT? It's a bit unsettling when headlines are dominated by Shareholder Alert: Law Firm XYZ Announces Investigation Into the Firm. Is this an ordinary instance executed by bears or shorts, or something to really be worried about?"
If you go to Yahoo Finance and scroll through the major news headlines for iRobot from the past few months or so, you'll see a lot of examples of what Tom is talking about. Before we dive into the question, a really quick look at the company. iRobot is a $2.5 billion market cap company. You can likely guess from its name, they generate revenue by building and selling robots, about 18 million of them in the past 15 years. The company leads the consumer robotics industry, and its devices are designed to make its customers lives easier. iRobot offers four major product lines, and they're all robots that can either help vacuum your floors, mop them up, clear your gutter, or clean your pool. So overall, this seems rather harmless. But Danny, kicking it over to you, what's with the legal scrutiny the company is facing?
Danny Vena: First of all, one of the things that investors will find after they've been doing this for a little while is that shareholder lawsuits are essentially just something that comes with the territory. There's a particular type of law firm that, this is their bread and butter, this is how they make their living, by basically exploiting a loophole in securities law.
You'll oftentimes hear these lawsuits referred to as a Milberg. The way it got its name was based on the infamous firm of Milberg Weiss, who gained notoriety back in the seventies. They would file lawsuits against companies supposedly on behalf of the little guy. It turns out, later on, they were prosecuted for kickbacks, racketeering, bribery, so basically, they were doing it to line their pockets. Now, the problem with these lawsuits is, once one of these lawsuit is filed, really the only one who makes any money is the attorneys involved. What you'll see is, the companies will spend a lot of money either pursuing these lawsuits or settling these lawsuits. Most of the money goes to the attorneys. And the people who are hurt are the shareholders. So it's not a good situation -- it's damaging to the present shareholders. In fact, the U.S. Chamber of Commerce has calculated that shareholder lawsuits cost companies about $39 billion every year, but they actually only recover about $5 billion. So the additional $34 billion, guess where that goes? To the lawyers.
Danny Vena has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends iRobot. The Motley Fool has a disclosure policy.