OK, when Bernie Ebbers reportedly lied to the congregants of his church that he didn't fleece WorldCom investors, there might have been some recourse. When Kenneth Lay reportedly hoodwinked Sherron Watkins into testifying that he had nothing to do with the massive fraud that was Enron, investors ought to receive some recompense perhaps.
When Salton (NYSE:SFP), the maker of the George Foreman grill and other kitchen gadgets, reports bad third-quarter earnings because the grills have saturated the market and there's little room to grow, should lawyers really pile on with class action lawsuits?
It has always stuck in my craw that whenever investors experience losses, there are ambulance chasers waiting in the ER (metaphorically, of course) to file class action lawsuits "on their behalf." Investing is not a game of guaranteed profits, but rather one of weighing the risks. Folks, sometimes you're going to back the wrong horse and you're going to lose money.
In the span of three days, no less than seven law firms have filed class action lawsuits against Salton, as each strives to become the lead law firm. Of course, it has nothing to do with the shareholders, and everything to do with extorting fees from the company.
Frequent class action filer Millberg Weiss was the first in line. Look for any bad earnings news from a company, and you'll usually find Weiss filing a lawsuit soon thereafter.
The law firm charges that management should have known that saturating the market with the "Lean, Mean, Fat-Cutting Machine" would lead to lower growth. Maybe investors should have known that there are only so many grills a kitchen can have. When a company starts promoting that it comes with designer color bun warmers, it may have reached the saturation point and needs to design a different product. As Bill Mann recently pointed out, kitchen and home appliances isn't exactly a high-growth industry. Bad economics does not a lawsuit make.
Krispy Kreme (NYSE:KKD) has experienced the same thing. A bad earnings report and the lawyers were lining up to take their cut (I mean, defend shareholders' rights). The law firm of Lerach Coughlin, another frequent filer of class action suits, charges the company should have known the Atkins diet would have cut into sales. It may be debatable whether low-carb diets are the only cause of the poor performance, yet differences of opinion should not be actionable.
Protecting shareholders from legitimate fraud, misfeasance, malfeasance, and nonfeasance (that enough "feasances" for you?) is one thing. Feeding at the trough because your investment went south and you lost money, is another.
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Fool contributor Rich Duprey wishes lawyers stopped "practicing" law and finally learned what they were doing. He does not own any of the stocks mentioned in this article.
