Financial Fraud Prevention and Detection: Governance and Effective Practices

CHAPTER THIRTEEN

Class Action Lawsuits

SEVERAL MONTHS INTO A FINANCIAL FRAUD CRISIS, it may be that the board of directors will have occasion to be satisfied with its progress. If all has been properly handled, the board will have undertaken an investigation, alerted the public through a press release, terminated the employment of those whose complicity was clear, and handled innumerable problems involving creditors, employees, suppliers, and others. Looking back, individual board members may be genuinely astonished at the alacrity with which difficult issues have been handled.

There is at least one aspect of the problem, however, where speed and efficiency of resolution most notably will not be the case. That is the aspect dealing with class action litigation. For the board, the litigation will likely proceed with exasperating inefficiency, delay, and expense. It is to this process of dealing with class action lawsuits that we now turn.

WHAT IS A CLASS ACTION?

Broadly stated, a class action is a type of lawsuit in which a single representative individual is permitted to sue on behalf of an entire group of similarly ­situated individuals known as a “class.” A class action theoretically comes about when an aggrieved shareholder contacts a lawyer and explains that he has been harmed. The law then generally permits that single shareholder to sue on behalf of all similar shareholders.

Although the conceptual justification for class action litigation begins with the predicate of an ...