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Frivolous lawsuits

A lawsuit filed against a company or an individual for a reason that doesn't make much sense, such as a drop in the company's share price.

Expanded Definition

If you run a publicly traded company, lawsuits are a fact of life, both on the instigating and the receiving ends. Sometimes they're about patent infringement or interpretations of contracts or trying to collect damages. Sometimes they're about an unsafe product. None of those are "frivolous."

What we mean by frivolous lawsuits are those that often follow a drop in the price of the company's shares. They're often announced by some law firm and seek to become a class action lawsuit. They often sound scary, full of terms like malfeasance, breach of fiduciary duty, and failure to make public certain knowledge that harmed shareholders when it did become public.

They are usually filed after some bad news comes out and the share price has dropped significantly. They seek to "recover" the "damages" suffered by investors who now own something that is less than what it was before.

C'mon, folks! Investing in public companies is risky. That's why expected returns are higher than investing in government bonds. Crap happens. Yes, we all wish we could see the future and know what will happen to avoid losses in our investments, but when bad news hits a company, its price will go down. That's part of the price we pay for the chance to make money in the stock market.

To then sue the company because of a drop in share price is the height of folly. Primarily, it distracts management at a time when they need to focus on dealing with whatever bad news caused the drop in the first place. And, it hurts the company because it has to spend money to defend itself, money that would be put to much better use pursuing new revenue opportunities or repairing problems that led to the bad news in the first place. Investors are just shooting themselves in the foot by participating in these lawsuits.

There's often one big clue that a particular lawsuit is frivolous. If you read the press release announcing the lawsuit, you'll often read that the law firm is seeking a "lead plaintiff." That means there's not a group of people yet, and that there's not someone who's volunteered to represent the group as a "typical" member who will sit in court during the lawsuit.

We're not saying that all lawsuits are bad. They are effective tools at enforcing contracts, recovering legitimate damages, and causing changes in corporate behavior. But to sue a company because you lost some money when the stock price went down? Good grief.

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