It’s often said that what goes up must come down, but when it comes to stock values, you certainly hope this isn’t the case. Falling stock prices can trigger investor lawsuits. So, ask yourself – if your stock drops, will you have sufficient D&O coverage is place for the shareholder liability suits that may follow?
The Risk of Large Stock Drops
The stock market is prone to volatility. According to Morningstar, there have been 19 market crashes (defined as a drop of 20% or more) since 1871. Given enough time, the market has always recovered.
However, the outlook for individual companies is not always so optimistic. Stock drops can occur for many different reasons, ranging from poor product performance and increased competition to regulatory activity and wider economic conditions. Whatever the cause, a stock drop can trigger a sell off, causing prices to plunge further. When this happens, an investor lawsuit is possible.
When Do Falling Stocks Trigger Investor Lawsuits?
Not every stock drop triggers an investor lawsuit.
An analysis from D&O Diary shows that stock drops are particularly likely to lead to lawsuits when both the company and the drop are large. This is not surprising since large shareholder losses are associated with larger attorneys’ fees and settlements and are therefore more likely to entice plaintiffs’ lawyers.
However, it should be noted that even with smaller drops and smaller companies, investor lawsuits are possible. If investors believe that their financial losses are the result of misrepresentations or mismanagement, a class action lawsuit may follow. Furthermore, the individual directors and officers may be named in such a lawsuit, and they may be held personally liable.
Investor lawsuits are fairly common. Recent examples include:
· The Trade Desk, Inc. is facing a class action lawsuit, according to Bleichmar Fonti & Auld LLP, alleging that the company’s senior executives may have violated federal security laws when making claims regarding the launch of a new platform. A 31% stock drop triggered the class action lawsuit.
· SoundHound AI is being sued for allegedly misleading investors regarding its accounting practices and amid increased scrutiny of the AI industry, according to CCN. The company’s stock dropped by nearly 15%.
· Ready Capital Corporation is being sued over allegations that it misrepresented the credit performance of its loans, according to Bleichmar Fonti & Auld LLP. The company’s stock fell by 27% after it announced its financial results for the fourth quarter of 2024.
Stock drop lawsuits can result in significant settlements and awards, though the amounts will depend on many factors, including the size of the investments and the severity of the stock drop. In one example, Channel Insider says VMware has agreed to pay $102.5 million to settle a class action investor lawsuit alleging that the company made misleading statements that artificially boosted the value of its stock. In another example, South Florida Business Journal says Boca Raton agreed to pay $1 million to settle an investor lawsuit alleging that leadership errors caused the company’s stock to drop by 94% after going public in 2022.
Protecting Your Company and Your Executives with D&O Coverage
Investors lawsuits frequently name the individual directors and officers accused of mismanaging the company or making misleading statements. D&O insurance provides protection for both the company and the individual business leaders.
Due to stock volatility and the potential for investor lawsuits, it’s critical to secure sufficient D&O insurance.
-
Do you have coverage for pre-IPO actions? Investor lawsuits may allege misrepresentations during the period leading up to going public.
-
Do you have coverage for lawsuits that may occur after a company fails? Tail coverage provides an extended reporting period, which can provide coverage for individual executives who are named in a lawsuit after a company goes out of business and lets its D&O policy lapse.
-
Do you have sufficient coverage for the individual executives? Side A coverage provides protection for the individual directors and officers when the company cannot indemnify them.
NSI Group provides D&O insurance for many companies, including microcaps and pre-IPO companies. We can help you review your company’s coverage needs. Learn more.
