From the November 2001 issue of Entrepreneur

There's an old saying that shareholders take their gains to the bank and their losses to court. That's certainly true these days, when a nosedive in price is enough to set shareholders off.

Even though Congress passed the Private Securities Litigation Reform Act in 1995, the number of federal securities class action filings increased from 191 in 1995 to 224 in 2000 and a projected 264 for 2001, with settlements averaging $12 million, according to National Economic Research Associates, a consulting and analysis firm in White Plains, New York. Filings rose from 11 to 19 per month between 1996 and 2000.

Most shareholder lawsuits are eventually dismissed or settled, but the legal process usually takes at least two years. How does a young company move forward in the meantime? First, remain calm. "Take a deep breath and realize that in class action litigation, the first pleading you file may actually be nine months to a year from now," says Tracy Nichols, a securities partner with law firm Holland & Knight LLP in Miami. Take some time to search for outside legal counsel specializing in securities law.

But there is one thing to do immediately: Get reacquainted with your directors and officers' insurance policy, which typically covers defense costs in this type of case. Some other survival tips:

  • Screen all public communications. Shareholders are listening. Seek legal advice before speaking publicly, and advise employees not to speak or write about the situation. "Don't give plaintiffs any unfair advantage by talking out of turn at cocktail parties," says Charles W. Schwartz, a securities litigation partner with Vinson & Elkins in Houston.
  • Gather paperwork. Don't destroy or misplace any documents. Preserve all company e-mails, faxes and memos for quick access. Fail to produce, and you could be accused of withholding documents and strengthen the plaintiffs' case, says Robert Fiebach, a securities partner with Philadelphia-based Cozen & O'Connor.
  • Stay focused on your business. Once you've taken care of these basics, wait. It's easy to let the case take over your life. Don't let it. Get updates from your legal counsel, but stay focused on building the business, generating new sales and keeping established clients happy. As Fiebach warns, "Don't win the case but lose the war."

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