Corporate officers are under constant pressure from "Wall Street" to show always improving financial statements. Some companies have chosen to lie about their company's performance in order to artificially inflate the price of the company's stock. Eventually the truth becomes evident and the company's stock falls to adjust to the true financial health of the corporation. The drop in stock price can be overwhelming, falling 50% or more in a single day. Not every decline in the stock price of a publicly traded corporation will be the result of a fraudulent scheme. However, if fraud is involved, a defrauded investor may sue to recoup his or her losses. Congress has passed many laws regulating the securities markets and the corporations who issue publicly traded securities. These regulations require corporations to be honest and forthright with their investors regarding the news that the corporations release as well as any statements made by corporate officials.
Corporate officials who knowingly lie about the corporation are committing fraud. There are potentially many reasons, but the most likely reason is greed and power. Most corporate executives have their compensation tied to the price of their company's stock. The higher the company's stock price, the higher the value of the executive's pay package. Many times this is accomplished through the use of executive stock options. More than likely, the potential gain for the executive is in the millions.
Many corporate takeovers are not proposed with the intention of maximizing the public shareholders value, rather they are proposed in order to enrich a select group of management with a sweetheart deal that will not only enrich them financially, but will also assure their ability to continue to run and manage the company. An appropriate class action can be brought that will force management to disclose all information and attempt to maximize the value to the public shareholders.
Typically, the type of lawsuit that is brought against a publicly traded corporation and its officers and directors is a "Class Action." Class Actions are brought by an individual who acts as a representative on behalf of all defrauded investors. Class Actions allow investors, even with very small losses, to bring actions seeking a recovery of their investment losses. Congress, by enacting the laws regarding Class Actions, intended to encourage people who have sustained losses that would not normally justify the cost of litigation, to bring an action to right the injustice that had been committed against them and to attempt to recover their losses.
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