shareholder backlash

The IPO mania that fueled Wall Street in recent years is now fueling courtroom drama, as more and more investors seek to recoup lost funds by taking companies and company management to court. The numbers are alarming. Nearly 500 securities litigation suits were filed last year, according to Stanford Law School's Securities Class Action Clearinghouse. Of those, 306 involve IPO-related charges, suggesting that newly public firms are even more at risk of incurring lawsuits than established firms.

"Investors who lose abunch of money can't imagine it's because it was a bad investment. They think there must have been some fraud somewhere," explains Michael Freeborn, a partner at Freeborn & Peters, a Chicago law firm that handles securities litigation. The charges brought in the lawsuits, he says, typically center around the failure to disclose relevant information or accounting irregularities.

Such suits can be costly, both for a company and its executives, adds Freeborn, who notes that suits often name both the company and its directors and officers as defendants. He recommends that executives adopt preventative measures that can minimize the possibility of a suit and put them in a better defense position should one occur.

"Many entrepreneurs don't think about these things because they're so busy dealing with the company's affairs, or they start with the assumption there's nothing they can do," Freeborn says. "Those are costly mistakes."