Companies misrepresenting income or other information material to their operations may face a shareholders’ lawsuit. Whether a business has a few stockholders or thousands, management must provide accurate information.
If you are an investor with reason to believe the materials presented to you reflect incomplete information, a lawsuit may force discovery, as described by the American Bar Association. The discovery process could order the company to supply a full set of financial or business records. As a shareholder, you may use them to determine the company’s true value.
Discovery may provide missing but required information
When you or other stockholders can review internal documents and records, you may find that management caused you financial harm. Examples include inflated executive salaries or officers taking loans from the business without intending to repay them. Directing a company’s funds to an insider’s other businesses may also show during the discovery process.
After uncovering mismanagement, shareholders may seek relief for the harm caused. If the court finds management provided false or misleading information, a company may have liability to pay the cash difference that stockholders would have received.
Shareholders settle lawsuit over allegations of misrepresentation
Stockholders of a company providing private detention services to the U.S. government filed a lawsuit alleging misrepresentation. As noted by U.S. News and World Report, the complaint included allegations of inflated stock values based on false information concerning the quality of its services.
When the U.S. Department of Justice decided to not renew the company’s contract, it published a memo describing issues with security and safety procedures. This revelation resulted in a large shareholder losing $1.2 million. A lawsuit followed alleging the company’s management knew its services were of poor quality.
Investors have a right to accurate information. Loss of a stock’s value based on a falsehood or an omission may require a legal action for relief.