We've all heard about class action lawsuits, and whether you know it or not, you've probably taken part in one. Class action lawsuits were created as a way to avoid having courts clogged with hundreds or even thousands of similar cases. On first brush it makes sense, but then lawyers realized this meant that it was now profitable to sue for even the most minor transgressions. Many of these result in little or no real relief for the aggrieved and big paydays for lawyers. Companies often realize that it's cheaper to pay the lawyers their "green mail" fees and settle, rather than take it to court. To make the best of a bad situation, the latest trend is for companies to use these settlements for marketing purposes by sending discount coupons or even discounts if the lawsuit plaintiffs agree to extend or expand their contractual obligations to the company. In one such lawsuit, Frank Chavez vs. Netflix, the proposed settlement would have those customers that signed up for a package that allows them to have up to three movies out at any one time would get a fourth movie for free for two months. After that time they'd be automatically enrolled in the higher priced four movie package. Pretty slick, only this was a little too aggressive and the judge made them reconsider. One has to wonder where the lawyers are that are supposed to be protecting the interests of the aggrieved. Counting the $2,528,000 in fees they received, perhaps?

Now the lawyers have found a new tool that's being used with increasing frequency to rack up big fees. This time it at the expense of shareholders. If you own stock shares directly (vs. indirectly in a mutual fund) you may have seen these. They're called Shareholder Derivative Suits. In this scenario, a derivative suit is filed by shareholders on behalf of a company. They allege that the company's directors or officers violated one or more fiduciary duties owed to the company and its shareholders. In theory, these are filed to protect the shareholder's long-term interest in the company and typically these are filed to impose corporate governance changes. If any monetary damages are extracted they go to the company, not the individual plaintiffs. Since the shareholders are the owners of the company, it means the shareholders are suing themselves. Bizarre? Yes. The real winners? You guessed it - the lawyers.

My favorite example was filed in March of 2001. It was charged that Oracle's Chief Executive Officer, Larry Ellison, engaged in insider trading by selling nearly $900 million in Oracle stock in January 2001, just weeks before the company announced that it would not meet earnings expectations for its third fiscal quarter of 2001. Ellison sold his stock for an average $30.76 per share and the day the third quarter results were announced the stock dropped to $16.98. Vice Chancellor Leo Strine, Jr. who oversaw the lawsuit, decided in November 2004 that "no rational trier of fact" could find Ellison possessed non public information at the time of stock sales and traded on that knowledge. The decision was upheld on appeal by the Delaware Supreme Court in early 2005. In spite of the lack of evidence against him, the lawyers wouldn't go away, so Ellison decided to settle the case. Under terms of the settlement, Ellison would make at least $20 million in charitable contributions per year over 5 years. Mr. Ellison, whose net worth was estimated by Forbes in 2007 to be $21.5 billion, already donates more that $20 million a year to charity. The settlement also states the lawyers who brought the case will receive $22.5 million. Since Mr. Ellison is an officer of Oracle, his legal fees are paid by Oracle. So I sue myself, even though there is no basis of fact for the charges, to make myself go away I pay the lawyers $22.5 million plus the money I spent on my in house lawyers defending myself. Oh, yeah, one more thing: that there is no material change in corporate governance.

However egregious the Oracle case was, opening my mail recently, I just found a better one. This one involves a pending settlement of a derivative lawsuit where Citigroup shareholders are suing ourselves. This lawsuits begins in 2002, when a series of derivative suits were brought by Citigroup shareholders claiming that "members of Citigroup's Board of Directors and certain Citigroup officers had breached their fiduciary duties to Citigroup and its shareholders by permitting Citigroup to engage in various transactions and relationships with, among other companies, Enron Corp., Dynergy, Inc., and WorldCom, Inc. and to employ certain analyst-related and IPO allocation practices". Prior to the filing of the case that is currently being settled, all of these derivative actions were dismissed by the state or federal courts in which they were filed and several dismissals have been affirmed on appeal, including by the Delaware Supreme Court. In 2002, even though the courts were unable to find any problems in corporate governance at Citigroup, Citigroup took the initiative to review its corporate governance and business policies and implemented a number of changes to strengthen the company's corporate governance framework.

So even though prior cases have been rejected, and Citigroup has voluntarily cleaned itself up, you think we'd learn and not keep trying to sue ourselves. Nope. Carroll v. Weill, et al. is filed in the state of New York. The case is dismissed, and an appeal was denied by the Appellate Division of the New York Supreme Court on November 24, 2003.

So, even though there isn't a case, it doesn't stop the lawyers. They expanded their scope of the suit to include more recent activity including private banking operations in Japan, US mutual funds, WorldCom, research analyst conflicts of interest and a European bond-trading investigation, among other matters. Realizing the lawyers weren't going to go away without a payoff, "Citigroup's senior management and its Board determined that it would be in the best interests of Citigroup and its shareholders not to engage in a lengthy, costly, risky, and distracting litigation, but rather to seek effect a resolution of this dispute…"

As part of the proposed settlement, an independent third party review by Lens Governance Advisors, P.A. of Citigroup's corporate governance policies found "the corporate governance reforms instituted by Citigroup after July 24, 2002 through the present are unique, cutting-edge, and exceed the best practices currently required by law."

The result: no smoking gun of wrong doing, no meaningful changes in corporate governance, but a nice legal payout to the lawyers. As part of the settlement, which has yet to be approved, the lawyers are seeking attorneys' fees and expenses of $3.3 million based on 2500 hours of litigation and almost $200,000 in expenses. Taking the expenses out of it, that's $3.1 million over 2500 hours: an hourly rate of $1,240! Keep in mind that we can assume that that's a mixture of administrative personnel, junior and senior lawyers. Now that's expensive legal advice.

Once again, regardless of merit, regardless of meaningful change, I sue myself and the big winners end up being the lawyers. You know, I really should learn my lesson and stop suing myself - it’s really getting to be an expensive habit.