Time is Money
When you hire a real estate agent, you assume that they will sell your home for the maximum amount possible. After all, the more you sell your home for, the higher their commission.
However, the data proves that the opposite is true. Real estate agents tend to tell their clients to sell once a reasonable offer comes in, even if that offer is a bit below what the house might actually sell for, especially if the seller is willing to wait.
In fact, when a real estate agent sells their own home, they keep it on the market about ten days longer, and sell for about three percent more than the homes of their clients.
So why do real estate agents tell their clients to sell for less? The answer can be summed up with a simple axiom: time is money.
Real estate agents know that if they wait for the best possible offer, they might see a very small increase in their commission. On the other hand, if they sell for a reasonable price, they can quickly move on to a new client and a new house. In the long run, it is much more profitable to sell a large number of homes for a little less than they are worth than it is to sell a small number of homes for full value.
The data shows a similar phenomenon in the way many attorneys handle securities lawsuits. Often, when a company is involved in malfeasance that makes shareholder’s investments worthless, attorneys will agree to a settlement which compensates them with pennies on the dollar for their losses.
Consider this: according to NERA Economic Consulting, one way to measure how much investors are getting back in securities settlements is to take all of the cases in a year and divide the median investor settlement by the median investor losses.
According to this measure, for every year since 2006, shareholders, on average, recovered less than three percent of their losses.
Why would attorneys agree to such small settlements? Again, time is money. Attorneys know that if they settle for a lower amount than they might achieve through long and costly litigation, they can move on to a new case.
This phenomenon can be seen in the lawsuits filed in the wake of the financial crisis. Fraud and negligent behavior on Wall Street had an effect on investors everywhere, but the worst damage occurred on Main Street. Ordinary Americans found that suddenly their 401k had lost much of its value and, as a result, many have had to delay retirement or take extreme measures to weather the financial storm.
Recently, Washington Mutual, which was at the center of the financial crises, reportedly came to a tentative settlement with its shareholders. Washington Mutual allegedly engaged in a number of questionable lending practices, making high-risk loans without verifying the income of borrowers. These practices ultimately brought the bank down and made shares of the company’s stock nearly worthless.
Recently, the FDIC filed a lawsuit against Washington Mutual’s Chief Executive, Kerry Killinger. This is a good start, and I hope that as more information comes out, we see more action taken.
But for the millions of investors who lost their savings because of WaMu’s risky bets on the housing market, there is little relief.
The tentative settlement is reportedly worth more than $200 Million. That might sound like a lot, but keep in mind there are 1.7 billion shares of the stock outstanding. According to the Seattle Times, that amounts to about 11 cents per share. Note that shares were worth more than $40 in 2007.
The attorneys that represented those shareholders will likely receive tens of millions of the settlement. That would mean that even though shareholders will recover a small fraction of their losses, the attorneys will receive a substantial amount.
That’s a nice payout, considering that the attorneys never even had to go to trial.
At Hagens Berman, we reject these penny on the dollar recoveries. Instead, we seek to always recover the maximum amount for our clients.
Recently, we did just that.
Since March of 2008, my legal team has aggressively pursued a case against Charles Schwab. We alleged that Schwab deceived investors when it sold them shares in its Schwab YieldPlus Funds. The funds were sold as cash alternatives, but we argued that the funds were very speculative and included risky mortgage-related debt.
When the housing market imploded, the value of the funds plummeted. The court ultimately estimated that investors lost, at a minimum, $439 million.
Last April, we reached an agreement with Schwab to restore over $200 million to investors. Unlike the proposed WaMu settlement, this $200 million would cover a large portion of investor’s losses, about 45 percent. The only hurdle remaining was to receive the court’s approval of the settlement.
But last November we suddenly received word that Schwab would be pulling out of the settlement. This was puzzling, as Schwab’s reason for the move was a bit strange. The company argued that since there were plaintiffs who could bring a separate claim against Schwab under California law, Schwab could kill the agreement.
We held firm, and I publically stated that I had no intention of giving back the funds Schwab had agreed to pay investors, and already deposited on their behalf. Ultimately, we came to a compromise which preserved the historic settlement and allowed investors to opt out of the settlement and pursue separate claims if they wished.
Recently, the court gave the settlement its final approval. The settlement will give investors back an unheard of amount of their losses, but I would argue it should do even more. It should serve as a wakeup call for the institutions that lead these cases to hire lawyers that will strive for similar results.
Just like homeowners should not settle for a real estate agent who sells their home for less than it is worth investors should not hire legal counsel who encourages a penny on the dollar settlement.
