In the US, where it became easier for shareholders to sue US corporates in the late 1980s, securities class actions have become big business - since 1997 there have been more than 3,000 cases, the vast majority of which included allegations of misleading financial statements. However, statistics would suggest these have become increasingly speculative in nature and of benefit to few but the lawyers. In 2002 over half of claims were either settled or went to court; in 2010 the proportion had swung to nearly two-thirds either dismissed or denied.
It isn't the first time this kind of litigation has been attempted in the UK, either. The same law firm targeting Tesco, Stewarts Law, is one of several currently acting for investors attempting to sue RBS over its £12bn rights issue in 2008, on the grounds that, simplistically put, they were misled about the state of the bank's health as it set about its capital-raising.
RBS strongly contests this. It had certainly become a complex beast, arguably too big to manage, but that doesn't imply criminality on the part of its directors - and there were many at the time loudly suggesting RBS had substantially overstretched itself with the acquisition of Dutch bank ABN Amro. So, shareholders had plenty of reason to be wary already, and cannot blame RBS alone for the subsequent financial crisis that hit their investments so hard.
Similarly there were warning signs at Tesco long before revelations of any profit overstatement came to light - declining returns on investment, as fund manager Terry Smith has long pointed out, and a highly visible structural shift in UK shopping habits. And is it even possible to fully extricate the short-term damage inflicted upon Tesco's share price by accounting mishaps from the long-term damage caused by misallocation of capital as a result of changes to its industry? Should we sue Sir Terry Leahy for building too many large stores in the wrong place? Of course not, just as we shouldn't sue over financial irregularities that were very clearly not the root cause of Tesco's fall from grace.
Sometimes we, the investors, should just put our hands up and accept that we have made a bad investment, rather than attempting to transfer the blame for our loss. As equity investors we should also accept that such problems are part and parcel of the asset class - risks that explain why returns from equities are theoretically higher. And, in fact, making mistakes and learning not to repeat them is one of the most valuable lessons anyone can learn.
