Class Action Attorneys Piling On Angie's List

It looks like there are now about six law firms that have filed class action shareholder lawsuits against Indianapolis-based Angie's List. All of the lawsuits are essentially based on the same claims: the company relied on the use of free memberships to artificially boost subscription numbers reported to investors; the company now relies on the majority of its revenues from the service provider businesses for which it supposedly provides objective reviews from its consumer members; and that it doesn't vet the service providers promoted on its website, questioning the company's website's value to members.

Seeking Alpha's Michael Sacerdote estimates that, in the worst case scenario, the total damages that could be awarded to affected investors is a little more than $1 billion, more than enough to bankrupt the company. Nonetheless, as class action suits go, Sacerdote estimates that the risk of the lawsuits collectively bankrupting the company are only about 7.7%. Based on past history, it's almost certain that no judgment in the $1 billion range would ever be obtained against the company. Less than one-half of one percent of class action shareholder suits go to trial according to Sacerdote. The average settlement is about $36 million compared to a median settlement amount of $12 million.

Sacerdote puts Angie's List odds at winning a dismissal of the suits at 50%, thereby only incurring the attorney's fees it spends defending the lawsuits. Of the remaining 50% of the cases, about half settle for the median settlement amount or less. About 25% of the cases are settled for more than the median settlement amount, which could be enough to sink the company he says; however, he notes that insurance may cover at least some of the potential liability. There's also risk that the negative publicity from the lawsuits will become very distractive for the company's leadership and dissuade investors from investing in the company. So far, the lawsuits have had minimal impact on the price of Angie's List stock, which has fallen only marginally over the past week.