Shareholder lawsuits cause more shareholder losses?

[sachertorte]

Could someone explain this to me?
Full Article

Relevant Snippet:

The event set off a near panic among investors, forced the government to create an emergency insurance program for money funds and led to a blizzard of shareholder litigation against the fund and its managers. If the fund trustees are right, that litigation could add 5.25 cents a share to the Lehman loss — for a final recovery for investors of 91.72 cents on the dollar.
The reduction comes from the creation of a $3.5 billion “special reserve” to cover all the potential expenses connected with two regulatory investigations and more than two dozen lawsuits filed by shareholders.

My understanding so far is that the Reserve Primary Fund is holding (my) money in order to pay for lawsuits that investors are slapping them around with.
Why would shareholders sue if it only meant they would have further losses?
Does this mean that some shareholders who sue will get more money at the expense of other shareholders who will get less?
Why can the Primary Fund use our money to defend against our lawsuits?
Are the shareholders essentially suing themselves? If so, why would they do that?

The whole thing seems really messed up to me.

[Freddy_the_Pig]

@sachertorte

Why would shareholders sue if it only meant they would have further losses?
Does this mean that some shareholders who sue will get more money at the expense of other shareholders who will get less?

Those questions are impossible to answer without knowing the details of each and every one of the 27 lawsuits filed to date. Some may be seeking damages against people who already got out of the fund–the article alludes to managers “improperly tipping some investors to get out before the losses hit”. Some lawsuits may be seeking to tap the personal wealth of the managers and directors, although that’s likely small in relation to the losses. Some may allege (I’m guessing) that particular investors were misled by duplicitous marketing, and therefore deserve greater recompense at the expense of other investors.

@sachertorte

Why can the Primary Fund use our money to defend against our lawsuits?

What’s the alternative? To lose by default, and allow select plaintiffs to make off with the entire fund?

@sachertorte

The whole thing seems really messed up to me.

No argument here. The most likely outcome is a massive transfer of wealth from the investors to trial lawyers.

[Fotheringay-Phipps]

@Freddy_the_Pig

The most likely outcome is a massive transfer of wealth from the investors to trial lawyers.

As is so frequently the case.

These lawyers get a huge cut out of the ultimate settlement. So it’s in their interests to bring on all these class actions lawsuits in which the plaintiffs get a few cents, sometimes of company’s - i.e. their own - money, as long as the lawyers get their cut.

On a similar note, I was once a shareholder in a company that was brought low by a suit filed by then-crusading-hero Elliot Spitzer. The stock lost 40% of its value in one day. And then I read the indictment. Among the “victims” on whose behalf Spitzer claimed to be filing his lawsuit were the very shareholders whose wealth he was in the process of destroying (he claimed they were being “defrauded” by the company’s misrepresentation of what they were doing). Insult to injury.

[Really_Not_All_That_Bright]

@sachertorte

Does this mean that some shareholders who sue will get more money at the expense of other shareholders who will get less?

Almost certainly.