You know the feeling. If you invest like I do, you really know the feeling. Eventually one of those maligned, misunderstood companies that you own is going to be smacked with a class action securities lawsuit. Cisco's
Safe Harbor Provisions be damned, eventually nearly every single publicly traded company in America is going to have to endure a class action lawsuit or two -- it's like a cost of being public. Depending on your perspective, and even depending on the situation, the class action lawyers are the white knights come to rescue the hapless and downtrodden, or they are the collective causes of every evil from athletes' foot to Muzak to the designated hitter -- they're bloodsucking parasites who serve as an atrocious impediment to American competitiveness. And depending on your experience with them, you're not likely to want to hear that they have any of the countervailing qualities.
Angels and devils in a convenient package
Guess what? They're both. For those who believe that class action securities lawyers are completely evil, please note that these were the very people who extracted a multibillion-dollar payment from Cendant
For those who believe that class action lawyers are saviors to those taken advantage of by unscrupulous managements, kept boards, and shady investment bankers, note once again that the Private Securities Litigation Reform Act (a.k.a. "Safe Harbor"), passed in 1995, came to be simply because class action firms dropped suits on companies for little more than the high crime of having a stock that had dropped.
With record numbers of companies filing restatements and a widely noted decline in accounting report quality, there should be no doubt that a large number of companies getting sued by shareholders richly deserves it. Our financial system, with all its checks and balances, continues to reward fraudulent behavior much more efficiently than it does penalize it. And the same Safe Harbor Act that was designed to limit frivolous class action suits -- the notorious "fraud by hindsight" cases that ran rampant in the early 1990s -- has also created an environment that explains some of the behavior among class action firms today.
"We fudged our numbers" isn't protected
In February, El Paso
A cynic might wonder how the firms filing these suits "on behalf of shareholders" would know anything at all about the companies they're serving notice against in such a short period of time. A deeper cynic still might wonder whether the firms had advance notice of the action that would take down a company's shares.
Honey, it's not how it looks!
The answer to both is "they didn't need to." Even students of jurisprudence think of the law as being a deliberate process. Thanks to the Safe Harbor Act, securities class action suits are more like "Mad Libs." How did so many firms file so fast? It's not complicated -- the firms have a cookbook with all of the various complaints completed. To file, all they need to do is slap in a few salient details. The firms then worry about building a case, and more importantly, attracting plaintiffs. The facts don't matter yet; speed does. Because in the end, regardless of how many law firms file suit or attract plaintiffs, the courts will require the suits to be combined into a single case, with the shareholder who has lost the most serving as lead plaintiff. And that shareholder can choose whichever law firm he or she wishes to serve as lead firm for the entire class.
Even the financial media get this wrong. The rash of shareholder lawsuits you see filed against a Nokia
These notices, by the way, are also outgrowths of the Safe Harbor Act, which requires that a notice of impending securities complaint be filed. Firms use this requirement essentially to trawl for plaintiffs. And because we're talking about a group of people who have usually just suffered substantial declines in their portfolios, these aren't exactly waters bereft of potential.
In the end, though, these companies won't have to deal with a swarm of class action suits. They'll have to address one. But this doesn't stop reporters from mentioning these class action suits like they're all independent events. They're not, and the firms haven't even begun to make their cases when the suits are filed. They're placeholders, ones that can be extremely lucrative for the firms.
It's easy to be cynical about the methods and impact of the class action firms. Since the Safe Harbor Act addresses predictions, but not other communications like financial statements, many corporate advocates call for a strengthening of the protections to make it still harder for the class action firms to ply their trade. But in this regard, companies are their own worst enemies. In an age when rampant executive compensation and rising instances of corporate fraud keep investors' (read: voters') distrust and anger at steady levels, there is little to no taste on Capitol Hill to make it harder for those same shareholders to successfully sue. Basically the sociopathic behavior of many corporate executives -- who ensure that their paydays are substantial regardless of performance -- guarantees that the abuses of the plaintiffs' bar will continue as well. I wish I could believe that they'd keep each other in balance, but it's a false dichotomy, as tendencies for excess from each come not out of each other's pockets, but out of shareholders' portfolios.
Bill Mann owns shares of McDonald's. Taking a cue from the disaster in corporate governance following Congressional intervention in 1993, Bill would consider dumping every American company that doesn't expense stock options should Congress get in FASB's way this time around.
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