There's a wonderful wave of sanity rippling across the court system, giving justice to bank shareholders bamboozled by company executives. Judges are getting good at throwing out proposed fraud settlements that essentially make shareholders pay for crimes committed against ... shareholders.
First, recall that in 2009, Bank of America's
"[the fine] does not comport with the most elementary notions of justice and morality" because the company's shareholders -- the victims of the alleged misconduct -- are the same people being asked to pay the fine.
Several months later, the same judge approved a $150 million penalty, partially on the grounds that the fees "be distributed to Bank of America shareholders harmed by the Bank's alleged disclosure violations."
Now it's Citigroup
I like this. Bank shareholders, while responsible for their own investing decisions, have indeed been outright defrauded by bank management in some cases. Yet the typical outcome of these crimes is management riding off into the sunset with millions of dollars while shareholders bear the burden.
One irony in these fraud cases is that management may have been persuaded to fudge the books in a misguided attempt to stop panics that would have been exacerbated by disclosing the truth. In that case, they may have done shareholders a short-term favor. Even still, there's no excuse for fraud. And what's maddening about these recent rulings is that they still fail to get to the heart of the matter: that the executives should have to pay these fines out of their own pockets.
Warren Buffett proposed a version of this idea earlier this year, saying: "If I was running things, if a bank had to go to the government for help, the C.E.O. and his wife would forfeit all their net worth." Ironically, Buffett's Berkshire Hathaway
Motley Fool co-founder Tom Gardner gets the last word here: "Until the market system looks meritocratic and constrained by ethics, why should we expect the mainstream investor and consumer to demonstrate confidence?"
Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Inside Value pick. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.