Commentary: Do Shareholder Class Actions Make Sense? - 9/17/2009

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Stanford Law School


2009 News and Press Releases

News News 2009


HEADLINE NEWS:

Commentary: Do Shareholder Class Actions Make Sense?, Not When They Extract Payments From Innocent Shareholders And Let Fraudsters Off The Hook
Michael Orey

Businessweek. September 17, 2009

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EXCERPT: When New York Federal District Court Judge Jed S. Rakoff rejected a proposed $33 million securities fraud settlement between the Securities & Exchange Commission and Bank of America (BAC) on Sept. 14, he pointed out that the money would come out of the pockets of BofA investors—meaning that "shareholders who were the victims of the bank's alleged misconduct [would] now pay the penalty for that misconduct." […] Rakoff said the SEC didn't adequately explain why it had not pursued charges directly against the bank executives or lawyers allegedly responsible for issuing "false and misleading" proxy statements and instead targeted the corporation. In his order nixing the deal, he called it "unfair," "unreasonable," and "inadequate." Rakoff's ruling prompts a question that seems to garner little attention outside a small circle of academics: Why do we tolerate the same perverse approach and empty outcomes in the resolution of private shareholder class actions? These lawsuits, typically filed by institutional investors, are independent of any government action and seek to recoup shareholder losses allegedly caused by a company providing false or incomplete information to the market. The value of settlements in such cases can dwarf those obtained by federal and state regulators, and there is widespread agreement among legal scholars that these class actions make little economic sense and are anemic deterrents to fraud. […] The age-old purpose of fraud claims is to force a wrongdoer to cough up ill-gotten gains to the person deceived. Shareholder lawsuits do no such thing. "An aftermarket fraud causes no transfer of wealth from an innocent victim to a guilty perpetrator of the fraud," noted Stanford University law professor and former SEC Commissioner Joseph A. Grundfest in a filing in an unrelated proceeding. "Instead, it causes a wealth transfer among equally innocent third parties." Other critics have referred to this as "circularity" or "pocket shifting."

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