Extortion by class action

Dick Thornberg:

The Supreme Court's recent decision to review securities class-action claims, in a case known as Stoneridge Investment Partners, has triggered an intense trial lawyers' media campaign.
The case is about whether plaintiffs' attorneys receive increased leverage to coerce "deep pocket" defendants to pay exorbitant settlements that have little or no relation to each defendant's legal liability. Thanks to their campaign, much of the media coverage has entirely missed what is at stake.
Unless they are dismissed before trial, most class actions settle -- which means the plaintiffs' claims may never be scrutinized by a judge or jury. Outcomes are often less a matter of justice than of negotiation, as many defendants decide it is better to settle than to incur the enormous costs, inconvenience and risks associated with what may become virtually endless litigation.
Congress and the courts have repeatedly tried to curtail abuses of the class-action process by allowing defendants to seek dismissal of legally invalid claims. Plaintiffs' lawyers respond by focusing media attention on victims of misconduct, and demanding "compensation" from any defendant in the vicinity -- regardless of legal responsibility. The individual awards to such victims usually pale by comparison to the huge fees collected by plaintiffs' lawyers.
In Stoneridge, a U.S. Court of Appeals dismissed efforts to hold equipment suppliers legally responsible for frauds committed by public companies with which they did business, because the equipment suppliers made no false representations to investors. On similar legal grounds, another U.S. Court of Appeals rejected claims against investment banks that did business with Enron. The Enron case is waiting while the Supreme Court considers Stoneridge.
Much of what has been published about these cases misses that mark. Plaintiffs' lawyers and their allies have portrayed the defendants, which include clients of my law firm, as greedy and impersonal "big businesses" and "Wall Street banks" that perpetrated frauds on innocent shareholders.
This rhetoric overlooks the fact that most "big businesses" and banks are themselves public companies, whose shareholders bear the burden of class-action settlements. The media's accolades to plaintiffs' lawyers frequently ignore that many class actions transfer wealth from one group of innocent shareholders to another -- after the plaintiffs' lawyers take their cut, and that prominent plaintiffs' lawyers have recently been accused of unlawful kickbacks and of lying to the courts.
Most media accounts also skip right over the critical legal issue at stake in these cases. In 1994, after reviewing the language and history of the securities laws, the Supreme Court decided, in a case called Central Bank, that Congress had not authorized private plaintiffs to bring "aiding and abetting" claims against defendants that did not make fraudulent statements to the public. Plaintiffs' lawyers have argued the same claims can be made by alleging the defendants engaged in "schemes to defraud." Appellate courts have rejected this obvious end run around Central Bank's reasoning.
There are good reasons why "scheme to defraud" claims should not be allowed. They can readily be abused. As the Supreme Court explained, most businesses sued as aiders and abettors would likely abandon their defenses and pay large settlements in order to avoid the expense and risks of going to trial before juries that would apply vague legal standards to complex facts. There could also be dangerous "ripple effects" if businesses were discouraged from dealing with public companies because they might be sued as "aiders and abettors" of someone else's fraud.
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While the arguments here may seem arcane, the cost are very real. As a general counsel it was always a good business decision to settle cases for what it would cost to defend the litigation. However, such settlements when combined with others generate a huge return to the plaintiff firms who brought the cases.

This resulted in competition among these firms to in some cases "buy" plaintiffs to use as a vehicle for these cases. The overall result is not just a loss of money to shareholders of investment banking firms but an increased cost of doing business that is past on to all customers. It is a corruption of the market that effects everyone.