Sunday, October 7, 2007

International Tort Crisis????

"Stoneridge could exponentially increase the U.S. litigation exposure of non-U.S. companies. ... The only requirement would be that their U.S.-listed partners be accused of misreporting transactions in which they participated, whether as buyers, sellers or advisers. ... Every business dealing with U.S.-listed companies would have to examine the possibility of fraudulent bookkeeping in every transaction", Norman Lamont, in the WSJ, 4 October.

If Lamont is right, that foreign entities would have their U.S. litigation exposure "exponentially increased", it means they have had none up to now. As to protecting advisers, buyers and sellers, who is Lamont kidding? What does a bank's structured finance department do, if not arrange transactions to circumvent accounting and tax rules? Similarly, buyers and sellers offering sales terms not available to all comers. I say there is no organization which can more easily determine a transaction's economic bona fides than the counter-party when it is entered into. The economics of information indicate the counter-party is the "least cost" investigator and should bear the burden of ascertaining the transaction's bona fides. Who believes they don't do it now? But they bear no responsibility for their actions which affect innocent third parties.


Bill Hobbs said...

It’s worth remembering that a ruling for the defendants in Stoneridge would leave current law unchanged, while a ruling for the plaintiffs would radically alter current law.

The Court and every federal circuit court but one have made secondary
liability (the plaintiffs call it “scheme” liability) off limits for private suits.

However, neither the Court
nor Congress have set prosecution of accomplices off bounds in securities
cases - they have simply left that task solely to the SEC and the Justice Department.

This balances the need for justice in such cases with the need to protect the economy from being hamstrung and hog-tied by an avalanche of lawsuits.

The blog “10b-5 Daily” had an interesting post last week headlined “NERA Releases Study on “Recent Trends In Shareholder Class Action Litigation”

The gist of it is that the NERA Economic Consulting study, included the following info:

The number of such filings has increased, with 76 new filings through the first half of 2007. The projected annual total of 152 would be a 12% increase over last year.

The average settlement value during the first half of 2007 (excluding settlements over $1 billion) hit a new high of $30 million. There is evidence, however, that this trend may reverse direction based on a decline: (i) in the investor losses associated with recent filings; and (ii) in the prevalence of accounting allegations in recent filings.

Eight of the top ten settlements of all time have resolved in 2006 or 2007, or are pending. Tyco’s announced preliminary settlement of $2.975 billion would be the largest amount ever paid by a single settling defendant.

Here’s the link:

Now, imagine if the Stoneridge case was decided for the plaintiffs. The number of such lawsuits would skyrocket, putting a “scheme liability” tax on the economy.

Independent Accountant said...

Scheme liability tax? This sounds like Chamber of Commerce special pleading. The only thing that would happen is big banks would close their "structured finance" departments and transactions like that at Charter would not occur. That the SEC and Justice Department can prosecute schemes does nothing for me. Does this "balance the need for justice" or tip the scales in favor of injustice as the DOJ and SEC will have less fear that third parties with a pecuniary interest in prosecuting cases will look over their shouldder and cause them public embarrasment? Look at people like Harvey Pitt and Mary Joe White. Who were they really working for while in the Federal Government's employ? I disagee Mr. Hobbs, we need more lawsuits, not less.