"Based on the Justices' questions at the Oct. 9 oral argument, a majority think investors should be barred from bringing class-action suits againt third parties. ... In a bank heist, for example, the getaway driver is just as guilty as the stickup man. But Congress was striking a very crude compromise reflecting a deep skepticism about whether shareholder lawsuits really benefit shareholders at all", Roger Parloff in Fortune, 12 November.
My "deep skepticsm" is that the SEC and Justice Department (DOJ) "benefit shareholders". I prefer lawsuits. It's true that corporations pay the lawsuits. So? Suppose they never paid? What is likely to happen? The incidence of financial fraud would soar. Why not? What's the disincentive not to commit fraud? The SEC and DOJ are compromised now. Suppose there were no class action lawsuits, without the plaintiffs' bar looking over the SEC and DOJ's shoulders, can you imagine what they would do? Read my 6 October post mentioning the Ray Dirks fiasco. Prohibiting lawsuits would hurt investors in another way. How? It would cause more capital misallocations. I know of lawsuits "deadweight loss". So? It's a monitoring or information cost. Viva lawsuits!
Parloff writes, "in real life most diversified investors, like mutual funds, aren't really harmed by securities frauds to begin with". No? Why not do away with the SEC competely? Better still, repeal the wire, mail and securities fraud statutes. As to Congress's "crude compromise", balderdash. Congress is "of Wall Street, by Wall Street, for Wall Street", to paraphrase Abraham Lincoln.
My "deep skepticsm" is that the SEC and Justice Department (DOJ) "benefit shareholders". I prefer lawsuits. It's true that corporations pay the lawsuits. So? Suppose they never paid? What is likely to happen? The incidence of financial fraud would soar. Why not? What's the disincentive not to commit fraud? The SEC and DOJ are compromised now. Suppose there were no class action lawsuits, without the plaintiffs' bar looking over the SEC and DOJ's shoulders, can you imagine what they would do? Read my 6 October post mentioning the Ray Dirks fiasco. Prohibiting lawsuits would hurt investors in another way. How? It would cause more capital misallocations. I know of lawsuits "deadweight loss". So? It's a monitoring or information cost. Viva lawsuits!
Parloff writes, "in real life most diversified investors, like mutual funds, aren't really harmed by securities frauds to begin with". No? Why not do away with the SEC competely? Better still, repeal the wire, mail and securities fraud statutes. As to Congress's "crude compromise", balderdash. Congress is "of Wall Street, by Wall Street, for Wall Street", to paraphrase Abraham Lincoln.
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