My friend Richard Painter weighs in on the Supreme Court's Halliburton decision:
The Supreme Court’s decision in Halliburton affirms a legal doctrine that for several decades has set the United States apart from most other countries. Lawyers who claim to represent enormous numbers of investors, most of whom have never met the lawyers, are allowed to sue public companies for alleged misrepresentations of material facts even if a substantial number, perhaps most, of the plaintiff investors never heard or read, much less relied upon, the alleged misrepresentations. When these class actions settle (almost all of them do settle rather than go to trial) damages are paid by the company to the plaintiff class, with the lawyers taking their fees off the top. The company’s current shareholders thus bear the cost of compensating the plaintiff investors and their lawyers. To the extent the plaintiff class includes current shareholders, these shareholders are paying themselves damages, less of course the share that goes to the lawyers. ...
Although Congress should not be in a position of having to “veto” laws made up by the courts, perhaps it needs to do just that and pass legislation rejecting the fraud on the market theory in securities class actions. Congress could also consider stricter measures to hold corporate managers responsible for misleading statements to investors – for example requiring that a portion of SEC fines and civil judgments imposed against a company for securities law violations come out of executive compensation instead of being taken only out of the pocket of shareholders. If Congress does nothing, many issuers and investors may find our obsession with class action litigation, and our unwillingness to make individuals instead of shareholders pay for fraud, to be an aberration that they no longer have to put up with in a global market. They may simply take their business elsewhere.
Go read the whole thing.
