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This is probably showing up because it showed up in Matt Levine’s newsletter which returned today. In the newsletter, Matt disagrees with one of the conclusions

This is probably showing up because it showed up in Matt Levine’s newsletter which returned today. In the newsletter, Matt disagrees with one of the conclusions drawn in the paper that shareholders have a perverse incentive to invest in companies that do bad things because they are compensated their loses when the stock goes down. He disagrees because their are compensated with money that the company has which already belongs to the shareholders.

mwnivek 6y ago
Link to Levine's piece: https://www.bloomberg.com/opinion/articles/2021-01-05/dystopian-future-securities-fraud https://www.bloomberg.com/opinion/articles/2021-01-05/dystop...
- tynpeddler 6y ago
  A securities fraud lawsuit against a company because the work environment is toxic reminds me of the movie Unforgiven. For those unaware, the movie starts with a cowboy disfiguring a prostitute with a knife because she laughed at him. After the incident, the guy who manages the brothel is financially compensated since he had invested money in bringing the prostitute to his place of business, money which he will presumably be unable to recover now that the woman has been disfigured. No compensation is ordered for the disfigured woman (another cowboy does try to compensate her out of guilt), instead, the perpetrator is flogged, and that's supposed to be enough for the woman. There's a real gap in our understanding of capitalism and crime if it's easier to compensate shareholders of a toxic company than it is to compensate the direct victims of that toxic behavior. If a toxic culture would suppress stock prices, it seems that the same culture would suppress career advancement, physical health and general mental well being. The problem seems to be that an employee must not only prove criminality but also particularized harm, whereas the standard for a successful securities fraud lawsuit seems to be lower.
  - vorpalhex 6y ago
    How much is the harm, in dollars, of securities fraud? Well the equation would be the expected profit based on the average share price over the given time period. We can argue details but that gives us a pretty tight range. How much is the harm, in dollars, of being grossly disfigured? There is definitely harm there. Is it the loss of earnings of the prostitute assuming she would make less money? That's some of it - the amount is at least that much. Yet presumably she also has less quality of life too - and how much is that worth? Is the basis for the quality of life of a prostitute less or more than a CEO? What if the prostitute really enjoys life and has a rewarding life, but the CEO is very drab and dislikes living? That it's hard to put monetary figures on a harm isn't some failure in our understanding - it's because we comprehend money is not a universal salve. You can fix a business with cash, you can't fix a human life with it.
  - jandrese 6y ago
    Economists like to talk about "utility" and the common good with their theories, but they tend to only measure money so unless you can put a price tag on it it is invisible to economists. The wellbeing of a prostitute is one of those things that has no market. The same is largely true of toxic workplace behavior. There is a tertiary effect from potential lawsuits, but those are almost impossible to price into a business model. If your bro culture allows you to succeed over your competitors at the cost of a million dollar lawsuit a decade down the road then it probably doesn't make economic sense to change the culture. Wall Street banks and trading houses were (are) notoriously hostile workplaces, but if your profit margins are in the billions and you're getting good returns then a million dollar suit in the future is basically not a concern.
    - nickff 6y ago
      Well there are (at least) two issues you're glossing over here: 1) Toxic workplace behavior is measurable, you can simply measure the wage premium paid by the so-called "toxic" employers or managers. 2) Bro culture may contribute to business success. I don't like that kind of 'culture', but it may help foster improved productivity in certain industries, and the lawsuits may just be a cost of doing business that's worth paying. Again, this isn't how I live my life, but it is conceivable that this is a workable model.
    - dcolkitt 6y ago
      > The wellbeing of a prostitute is one of those things that has no market. Sure it can. Everyday institutions make calculations that assign a standard monetary value to a human life.[1] And it's not just the market, the government and policymakers do it all the time as well.[2] Heck, you even put a value on your own life. Do you drive the latest car model and live in a house that was built in the last two years? If not, you're trading off money against mortality, by increasing your risk of dying in a car accident or house fire. [1] https://en.wikipedia.org/wiki/Value_of_life https://en.wikipedia.org/wiki/Value_of_life [2] https://www.bloomberg.com/graphics/2017-value-of-life/ https://www.bloomberg.com/graphics/2017-value-of-life/
      - jandrese 6y ago
  - tomxor 6y ago
    Given this type of scenario, it feels like the opposite should happen: Investors should be blocked from recovering losses and victims should be compensated. That's a far better preventative measure.. to incentivise investors to be responsible in what they invest in rather than "just letting shit happen" and reclaiming money if necessary because it's easier. If harm comes to people due to their investment, they only get whatever is left over after victims are compensated.
    - JumpCrisscross 6y ago
      > it feels like the opposite should happen: Investors should be blocked from recovering losses and victims should be compensated This kneecaps the investor-lawsuit mechanism by removing the incentive to discover and pursue problems. Do we have precedent for employee lawsuits citing shareholder litigation to burnish their case?
    - nemothekid 6y ago
      >Investors should be blocked from recovering losses and victims should be compensated. I think Levine's take is a bit more nuanced. It's not like shareholders are taking up the case for some altruistic reasons, it's just that for lawyers it's an easier case to litigate. To paraphrase Matt, if you had to sue the CEO, on behalf of victims, for sexual harassment, as a lawyer you would have to prove the damages by showing that maybe the CEO had a pattern, that the victim was actually traumatized and not just "regretting it" and any other of mountain of historically charged counter claims of sexual harassment. But securities fraud, all the lawyer has to do is point to a newspaper article about how the news came out and the stock went down. In other words, investors being blocked from being compensated wouldn't solve the issue - it would just remove a possible disincentive for actors to act improperly.
      - dmix 6y ago
        Yeah this isn’t some textbook or ideological economics “what’s better for everyone” scenario where we can just push a button to choose the better one. It’s far more complicated. It’s just a product of better lawyering but also critically access to information, not some easily controllable incentives system where regulators or some sort of centralized agency can effectively tip the balance back towards some abstract group of victims, in only a subset of cases (which cases do they help with? Proactively looking for ones they deem need the victims help the most? Etc it’s a hard solution to build and probably an unrealistic one). The other option of arbitrarily downplaying investors power in the courts in general sounds like it could be full of unexpected downsides and false positives IRL. Consumer class action suits are already seedy and full of unfair ‘captain retrospect’ sort of policing and the lawyer groups again also make most of the money anyway (and often are the biggest motivator and resource backer too). Which at the end of the day doesn’t make the ‘bad’ companies operate any better in a realistic world. The courts may be flawed but they tend to be way better than almost anything else available. Any new ‘system’ or balancing act would have to deal with counter balancing certain parties having better motivation/resources/positioning/information. Which historically in other systems has been even more ripe for abuse by power holders who end up being pushed and prodded by the same groups with above said advantages. A far better solution IMO is more and better organizations advocating for victims groups in such cases. An adaptation to the reality of the courts and the markets, rather than a rejection of them. Otherwise we’re just pointing the overlaid lawyers in a new direction and nothing in the consumer world actually gets better through the process.
  - 1vuio0pswjnm7 6y ago
    "There's a real gap in our understanding of capitalism and crime if it's easier tom compensate shareholders of a toxic company than it is to compensate the direct victims of that toxic behaviour." Fortunately, the Strauss paper^1 on which this Levine newsletter entry is based does not suggest it is easier. Where did this idea come from. Instead, the author found that non-SEC regulators and primary victims generally received greater recoveries than investors and their securities fraud class-action plaintiffs lawyers, where the class-action lawyers were piggybacking on investigations by non-SEC regulators and litigation by primary, non-shareholder victims. (That is only based on available data; some primary victim settlements might be private.) In this piggyback litigation the author reviewed, the vast majority of cases resulted were successful for both the primary victims (non-shareholders) and the securities fraud shareholder plaintiffs. In other words, the non-shareholder victims are getting compensated, and they are getting larger payouts than shareholders in piggyback securities fraud class-actions. There is no suggestion anywhere in the paper that it is easier to be compensated in securities fraud class-actions than in actions brought by non-SEC regulators or non-shareholder victims of the corporation's conduct. In general, class-action securities fraud complaints have a very low probability of surviving a motion to dismiss. Rather, the paper suggests class-action securities fraud plaintiff's lawyers can increase their odds by piggybacking on non-SEC investigations and litigation by non-shareholders who are victim's of the corporation's conduct. That is not surprising. 1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3664132 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3664132 New title: Is Everything Also Securities Fraud?
    - fuzzfactor 6y ago
      Exactly. Even when I was selling securities, I never tried to pretend that Everything was Securities Legitimate. When a corporation is prospering without any actual greed being detectable in their operations, that can be some of the most reliable investments. There should be plenty of money without that. This kind of thing seems to have always been hard to find, so it can really take some effort to snoop it out. Some things have always been more legitimate than others.
deleted 6y ago
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ashtonkem 6y ago
This also probably disincentives companies from misbehaving, as being sued by their shareholders is expensive and bad.
- nickff 6y ago
  Companies don't act, investors, board members, executives, and employees do; these decisions would only disincentivize executives if they hold un-exercised options, or their shares are somehow excluded from the judgement.
  - ashtonkem 6y ago
    I can’t speak to judgements, but executives often hold a lot of shares. The largest individual shareholder of Disney is the CEO, for example.
    - nickff 6y ago
      If the executives continually hold shares from the time of the 'wrongdoing' to the time of the judgement, and are included in the settlement or decision, the impact on them would be to transfer money from one pocket to another, minus some loss to the lawyers on both sides.
      - ashtonkem 6y ago
        Logically speaking, it makes sense that any executive shareholders should be excluded from such lawsuit payouts. But I have no idea how it actually works.
pvarangot 6y ago
So I didn't read the piece, but that money may belong to the shareholders but not be reflected on the stock price. When a company tanks stocks can be kind like "not really that liquid", because to get back the "true" value of the assets you own via your share of the company back you need to wait for it to go up again. If you sue you may get your money sooner and put it back to work on a functioning company or lower risk investment. Does he tackle that? Skimming the article it doesn't look like it, and the motivation to sue on some of this cases is to get the ROI shareholders were hoping for in a timely and less risky fashion after a company collapses due to malice or incompetence.
titanomachy 6y ago
That... is a good point. Actually, suing a company for securities fraud seems kind of strange when you put it that way. How could a shareholder derive net benefit from suing a company for a share of the assets they already own? Unless they've already sold the shares and they're suing to try and recover their loss? Is that allowed?
- greenshackle2 6y ago
  If only a subset of shareholders are suing, e.g. shareholders who bought shares between date X and date Y, they are only losing a fraction of a dollar in share value for every dollar they win in the lawsuit. They are gaining at the expense of shareholders who are not part of the lawsuit. (Ignoring court fees.. the suing shareholder is paying court fees on both ends, could end up being net negative.)
  - titanomachy 6y ago
    Wouldn't anyone who held shares during that time have standing for the lawsuit, regardless of when they bought them?
    - greenshackle2 6y ago
      Possibly? I would have thought if the problem is artificially inflated price, shareholders who didn't buy or sell during the period are not affected, but to be honest I don't know how these suits work in details. Just picking at random off Google, I looked at the Pinterest suit, and it's a big shareholder suing Pinterest Inc... on behalf of Pinterest Inc. So yeah you might be right. Sounds very odd. https://www.scribd.com/document/486543528/Pinterest-Shareholder-Lawsuit https://www.scribd.com/document/486543528/Pinterest-Sharehol...
- notional 6y ago
  Do you still have to be a share holder when you sue? Or can it play out like, I own xx shares in Y Corp. Y Corp does something bad and share price goes down, I sell my stake and sue Y Corp for securities fraud for making my shares go down during the time period I owned them?
acchow 6y ago
Shareholders own the free cash flow (roughly). But through lawsuits convert that to debt.
eastbayjake 6y ago
So glad Matt Levine is back! I missed the newsletter a lot
baybal2 6y ago
> He disagrees because their are compensated with money that the company has which already belongs to the shareholders. Preferably, other shareholders
- stopFalse 6y ago
  My buddy has a Tesla and had multiple free repairs, all at the expense of stock holders.
Shivetya 6y ago
I understand where he is coming from but he does make a point in that many law firms simply use the process to generate wealth for themselves which in a way is similar to those patent sitting lawyers. The don't produce anything, they just use the system to exploit it from others. I haven't googled it but I would love to know the cost to the economy of these types of actions, the companies that don't produce anything but exist simply by getting money from others through the courts or threat of using them
rsync 6y ago
"Matt disagrees with one of the conclusions drawn in the paper that shareholders have a perverse incentive to invest in companies that do bad things because they are compensated their loses when the stock goes down. He disagrees because their are compensated with money that the company has which already belongs to the shareholders." This may be a romantic notion that I misunderstand but isn't there a mechanism wherein I, an aggrieved (citizen/neighbor/bystander/victim) can buy a single share in a public company and then, as a shareholder, speak and/or protest at the annual meeting and cause all manner of discomfort, public reckoning, etc. Does that work the way I think it does or am I caught in some hollywood trope ?
- Matticus_Rex 6y ago
  It depends on the company. At many companies any number of shares entitles you to attend, though many companies set a minimum number of shares in their bylaws (I think public companies can only limit this to a maximum of 1000 shares, and IIRC nearly all publicly-traded companies set a limit to avoid single-share troublemakers). Speaking also depends on how the bylaws say the agenda is constructed, but I've never seen any where a share would entitle someone to a spot on the agenda. There are sometimes spaces for comment, and I think the rules for how those are selected/filtered are set in the bylaws.
- deleted 6y ago
  [deleted]
- yellowstuff 6y ago
  > This may be a romantic notion that I misunderstand but isn't there a mechanism wherein I, an aggrieved (citizen/neighbor/bystander/victim) can buy a single share in a public company and then, as a shareholder, speak and/or protest at the annual meeting Yes. > and cause all manner of discomfort, public reckoning, No. The etiquette is to let people speak their piece while the board looks concerned, but as far as I know there have never been any actual consequences from this.
- elliekelly 6y ago
  It does and it doesn’t. Can you go to the shareholder meeting and speak? Sure. But your time will probably be limited and if you ask something contentious you’re likely to get a politicians non-answer. For anything more meaningful you would need to meet one of the three criteria of Exchange Act Rule 14a-8 which the SEC recently “modernized”.[1] It used to be a requirement that a shareholder own $2,000 or 1% of the outstanding shares in order to bring a proposal. The new Rule is you must own $2,000 or 1% of the outstanding shares for three or more years in order to bring a proposal. There’s also criteria for a shareholder to bring a proposal in a shorter amount of time if they own a higher dollar amount of shares but I believe the shortest time period under the new rule is one year. So one share probably isn’t going to cut it for most public companies other than AMZN and Berkshire Hathaway. And even if you meet the requirements to bring a shareholder proposal it would very likely require advanced notice which is a whole big thing. Especially if management doesn’t agree with whatever it is you’re trying to do. So I guess the answer is no, securities law is a lot more paperwork and a lot less exciting than in the movies. [1]https://www.sec.gov/news/press-release/2020-220 https://www.sec.gov/news/press-release/2020-220 Edit: It just occurred to me that your question about standing at a shareholder meeting is different from the topic of the article which is private lawsuits alleging securities fraud. Management’s duty is to the shareholders (collectively) so the “own one share” question doesn’t really apply the same way. You’d need to show that you purchased or sold the security in reliance on the fraudulent information (or undisclosed information).
miguelmota 6y ago
Excerpt from paper which was interesting > Finally, managers often pursue conduct that harms outside victims (whether by shoddy manufacturing, false advertising, or negligent safety measures) in order to bolster their share price. The fact that investor lawsuits under these circumstances are likely to be more successful and lucrative may reinforce shareholders’ potential preference for managers to continue externalizing costs to third parties, on the assumption that if the management is not caught, their shares will increase in value, and if the management is caught, they will be able to recoup at least some of their losses through settlements after the fact. > [...] Moreover, securities class action settlements generally “target the wrong party for sanctions;”83typically, the firm pays the settlement while the manager who actually committed the fraud is, at worst, fired.
hinkley 6y ago
You mean like how we fine local government for malfeasance and the money comes out of taxes, meaning either we pay ourselves or we don't get a service we paid for? I think the problem might have existed before articles of incorporation and we just never solved it.
boh 6y ago
The money doesn't actually belong to the shareholders, since a shareholder only owns the company stock not the company (stocks typically do not grant any ownership rights of any kind besides votes on management/corporate actions--many don't even do that). Companies can decide to re-allocate profits through dividends or buy-backs, but can also decide to re-allocate to other things that may not ultimately benefit the shareholder. Suing the company potentially gives shareholders access to money they may not be able to access otherwise.
- s1artibartfast 6y ago
  As far as I know, everything you said is factually incorrect in the majority of cases. Common stock is a security that represents ownership in a corporation. In a liquidation, common stockholders receive whatever assets remain after creditors, bondholders, and preferred stockholders are paid. Do you have a source for these bold claims?
  - matthewdgreen 6y ago
    It seems to me that both descriptions are practically accurate. A compromise position is: lawsuits allow shareholders to receive company funds even in a situation where the majority of the (voting) shareholders would not otherwise authorize it. For some companies with dual-class voting structures, this might even be the only way that a common shareholder would ever see a payout.
  - boh 6y ago
    These aren't bold claims, it's literally how stocks work. The belief of shareholders actually owning the company was just a side-effect of the marketing for shareholder primacy ideology. Even recent finance/management textbooks specifically call this out. Some sources: https://hbr.org/2012/07/what-good-are-shareholders https://hbr.org/2012/07/what-good-are-shareholders https://www.ft.com/content/7bd1b20a-879b-11e5-90de-f44762bf9896 https://www.ft.com/content/7bd1b20a-879b-11e5-90de-f44762bf9...
- imtringued 6y ago
  Shareholders can just liquidate the company and redistribute the assets of the company based on the number of shares a person possesses. Liquidation is generally only done when absolutely necessary. Why close a functioning company if you can just sell it to someone else?

mwnivek 6y ago

Link to Levine's piece: https://www.bloomberg.com/opinion/articles/2021-01-05/dystopian-future-securities-fraud https://www.bloomberg.com/opinion/articles/2021-01-05/dystop...

tynpeddler 6y ago
A securities fraud lawsuit against a company because the work environment is toxic reminds me of the movie Unforgiven. For those unaware, the movie starts with a cowboy disfiguring a prostitute with a knife because she laughed at him. After the incident, the guy who manages the brothel is financially compensated since he had invested money in bringing the prostitute to his place of business, money which he will presumably be unable to recover now that the woman has been disfigured. No compensation is ordered for the disfigured woman (another cowboy does try to compensate her out of guilt), instead, the perpetrator is flogged, and that's supposed to be enough for the woman. There's a real gap in our understanding of capitalism and crime if it's easier to compensate shareholders of a toxic company than it is to compensate the direct victims of that toxic behavior. If a toxic culture would suppress stock prices, it seems that the same culture would suppress career advancement, physical health and general mental well being. The problem seems to be that an employee must not only prove criminality but also particularized harm, whereas the standard for a successful securities fraud lawsuit seems to be lower.
- vorpalhex 6y ago
  How much is the harm, in dollars, of securities fraud? Well the equation would be the expected profit based on the average share price over the given time period. We can argue details but that gives us a pretty tight range. How much is the harm, in dollars, of being grossly disfigured? There is definitely harm there. Is it the loss of earnings of the prostitute assuming she would make less money? That's some of it - the amount is at least that much. Yet presumably she also has less quality of life too - and how much is that worth? Is the basis for the quality of life of a prostitute less or more than a CEO? What if the prostitute really enjoys life and has a rewarding life, but the CEO is very drab and dislikes living? That it's hard to put monetary figures on a harm isn't some failure in our understanding - it's because we comprehend money is not a universal salve. You can fix a business with cash, you can't fix a human life with it.
- jandrese 6y ago
  Economists like to talk about "utility" and the common good with their theories, but they tend to only measure money so unless you can put a price tag on it it is invisible to economists. The wellbeing of a prostitute is one of those things that has no market. The same is largely true of toxic workplace behavior. There is a tertiary effect from potential lawsuits, but those are almost impossible to price into a business model. If your bro culture allows you to succeed over your competitors at the cost of a million dollar lawsuit a decade down the road then it probably doesn't make economic sense to change the culture. Wall Street banks and trading houses were (are) notoriously hostile workplaces, but if your profit margins are in the billions and you're getting good returns then a million dollar suit in the future is basically not a concern.
  - nickff 6y ago
    Well there are (at least) two issues you're glossing over here: 1) Toxic workplace behavior is measurable, you can simply measure the wage premium paid by the so-called "toxic" employers or managers. 2) Bro culture may contribute to business success. I don't like that kind of 'culture', but it may help foster improved productivity in certain industries, and the lawsuits may just be a cost of doing business that's worth paying. Again, this isn't how I live my life, but it is conceivable that this is a workable model.
  - dcolkitt 6y ago
    > The wellbeing of a prostitute is one of those things that has no market. Sure it can. Everyday institutions make calculations that assign a standard monetary value to a human life.[1] And it's not just the market, the government and policymakers do it all the time as well.[2] Heck, you even put a value on your own life. Do you drive the latest car model and live in a house that was built in the last two years? If not, you're trading off money against mortality, by increasing your risk of dying in a car accident or house fire. [1] https://en.wikipedia.org/wiki/Value_of_life https://en.wikipedia.org/wiki/Value_of_life [2] https://www.bloomberg.com/graphics/2017-value-of-life/ https://www.bloomberg.com/graphics/2017-value-of-life/
    - jandrese 6y ago
- tomxor 6y ago
  Given this type of scenario, it feels like the opposite should happen: Investors should be blocked from recovering losses and victims should be compensated. That's a far better preventative measure.. to incentivise investors to be responsible in what they invest in rather than "just letting shit happen" and reclaiming money if necessary because it's easier. If harm comes to people due to their investment, they only get whatever is left over after victims are compensated.
  - JumpCrisscross 6y ago
    > it feels like the opposite should happen: Investors should be blocked from recovering losses and victims should be compensated This kneecaps the investor-lawsuit mechanism by removing the incentive to discover and pursue problems. Do we have precedent for employee lawsuits citing shareholder litigation to burnish their case?
  - nemothekid 6y ago
    >Investors should be blocked from recovering losses and victims should be compensated. I think Levine's take is a bit more nuanced. It's not like shareholders are taking up the case for some altruistic reasons, it's just that for lawyers it's an easier case to litigate. To paraphrase Matt, if you had to sue the CEO, on behalf of victims, for sexual harassment, as a lawyer you would have to prove the damages by showing that maybe the CEO had a pattern, that the victim was actually traumatized and not just "regretting it" and any other of mountain of historically charged counter claims of sexual harassment. But securities fraud, all the lawyer has to do is point to a newspaper article about how the news came out and the stock went down. In other words, investors being blocked from being compensated wouldn't solve the issue - it would just remove a possible disincentive for actors to act improperly.
    - dmix 6y ago
      Yeah this isn’t some textbook or ideological economics “what’s better for everyone” scenario where we can just push a button to choose the better one. It’s far more complicated. It’s just a product of better lawyering but also critically access to information, not some easily controllable incentives system where regulators or some sort of centralized agency can effectively tip the balance back towards some abstract group of victims, in only a subset of cases (which cases do they help with? Proactively looking for ones they deem need the victims help the most? Etc it’s a hard solution to build and probably an unrealistic one). The other option of arbitrarily downplaying investors power in the courts in general sounds like it could be full of unexpected downsides and false positives IRL. Consumer class action suits are already seedy and full of unfair ‘captain retrospect’ sort of policing and the lawyer groups again also make most of the money anyway (and often are the biggest motivator and resource backer too). Which at the end of the day doesn’t make the ‘bad’ companies operate any better in a realistic world. The courts may be flawed but they tend to be way better than almost anything else available. Any new ‘system’ or balancing act would have to deal with counter balancing certain parties having better motivation/resources/positioning/information. Which historically in other systems has been even more ripe for abuse by power holders who end up being pushed and prodded by the same groups with above said advantages. A far better solution IMO is more and better organizations advocating for victims groups in such cases. An adaptation to the reality of the courts and the markets, rather than a rejection of them. Otherwise we’re just pointing the overlaid lawyers in a new direction and nothing in the consumer world actually gets better through the process.
- 1vuio0pswjnm7 6y ago
  "There's a real gap in our understanding of capitalism and crime if it's easier tom compensate shareholders of a toxic company than it is to compensate the direct victims of that toxic behaviour." Fortunately, the Strauss paper^1 on which this Levine newsletter entry is based does not suggest it is easier. Where did this idea come from. Instead, the author found that non-SEC regulators and primary victims generally received greater recoveries than investors and their securities fraud class-action plaintiffs lawyers, where the class-action lawyers were piggybacking on investigations by non-SEC regulators and litigation by primary, non-shareholder victims. (That is only based on available data; some primary victim settlements might be private.) In this piggyback litigation the author reviewed, the vast majority of cases resulted were successful for both the primary victims (non-shareholders) and the securities fraud shareholder plaintiffs. In other words, the non-shareholder victims are getting compensated, and they are getting larger payouts than shareholders in piggyback securities fraud class-actions. There is no suggestion anywhere in the paper that it is easier to be compensated in securities fraud class-actions than in actions brought by non-SEC regulators or non-shareholder victims of the corporation's conduct. In general, class-action securities fraud complaints have a very low probability of surviving a motion to dismiss. Rather, the paper suggests class-action securities fraud plaintiff's lawyers can increase their odds by piggybacking on non-SEC investigations and litigation by non-shareholders who are victim's of the corporation's conduct. That is not surprising. 1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3664132 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3664132 New title: Is Everything Also Securities Fraud?
  - fuzzfactor 6y ago
    Exactly. Even when I was selling securities, I never tried to pretend that Everything was Securities Legitimate. When a corporation is prospering without any actual greed being detectable in their operations, that can be some of the most reliable investments. There should be plenty of money without that. This kind of thing seems to have always been hard to find, so it can really take some effort to snoop it out. Some things have always been more legitimate than others.

deleted 6y ago

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ashtonkem 6y ago

This also probably disincentives companies from misbehaving, as being sued by their shareholders is expensive and bad.

nickff 6y ago
Companies don't act, investors, board members, executives, and employees do; these decisions would only disincentivize executives if they hold un-exercised options, or their shares are somehow excluded from the judgement.
- ashtonkem 6y ago
  I can’t speak to judgements, but executives often hold a lot of shares. The largest individual shareholder of Disney is the CEO, for example.
  - nickff 6y ago
    If the executives continually hold shares from the time of the 'wrongdoing' to the time of the judgement, and are included in the settlement or decision, the impact on them would be to transfer money from one pocket to another, minus some loss to the lawyers on both sides.
    - ashtonkem 6y ago
      Logically speaking, it makes sense that any executive shareholders should be excluded from such lawsuit payouts. But I have no idea how it actually works.

pvarangot 6y ago

So I didn't read the piece, but that money may belong to the shareholders but not be reflected on the stock price. When a company tanks stocks can be kind like "not really that liquid", because to get back the "true" value of the assets you own via your share of the company back you need to wait for it to go up again. If you sue you may get your money sooner and put it back to work on a functioning company or lower risk investment. Does he tackle that? Skimming the article it doesn't look like it, and the motivation to sue on some of this cases is to get the ROI shareholders were hoping for in a timely and less risky fashion after a company collapses due to malice or incompetence.

titanomachy 6y ago

That... is a good point. Actually, suing a company for securities fraud seems kind of strange when you put it that way. How could a shareholder derive net benefit from suing a company for a share of the assets they already own? Unless they've already sold the shares and they're suing to try and recover their loss? Is that allowed?

greenshackle2 6y ago
If only a subset of shareholders are suing, e.g. shareholders who bought shares between date X and date Y, they are only losing a fraction of a dollar in share value for every dollar they win in the lawsuit. They are gaining at the expense of shareholders who are not part of the lawsuit. (Ignoring court fees.. the suing shareholder is paying court fees on both ends, could end up being net negative.)
- titanomachy 6y ago
  Wouldn't anyone who held shares during that time have standing for the lawsuit, regardless of when they bought them?
  - greenshackle2 6y ago
    Possibly? I would have thought if the problem is artificially inflated price, shareholders who didn't buy or sell during the period are not affected, but to be honest I don't know how these suits work in details. Just picking at random off Google, I looked at the Pinterest suit, and it's a big shareholder suing Pinterest Inc... on behalf of Pinterest Inc. So yeah you might be right. Sounds very odd. https://www.scribd.com/document/486543528/Pinterest-Shareholder-Lawsuit https://www.scribd.com/document/486543528/Pinterest-Sharehol...
notional 6y ago
Do you still have to be a share holder when you sue? Or can it play out like, I own xx shares in Y Corp. Y Corp does something bad and share price goes down, I sell my stake and sue Y Corp for securities fraud for making my shares go down during the time period I owned them?

acchow 6y ago

Shareholders own the free cash flow (roughly). But through lawsuits convert that to debt.

eastbayjake 6y ago

So glad Matt Levine is back! I missed the newsletter a lot

baybal2 6y ago

> He disagrees because their are compensated with money that the company has which already belongs to the shareholders. Preferably, other shareholders

stopFalse 6y ago
My buddy has a Tesla and had multiple free repairs, all at the expense of stock holders.

Shivetya 6y ago

I understand where he is coming from but he does make a point in that many law firms simply use the process to generate wealth for themselves which in a way is similar to those patent sitting lawyers. The don't produce anything, they just use the system to exploit it from others. I haven't googled it but I would love to know the cost to the economy of these types of actions, the companies that don't produce anything but exist simply by getting money from others through the courts or threat of using them

rsync 6y ago

"Matt disagrees with one of the conclusions drawn in the paper that shareholders have a perverse incentive to invest in companies that do bad things because they are compensated their loses when the stock goes down. He disagrees because their are compensated with money that the company has which already belongs to the shareholders." This may be a romantic notion that I misunderstand but isn't there a mechanism wherein I, an aggrieved (citizen/neighbor/bystander/victim) can buy a single share in a public company and then, as a shareholder, speak and/or protest at the annual meeting and cause all manner of discomfort, public reckoning, etc. Does that work the way I think it does or am I caught in some hollywood trope ?

Matticus_Rex 6y ago
It depends on the company. At many companies any number of shares entitles you to attend, though many companies set a minimum number of shares in their bylaws (I think public companies can only limit this to a maximum of 1000 shares, and IIRC nearly all publicly-traded companies set a limit to avoid single-share troublemakers). Speaking also depends on how the bylaws say the agenda is constructed, but I've never seen any where a share would entitle someone to a spot on the agenda. There are sometimes spaces for comment, and I think the rules for how those are selected/filtered are set in the bylaws.
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yellowstuff 6y ago
> This may be a romantic notion that I misunderstand but isn't there a mechanism wherein I, an aggrieved (citizen/neighbor/bystander/victim) can buy a single share in a public company and then, as a shareholder, speak and/or protest at the annual meeting Yes. > and cause all manner of discomfort, public reckoning, No. The etiquette is to let people speak their piece while the board looks concerned, but as far as I know there have never been any actual consequences from this.
elliekelly 6y ago
It does and it doesn’t. Can you go to the shareholder meeting and speak? Sure. But your time will probably be limited and if you ask something contentious you’re likely to get a politicians non-answer. For anything more meaningful you would need to meet one of the three criteria of Exchange Act Rule 14a-8 which the SEC recently “modernized”.[1] It used to be a requirement that a shareholder own $2,000 or 1% of the outstanding shares in order to bring a proposal. The new Rule is you must own $2,000 or 1% of the outstanding shares for three or more years in order to bring a proposal. There’s also criteria for a shareholder to bring a proposal in a shorter amount of time if they own a higher dollar amount of shares but I believe the shortest time period under the new rule is one year. So one share probably isn’t going to cut it for most public companies other than AMZN and Berkshire Hathaway. And even if you meet the requirements to bring a shareholder proposal it would very likely require advanced notice which is a whole big thing. Especially if management doesn’t agree with whatever it is you’re trying to do. So I guess the answer is no, securities law is a lot more paperwork and a lot less exciting than in the movies. [1]https://www.sec.gov/news/press-release/2020-220 https://www.sec.gov/news/press-release/2020-220 Edit: It just occurred to me that your question about standing at a shareholder meeting is different from the topic of the article which is private lawsuits alleging securities fraud. Management’s duty is to the shareholders (collectively) so the “own one share” question doesn’t really apply the same way. You’d need to show that you purchased or sold the security in reliance on the fraudulent information (or undisclosed information).

miguelmota 6y ago

Excerpt from paper which was interesting > Finally, managers often pursue conduct that harms outside victims (whether by shoddy manufacturing, false advertising, or negligent safety measures) in order to bolster their share price. The fact that investor lawsuits under these circumstances are likely to be more successful and lucrative may reinforce shareholders’ potential preference for managers to continue externalizing costs to third parties, on the assumption that if the management is not caught, their shares will increase in value, and if the management is caught, they will be able to recoup at least some of their losses through settlements after the fact. > [...] Moreover, securities class action settlements generally “target the wrong party for sanctions;”83typically, the firm pays the settlement while the manager who actually committed the fraud is, at worst, fired.

hinkley 6y ago

You mean like how we fine local government for malfeasance and the money comes out of taxes, meaning either we pay ourselves or we don't get a service we paid for? I think the problem might have existed before articles of incorporation and we just never solved it.

boh 6y ago

The money doesn't actually belong to the shareholders, since a shareholder only owns the company stock not the company (stocks typically do not grant any ownership rights of any kind besides votes on management/corporate actions--many don't even do that). Companies can decide to re-allocate profits through dividends or buy-backs, but can also decide to re-allocate to other things that may not ultimately benefit the shareholder. Suing the company potentially gives shareholders access to money they may not be able to access otherwise.

s1artibartfast 6y ago
As far as I know, everything you said is factually incorrect in the majority of cases. Common stock is a security that represents ownership in a corporation. In a liquidation, common stockholders receive whatever assets remain after creditors, bondholders, and preferred stockholders are paid. Do you have a source for these bold claims?
- matthewdgreen 6y ago
  It seems to me that both descriptions are practically accurate. A compromise position is: lawsuits allow shareholders to receive company funds even in a situation where the majority of the (voting) shareholders would not otherwise authorize it. For some companies with dual-class voting structures, this might even be the only way that a common shareholder would ever see a payout.
- boh 6y ago
  These aren't bold claims, it's literally how stocks work. The belief of shareholders actually owning the company was just a side-effect of the marketing for shareholder primacy ideology. Even recent finance/management textbooks specifically call this out. Some sources: https://hbr.org/2012/07/what-good-are-shareholders https://hbr.org/2012/07/what-good-are-shareholders https://www.ft.com/content/7bd1b20a-879b-11e5-90de-f44762bf9896 https://www.ft.com/content/7bd1b20a-879b-11e5-90de-f44762bf9...
imtringued 6y ago
Shareholders can just liquidate the company and redistribute the assets of the company based on the number of shares a person possesses. Liquidation is generally only done when absolutely necessary. Why close a functioning company if you can just sell it to someone else?