7 ms·

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

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.

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.