Friday, September 05, 2008

Bonanza ahead for trial bar extortion?

A week ago I received one of those regular notices of a class action settlement for one of the stocks that I own. This one was a great example of what goes on in these cases and, darn it, I tossed the letter out after sending back my usual hostile reply, but I do remember the basics. This was the settlement of a class action suit against the Coca Cola Company filed by an Atlanta law firm and a Los Angeles law firm jointly. What it was about was impossible to tell with a quick scan of the legalese, some sort of accusation of supposed misleading communication by Coke. The settlement was was for $139 million with Coke not admitting to any wrongdoing. The case had been ongoing for five years, and covered the class of all shareholders of the company from 2001 to 2005. The law firms were awarded by the court a fee of 27% of the settlement plus all expenses associated with the action.

So here's a little quick math. A 27% cut as the law firms' fees equates to $38 million of the settlement. One can only guess at the expenses, but they include all printing, mailings, phone calls, hotels, meals eaten when working on the case, car services used by all employees when working on the case, all air travel, outside vendors such as deposition video services, stenographers and outside experts, and god knows what else. Since law firms are generally not public corporations there are no limits on their spending and everything is generally top drawer, meaning front of the plane, limousines, the best restaurants, no limits, as long as the court can be shown that it related to the case. So over five years it is easy to guess that there were as much as $10 million of expenses associated with the case. So that's $48 million to those defenders of the little guys against the evils of corporate America, and that leaves $91 million for the affected class. At that time on average it appears that Coke had 2.1 billion shares outstanding. Since there is turnover in shares and the settlement covers anyone who held shares during a four year period that needs to be grossed up by 20%, and that is definitely conservative, and it leads to a class of 2.5 billion shares. That leads to an award of 3.6 cents per share for the shareholders. So you, the little guy who the trial bar says they protect, had 200 shares, you could fill out detailed forms proving what you held during that time period, pay your postage, and get $7.20 back in the mail. 1000 shares you own, which means that you have over $50,000 worth of Coke stock, not such a little guy, you would get $36 back. Meanwhile, your company, KO's the symbol, has spent countless man hours and expenses dealing with the trial bar. There is only one winner here, and there is no ethical purpose whatsoever to their calling.

Most retail shareholders for obvious reasons don't even bother seeking their pittance and even small institutions can't take the time to document their holdings for such a small payout. Only the biggest institutions bother to file, and only a group of union pension funds who are allied with the trial bar in ways that should be investigated feel like this is any victory. So, just guessing, say 50% of the $91 million goes unclaimed. Eventually the court allows Coke to pay the shareholders in general, so Coke cuts a check, so to speak, from their cash account and pays it to their shareholder equity account, meaning Coke pays Coke. The only real purpose of the great majority of these suits is for a small group, relative to the employees of corporate America a tiny group, of attorneys to make huge fees for themselves.

Of course there is a public purpose of value for the trial bar. Some represent victims of true medical malpractice although that has become an extortionary business of its own in recent years raising medical costs for all. Some sue insurance companies who refuse to honestly pay off claims against their policies and, generally speaking, more power to them. Some have cases where corporations have knowingly produced faulty, unhealthy and dangerous products and foisted them on the public, and some of course take corporate managements to court for deliberately and materially misleading shareholders. Unfortunately those types of cases that were the stated purpose of the trial bar years ago are in the great minority today. Most are just plain extortionists.

Today a few of the leading practitioners of this activity in the last 30 years are going to jail so there is at least a shot across the bow of this pirate ship. Unfortunately, however, the riches to be gained are such that firms dedicated to simply looking for the next suit have proliferated and attorneys graduate from law school seeking a career in what is a huge waste of economic resources with no social purpose.

Why do I bring this up now. Stocks across the board have suffered over the past year. That's all the trial bar needs. What corporate management predicted this current environment correctly. If they did not, well, of course they misled their shareholders. Massive numbers of suits will be filed against companies large and small as this develops. It's damn sad.

So I started by mentioning "my usual hostile reply". With every one of these "settlements" there are forms to fill out to claim a part of the settlement plus, of course, a return envelope, occasionally pre-stamped in real legitimate cases, but most often not. With Coke I put my 42 cent stamp on the envelope and enclosed a brief note on an index card that began "To the person that opens this envelope---the people you are working for are the genital warts on the American free market economic system. They extort millions, sometimes even billions, for the benefit of no more than a handful of people from U.S. corporations that employ millions of hard working Americans...SHAME", or something like that. Genital warts was a new one, as scum, vultures, leeches etc. have also come to mind at times. Juvenile, useless, yeah I know, but what the heck.

What political party is by far the biggest supporter of the trial bar and is a huge beneficiary of their largesse? What party actually had one of these people running for President? What party blocked all efforts at any reform legislation when they held the presidency from 1992 - 2000? What party passed some meaningful reforms(more are needed) in the last eight years and began to seek to prosecute the most high profile and egregious offenders, among whom was Bill Lerach who openly bragged about what he was really doing, and now the creep is finally off to prison.

If Obama, by any chance, is elected one would hope that he could take on the Carl Levin and Hillary Clinton types of his party, and there are many, and begin to address this amazing blind spot in a party that purports to have much more noble goals.


Anonymous Anonymous said...

You must realize that Republicans push tort reform just to relieve pressure on corporations that support them, and not for any high minded principle.

8:25 PM  
Blogger John Borden said...

Yes, anonymous, you certainly make a valid point on the large corporate front. It does seem, however, that the Democrats take a naive view of what generates entrepreneurship and innovation, and ignores the impact of the trial bar on the type of risk taking that had made this country great. You know what I mean. A biotech gets a bad Phase III trial result and there goes all of their capital into the hands of the trial bar. That's not good.

9:07 AM  

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