How to Cure Corporate Mistakes and Wrong Actions

How to Cure Corporate Mistakes and Wrong Actions

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In recent years, class action suits have become a popular way of bringing justice to victims of corporate mistakes. In 2009, the Securities and Exchange Commission (SEC) took the top executives of Bank of America to task over their $50 billion acquisition of doomed bank, Merrill Lynch and the case was settled for $150 million. Meanwhile, a private class action suit was brought against the bank. This settled for $2.4 billion, which was a lot more than the original settlement figure obtained by the SEC.

This pattern has been repeated many times over in recent years. The Enron case was settled by the SEC for $450 million, but a later class action suit achieved a far higher settlement figure: $7.2 billion to be exact. Similarly, class action suits against Citigroup in 2010 settled for $1.3 billion, compared to the SEC settlement of $75 million.

Huge Settlements in Class Action Suits

At first glance, you might look at the figures and think that the defrauded shareholders who brought these class action suits did very well out of the cases, when compared to the settlement figures obtained by the SEC, but all is not what it seems.

tug of war between businessmen

What usually happens is that settlement figures are paid out by the companies themselves rather than the executives responsible for making the poor decisions that led to the case in the first place. As such, the current shareholders who have invested in the company prior to the fraud are in effect paying out the second group of shareholders who were defrauded. In essence, the only beneficiaries of the whole debacle are the lawyers, who stand to make millions in fees as a result of the long and protracted court cases.

A Contentious Form of Litigation

Class action lawsuits are highly contentious forms of litigation. Advocates say they provide an opportunity for ordinary people to play their part in combatting corporate misconduct, but critics argue that class action suits do nothing to hold executives responsible for misconduct accountable. Rather, class action suits merely line the pockets of self-interested lawyers.

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John Coffee Book

The publication of a book by John C. Coffee Jr, a Colombia law professor, seeks to shed light on the merits and demerits of class action suits by appraising the strengths and weaknesses of it as a judicial process.

Entrepreneurial Litigation

The book, entitled Entrepreneurial Litigation, is a highly comprehensive study of class actions. Coffee examines the history of class action lawsuits, from the 19th century right through to the modern day. He looks at the many different types of class action suits and discusses who benefited from them, and why. One thing he does note is that in almost all cases, class action suits were lawyer driven. Sometimes this was for ideological purposes, perhaps to identify more claimants in order to address their concerns, but in most cases the primary driver was financial.

John Coffee concludes by the end of his book that securities class action suits do serve a purpose, but they need to be better regulated by the government and class action bar if they are to be truly effective.

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