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Lawrence W. Schonbrun: A financial rip-off worse than Bernie Madoff
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The Bernard Madoff fiasco was a $65 billion tragedy for the thousands of Americans who lost their life savings. However, his now infamous scheme is nothing compared to the securities class-action rip-off that is skimming hundreds of billions of dollars from investors in U. S. corporations.
The occasion for this bigger-than- Madoff revelation is a recent story about U. S. District Court Judge Jed S. Rakoff’s refusal to approve a $33 million Securities and Exchange Commission class-action settlement with Bank of America because innocent bank shareholders were paying for the settlement. The SEC was pursuing allegations that Bank of America hid from its shareholders the fact that as much as $5.8 billion of their money would be given as bonuses to the recently acquired brokerage firm of Merrill Lynch & Co.’s executives, who had run that company nearly into bankruptcy.
The reason for the judge’s concern was that Bank of America shareholders were being ripped off a second time; although it was the corporation’s executives who caused the harm, the same shareholders who suffered the harm were being required to foot the bill.
What would you think of a legal system in which someone burglarizes your house, yet you are the one who is sued and have to pay all the damage caused by the burglar? What would you think of a legal system that allowed the phone company to be sued every time someone received a harassing phone call? And what would you think of a legal system that functioned so that if you were in a car accident and had a legitimate claim for $5,000 for damage to your automobile, the best your lawyer could do was get you $500 and then take 30 percent of that for his fee plus costs and expenses?
Unless you were a lawyer, wouldn’t you think these systems of “compensation” were tragically flawed?
Now a federal judge finally has noticed the flaw in the securities class-action business: The settlement proposal, Rakoff said, would make “the victims of the violation pay an additional penalty for their own victimization.”
But this is how the securities class-action system has worked for decades. In a typical year, more than 200 securities class action lawsuits are filed against American companies, with an average settlement of more than $100 million each; that adds up to a staggering $20 billion a year! Over nearly 40 years, that means that this system has drained upward of $800 billion of shareholder wealth, not just from people who directly trade securities but from all Americans who own mutual funds, or have pension funds or other types of retirement plans. Kind of dwarfs Madoff’s $65 billion, doesn’t it?
Especially when you consider that, unlike Madoff’s Ponzi scheme that ensnared an unlucky but finite group of people, securities class actions take money from all of us, and left unchecked will continue to do so.
Lawrence W. Schonbrun is executive director of Class Action Watch, a tort reform organization.
Published: November 21, 2009, 12:30 am