Bill Lerach, formerly of Milberg Weiss, whose criminal prosecution disrupted relations with institutional clients in securities class actions.
Professor Joseph A. Grundfest of Stanford speculates, in the WSJ today, that the number of securities class actions has fallen off lately because . . . they don’t do any good any more. He dismisses the criminal prosecution of securities class action powerhouse Milberg Weiss and the rising stock market as secondary or tertiary causes of the decline. And he concludes:
As long as the government’s enforcement activities remain sufficiently vigorous, the private class-action securities fraud lawsuit can be viewed as an expensive, wasteful and unnecessary sideshow that generates little deterrence and offers questionable levels of compensation. The question then is not why these lawsuits have been shrinking so rapidly in recent months, but when and whether they should exist at all.
Put Blawgletter down as, um, er, well, dubious. Not so much because the professor misreads recent history — the assault on Milberg Weiss (whose success with garnering institutional clients allowed it to dominate the field) created far more disruption in the class action bar than he supposes, and the high-flying stock market has covered a multitude of corporate sins, many of which we may never discover.
No, Blawgletter doubts Professor Grundfest’s thesis mainly because it takes too little account of human nature. As the late Harvard Economics Professor John Kenneth Galbraith explained in The Great Crash: 1929 (1955):
In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should be called the bezzle. It also varies in size with the business cycle.
Can the government root out all — or even most — securities frauds? Did they in 1929, when the stock market crashed? Did they in 2001, when Enron filed for bankruptcy? Do they have the resources even to investigate, much less prosecute, the hundreds of corporate officers and directors who approved or benefited from backdating of stock options?
Put Blawgletter down as dubious. Yes.
