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PRO-CON: Is Rising Tide of Shareholder Litigation Against Banks Good or Bad for Consumers?

April 12, 2009
Tom Sabulis
The Atlanta Journal-Constitution

GOOD

John C. Herman, partner, Coughlin Stoia Geller Rudman & Robbins LLP

Despite the flood of well-documented corporate misdeeds that have led to the worst recession of our lifetime, the powerful corporate immunity lobby still tries to prevent corporations and the executives who run them from being held accountable for their actions. Monolithic companies like AIG, Bank of America, Fannie Mae and Freddie Mac lost billions of dollars for shareholders and taxpayers, plunging the world economy into peril unseen since the Great Depression. Now some of these companies seek more taxpayer-funded bailouts while continuing to pay billions to failed executives.

While litigation should be a last resort, access to our judicial system provides consumers and shareholders a chance to fight back against the record level of corporate fraud. For example, the Coughlin Stoia law firm was able to recover more than $7 billion for shareholders defrauded in the Enron scam. Holding corporate miscreants accountable levels the playing field and is good for shareholders, honest businesses and our markets. To remain the best in the world, the U.S. capital market system must be safe, credible and transparent. When powerful corporations are held accountable to shareholders —- the true owners of the companies —- it increases shareholders’ trust in our markets and strengthens the economy as a whole.

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BAD

Betsy P. Collins, partner, Burr & Forman LLP

Financial institutions are facing a tide of litigation running the gamut from “show me the paperwork” suits designed to forestall foreclosures to shareholder class actions. Much of the litigation will involve novel theories asserted in class action litigation. Who benefits from all of this class action litigation? Not consumers: The class action litigation system does not serve its intended purposes of compensating injured parties, discouraging misconduct and opening the court system to claimants whose claims would not be big enough to justify filing alone. Typically, if class members complete settlement claim forms, they receive only pennies on the dollar. Additionally, inefficiencies make shareholder litigation an expensive means of “regulating” corporate conduct with about half of every settlement dollar going to costs of litigation.

Who does benefit? Just follow the money. In 2008, at over $232 million, lawyers came in second on the list of the highest contributions to political campaigns, far above other powerful industries. In shareholder litigation, the system has all too often engendered corrupt practices such as illegal payments to lead plaintiffs and a “pay-to-play culture” of corruption where plaintiffs’ lawyers make generous political contributions to politicians who are in charge of deciding who will represent large pension funds. Alleged wrongdoers rarely contribute to settlements since they are indemnified by the corporation or covered by insurance. Thus, current shareholders of financial institutions will foot the bill for litigation brought by other shareholders by funding litigation, settlements and increased insurance premiums.

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