[HN Gopher] Is Everything Securities Fraud?
___________________________________________________________________
Is Everything Securities Fraud?
Author : Tomte
Score : 110 points
Date : 2021-01-05 18:36 UTC (4 hours ago)
(HTM) web link (papers.ssrn.com)
(TXT) w3m dump (papers.ssrn.com)
| kachnuv_ocasek wrote:
| Heads up - the linked article has not been peer reviewed yet:
| "Preliminary draft January 5, 2021-Please do not cite or
| circulate."
| kemitchell wrote:
| Only a few law journals do traditional _peer_ review. Most law
| review articles are reviewed by law review editors, who are law
| students in their second and third years, not law professors.
|
| In any case, you rightly point out that the author marked this
| private and preliminary. It's not a crazy idea. Nobody outside
| academe looks at SSRN ... until they do.
| pottertheotter wrote:
| It's a little odd to put a paper on SSRN that is "do not
| circulate". I'm guessing it was left on there by accident.
| labster wrote:
| I was just thinking, maybe we should privatize the police force.
| And then when the police kill or maim another unarmed black man,
| we can sue them for securities fraud, for not providing the
| promised level safety of law enforcement. It sounds like a lot
| more justice than we're getting now.
| kensai wrote:
| It just happened with QuantumScape allegedly because a speculator
| posted a negative opinion on Seeking Alpha. After the 40% drop in
| one day, litigation law offices jumped in.
| hervature wrote:
| This is probably showing up because it showed up in Matt Levine's
| newsletter which returned today. In the newsletter, Matt
| disagrees with one of the conclusions drawn in the paper that
| shareholders have a perverse incentive to invest in companies
| that do bad things because they are compensated their loses when
| the stock goes down. He disagrees because their are compensated
| with money that the company has which already belongs to the
| shareholders.
| hinkley wrote:
| You mean like how we fine local government for malfeasance and
| the money comes out of taxes, meaning either we pay ourselves
| or we don't get a service we paid for?
|
| I think the problem might have existed before articles of
| incorporation and we just never solved it.
| miguelmota wrote:
| Excerpt from paper which was interesting
|
| > Finally, managers often pursue conduct that harms outside
| victims (whether by shoddy manufacturing, false advertising, or
| negligent safety measures) in order to bolster their share
| price. The fact that investor lawsuits under these
| circumstances are likely to be more successful and lucrative
| may reinforce shareholders' potential preference for managers
| to continue externalizing costs to third parties, on the
| assumption that if the management is not caught, their shares
| will increase in value, and if the management is caught, they
| will be able to recoup at least some of their losses through
| settlements after the fact.
|
| > [...] Moreover, securities class action settlements generally
| "target the wrong party for sanctions;"83typically, the firm
| pays the settlement while the manager who actually committed
| the fraud is, at worst, fired.
| pvarangot wrote:
| So I didn't read the piece, but that money may belong to the
| shareholders but not be reflected on the stock price. When a
| company tanks stocks can be kind like "not really that liquid",
| because to get back the "true" value of the assets you own via
| your share of the company back you need to wait for it to go up
| again. If you sue you may get your money sooner and put it back
| to work on a functioning company or lower risk investment. Does
| he tackle that? Skimming the article it doesn't look like it,
| and the motivation to sue on some of this cases is to get the
| ROI shareholders were hoping for in a timely and less risky
| fashion after a company collapses due to malice or
| incompetence.
| titanomachy wrote:
| That... is a good point. Actually, suing a company for
| securities fraud seems kind of strange when you put it that
| way. How could a shareholder derive net benefit from suing a
| company for a share of the assets they already own? Unless
| they've already sold the shares and they're suing to try and
| recover their loss? Is that allowed?
| greenshackle2 wrote:
| If only a subset of shareholders are suing, e.g. shareholders
| who bought shares between date X and date Y, they are only
| losing a fraction of a dollar in share value for every dollar
| they win in the lawsuit. They are gaining at the expense of
| shareholders who are not part of the lawsuit.
|
| (Ignoring court fees.. the suing shareholder is paying court
| fees on both ends, could end up being net negative.)
| titanomachy wrote:
| Wouldn't anyone who _held_ shares during that time have
| standing for the lawsuit, regardless of when they bought
| them?
| greenshackle2 wrote:
| Possibly? I would have thought if the problem is
| artificially inflated price, shareholders who didn't buy
| or sell during the period are not affected, but to be
| honest I don't know how these suits work in details.
|
| Just picking at random off Google, I looked at the
| Pinterest suit, and it's a big shareholder suing
| Pinterest Inc... on behalf of Pinterest Inc. So yeah you
| might be right. Sounds very odd.
|
| https://www.scribd.com/document/486543528/Pinterest-
| Sharehol...
| notional wrote:
| Do you still have to be a share holder when you sue?
|
| Or can it play out like, I own xx shares in Y Corp. Y Corp
| does something bad and share price goes down, I sell my stake
| and sue Y Corp for securities fraud for making my shares go
| down during the time period I owned them?
| nickff wrote:
| IANAL, but I think you've right that you don't need to hold
| on to the shares, and you've pointed out the only groups of
| investors who would benefit from the judgement. The most
| benefited would be those who were harmed but sold their
| shares before the lawsuit was announced; shareholders who
| sold their shares before the matter was decided are likely
| to benefit to a lesser degree.
|
| In reality, class-action lawyers go looking for class
| members to file suit on behalf of, and make special
| arrangements for them to receive additional compensation
| above and beyond what 'regular' class members get.
| dsizzle wrote:
| Could it be even worse -- that they are shorting the stock
| by the time the lawsuit goes to court?
|
| The notices of class action lawsuits for stocks I've owned
| have only stipulated that you've owned the stock during
| some time window, as far as I recall.
| Ajedi32 wrote:
| That still seems strange to me; everyone's shares went down
| in value, not just yours. Should you be compensated for
| your loss by the remaining shareholders just because you
| decided to sell your shares and they didn't? If everyone
| sold their shares, wouldn't the price have gone down even
| _more_?
| Shivetya wrote:
| I understand where he is coming from but he does make a point
| in that many law firms simply use the process to generate
| wealth for themselves which in a way is similar to those patent
| sitting lawyers.
|
| The don't produce anything, they just use the system to exploit
| it from others. I haven't googled it but I would love to know
| the cost to the economy of these types of actions, the
| companies that don't produce anything but exist simply by
| getting money from others through the courts or threat of using
| them
| eastbayjake wrote:
| So glad Matt Levine is back! I missed the newsletter a lot
| [deleted]
| rsync wrote:
| "Matt disagrees with one of the conclusions drawn in the paper
| that shareholders have a perverse incentive to invest in
| companies that do bad things because they are compensated their
| loses when the stock goes down. He disagrees because their are
| compensated with money that the company has which already
| belongs to the shareholders."
|
| This may be a romantic notion that I misunderstand but isn't
| there a mechanism wherein I, an aggrieved
| (citizen/neighbor/bystander/victim) can buy a single share in a
| public company and then, as a shareholder, speak and/or protest
| at the annual meeting and cause all manner of discomfort,
| public reckoning, etc.
|
| Does that work the way I think it does or am I caught in some
| hollywood trope ?
| Matticus_Rex wrote:
| It depends on the company. At many companies any number of
| shares entitles you to attend, though many companies set a
| minimum number of shares in their bylaws (I think public
| companies can only limit this to a maximum of 1000 shares,
| and IIRC nearly all publicly-traded companies set a limit to
| avoid single-share troublemakers).
|
| Speaking also depends on how the bylaws say the agenda is
| constructed, but I've never seen any where a share would
| entitle someone to a spot on the agenda. There are sometimes
| spaces for comment, and _I think_ the rules for how those are
| selected /filtered are set in the bylaws.
| [deleted]
| yellowstuff wrote:
| > This may be a romantic notion that I misunderstand but
| isn't there a mechanism wherein I, an aggrieved
| (citizen/neighbor/bystander/victim) can buy a single share in
| a public company and then, as a shareholder, speak and/or
| protest at the annual meeting
|
| Yes.
|
| > and cause all manner of discomfort, public reckoning,
|
| No.
|
| The etiquette is to let people speak their piece while the
| board looks concerned, but as far as I know there have never
| been any actual consequences from this.
| elliekelly wrote:
| It does and it doesn't. Can you go to the shareholder meeting
| and speak? Sure. But your time will probably be limited and
| if you ask something contentious you're likely to get a
| politicians non-answer.
|
| For anything more meaningful you would need to meet one of
| the three criteria of Exchange Act Rule 14a-8 which the SEC
| recently "modernized".[1] It used to be a requirement that a
| shareholder own $2,000 or 1% of the outstanding shares in
| order to bring a proposal. The new Rule is you must own
| $2,000 or 1% of the outstanding shares for _three or more
| years_ in order to bring a proposal. There's also criteria
| for a shareholder to bring a proposal in a shorter amount of
| time if they own a higher dollar amount of shares but I
| believe the shortest time period under the new rule is one
| year.
|
| So one share probably isn't going to cut it for most public
| companies other than AMZN and Berkshire Hathaway.
|
| And even _if_ you meet the requirements to bring a
| shareholder proposal it would very likely require advanced
| notice which is a whole big thing. Especially if management
| doesn't agree with whatever it is you're trying to do.
|
| So I guess the answer is no, securities law is a lot more
| paperwork and a lot less exciting than in the movies.
|
| [1]https://www.sec.gov/news/press-release/2020-220
|
| Edit: It just occurred to me that your question about
| standing at a shareholder meeting is different from the topic
| of the article which is private lawsuits alleging securities
| fraud. Management's duty is to the shareholders
| (collectively) so the "own one share" question doesn't really
| apply the same way. You'd need to show that you purchased or
| sold the security in reliance on the fraudulent information
| (or undisclosed information).
| baybal2 wrote:
| > He disagrees because their are compensated with money that
| the company has which already belongs to the shareholders.
|
| Preferably, other shareholders
| stopFalse wrote:
| My buddy has a Tesla and had multiple free repairs, all at
| the expense of stock holders.
| ashtonkem wrote:
| This also probably disincentives companies from misbehaving, as
| being sued by their shareholders is expensive and bad.
| nickff wrote:
| Companies don't act, investors, board members, executives,
| and employees do; these decisions would only disincentivize
| executives if they hold un-exercised options, or their shares
| are somehow excluded from the judgement.
| ashtonkem wrote:
| I can't speak to judgements, but executives often hold a
| lot of shares. The largest individual shareholder of Disney
| is the CEO, for example.
| nickff wrote:
| If the executives continually hold shares from the time
| of the 'wrongdoing' to the time of the judgement, and are
| included in the settlement or decision, the impact on
| them would be to transfer money from one pocket to
| another, minus some loss to the lawyers on both sides.
| mwnivek wrote:
| Link to Levine's piece:
|
| https://www.bloomberg.com/opinion/articles/2021-01-05/dystop...
| tynpeddler wrote:
| A securities fraud lawsuit against a company because the work
| environment is toxic reminds me of the movie Unforgiven. For
| those unaware, the movie starts with a cowboy disfiguring a
| prostitute with a knife because she laughed at him. After the
| incident, the guy who manages the brothel is financially
| compensated since he had invested money in bringing the
| prostitute to his place of business, money which he will
| presumably be unable to recover now that the woman has been
| disfigured. No compensation is ordered for the disfigured
| woman (another cowboy does try to compensate her out of
| guilt), instead, the perpetrator is flogged, and that's
| supposed to be enough for the woman.
|
| There's a real gap in our understanding of capitalism and
| crime if it's easier to compensate shareholders of a toxic
| company than it is to compensate the direct victims of that
| toxic behavior. If a toxic culture would suppress stock
| prices, it seems that the same culture would suppress career
| advancement, physical health and general mental well being.
| The problem seems to be that an employee must not only prove
| criminality but also particularized harm, whereas the
| standard for a successful securities fraud lawsuit seems to
| be lower.
| jandrese wrote:
| Economists like to talk about "utility" and the common good
| with their theories, but they tend to only measure money so
| unless you can put a price tag on it it is invisible to
| economists. The wellbeing of a prostitute is one of those
| things that has no market. The same is largely true of
| toxic workplace behavior. There is a tertiary effect from
| potential lawsuits, but those are almost impossible to
| price into a business model.
|
| If your bro culture allows you to succeed over your
| competitors at the cost of a million dollar lawsuit a
| decade down the road then it probably doesn't make economic
| sense to change the culture. Wall Street banks and trading
| houses were (are) notoriously hostile workplaces, but if
| your profit margins are in the billions and you're getting
| good returns then a million dollar suit in the future is
| basically not a concern.
| jjoonathan wrote:
| > Economists like to talk about "utility" and the common
| good with their theories, but they tend to only measure
| money
|
| Yeah, that's the problem. The economic notion of value
| weights according to wealth while the moral notion of
| value does not. It's absolutely scandalous that we let
| economists conflate the two.
|
| Feed a starving kid in Africa? Zero economic value. The
| kid doesn't have money. Figure out how to merge together
| a bunch of megacorps to build a monopoly, raise prices,
| reduce quality, and make the lives of millions strictly
| worse? The market will ejaculate capital all over your
| value-creating endeavor.
| renewiltord wrote:
| This is nonsense. It's not The Market(tm) or The
| System(tm). It turns out starving kids in Africa are of
| no value to anyone except to their parents, who have no
| means to provide commensurate to the child's value to
| them.
|
| The blunt truth is that arbitrary lives are probably
| nearly valueless and certainly worth less than $1000. I
| have tested this hypothesis by describing GiveWell's
| mathematics to people at varying stages before they would
| spend money similar to that: in every case, people choose
| to spend the money rather than save arbitrary life.
|
| I have tested this hypothesis on myself and it turns out
| that a pair of Zipp 606 carbon fibre wheels are worth way
| more to me than two African children.
|
| The "moral notion of value" is a nonsensical concept
| invented to reinforce the notion of self-worth while not
| contributing to anything. Test it on yourself each time
| you spend: is a human life worth more to you than a
| hundred burritos? a set of car tyres? the higher trim on
| your car? The magic of this method is that it's
| memoryless. Irrespective of whether you give a million
| dollars a year or ten, the question applies to the next
| one thousand.
|
| Your spending habits will prove it. No. Arbitrary life is
| valueless to you. And if you disagree, it should be easy
| to prove since GiveWell can save one arbitrary life per
| thousand dollars. Show me your spending and I will
| construct a way you could save a life by giving up non-
| essential parts of life.
| gowld wrote:
| You are pushing a bit too far. GiveWell _does_ raise many
| millions of dollars for those lives. It just doesn 't
| raise all (or even nearly all) the money it would if
| people actually held the Communist or Utilitarian ideals
| they may half-profess.
| renewiltord wrote:
| The fact that they do raise money but not as much as they
| would if people adhered to these ideals indicates to me
| that the utility function is different. i.e. that it
| isn't just the life that is being paid for.
|
| And that's fine. I think people should spend their money
| as they see fit.
|
| It's the bit where people make arguments from fictional
| moral authority that needs some push back. It's just
| nonsensical outrage - the opium of the partly-informed.
| morelisp wrote:
| I live nude in a barrel by a river, all I do is trade
| cryptocurrency on my phone collecting over 8 figures
| annually, and everything I don't spend on potatoes I
| donate to GiveWell. How could I save more lives?
| QuesnayJr wrote:
| I am an economist, and I have no idea what you're talking
| about.
| ajb wrote:
| It is difficult to get a man to understand something,
| when his salary depends on his not understanding it.
| renewiltord wrote:
| It is also difficult to get a man to understand something
| when you are not familiar enough with the subject. I
| suspect that is the more common failure mode.
| nickff wrote:
| Well there are (at least) two issues you're glossing over
| here:
|
| 1) _Toxic workplace behavior is measurable_ , you can
| simply measure the wage premium paid by the so-called
| "toxic" employers or managers.
|
| 2) _Bro culture may contribute to business success_. I
| don 't like that kind of 'culture', but it may help
| foster improved productivity in certain industries, and
| the lawsuits may just be a cost of doing business that's
| worth paying. Again, this isn't how I live my life, but
| it is conceivable that this is a workable model.
| dcolkitt wrote:
| > The wellbeing of a prostitute is one of those things
| that has no market.
|
| Sure it can. Everyday institutions make calculations that
| assign a standard monetary value to a human life.[1] And
| it's not just the market, the government and policymakers
| do it all the time as well.[2]
|
| Heck, you even put a value on your own life. Do you drive
| the latest car model and live in a house that was built
| in the last two years? If not, you're trading off money
| against mortality, by increasing your risk of dying in a
| car accident or house fire.
|
| [1] https://en.wikipedia.org/wiki/Value_of_life [2]
| https://www.bloomberg.com/graphics/2017-value-of-life/
| jandrese wrote:
| That's not a measure of your wellbeing though. Usually
| they just assume that if you have more money you'll be
| happier.
|
| Maybe a fancy car will increase your happiness, but there
| is no unit of measure you can divide the purchase price
| of that mid-life crisis car by.
|
| The value of a life is roughly how much money they would
| have made if they had lived until some arbitrary end
| date. Happiness doesn't figure into it at all. It's
| calculated so life insurance companies know how to price
| their product, which is ultimately just paying off some
| fraction of the remainder of someone's theoretical
| lifetime income if they die early.
| gjm11 wrote:
| That isn't how the various things called "value of a
| life" are calculated.
|
| The Wikipedia article linked above describes some ways to
| do it, and if you look at them you will see that with one
| exception they are _not_ estimating, nor trying to
| estimate, expected future earning power or anything like
| it. (Though that might _affect_ the answer.)
|
| The first approach they describe: take N people and ask
| each of them how much they would pay to reduce their
| chance of dying in the next year by 1/M. Then the average
| of M times this figure is the group's estimate of the
| value of their lives. (The description in the article
| simplifies the calculation by taking N=M, but there is no
| need to.)
|
| The second approach: look at what people are willing to
| forgo in order to reduce their chance of dying a bit, or
| willing to increase their chance of dying a bit in order
| to have. If you're willing to increase your chance of
| dying by X in order to get Y, that suggests you value
| your life at no more than (the value to you of Y) / X.
| Look at lots of different X and take some sort of average
| of the resulting estimates.
|
| The third approach _is_ looking at future earnings. The
| page adds this caveat: "Another potential issue when
| using wages to value life is that the calculation does
| not take into account the value of time that is not spent
| working, such as vacation or leisure."
|
| The fourth approach is more or less the same as the
| first.
|
| It's obvious that aside from the second these are _not_
| the same as a person 's future earnings. And we shouldn't
| expect them to be; people generally value other things
| about their future lives besides the money they may earn.
|
| (A kinda-artificial example that I think makes the point.
| Suppose the following things happen: 1. Economic growth
| stops or slows sufficiently that no one expects
| investments to grow appreciably an more. 2. You get rich.
| 3. You retire, intending to supply your needs and wants
| simply by spending some of your mountain of cash. In this
| situation your expected future income is _zero_. But I
| bet you would still be willing to pay something to reduce
| your chance of early death.)
|
| Also, though this is a less important point: Life
| insurance is not _only_ for paying off some fraction of
| your theoretical lifetime income. E.g., you can buy life
| insurance policies even after you have retired, even if
| you have no income. Obviously one reason why you would
| buy life insurance is to make up for loss of future
| income; but it could be e.g. that one thing you do is to
| care for other family members, and that if you died they
| would need someone else to do that who would need paying,
| and if you were buying life insurance that would be
| something you would take into account.
| vlovich123 wrote:
| If you ask a billionaire how much they're willing to
| spend to save their life (or significantly improve their
| health) and you ask someone with a $1000 dollars in their
| bank account, is the answer to that question measuring
| the worth of a life or how much that capital is worth?
| Very wealthy people would be more willing to trade wealth
| for health/happiness whereas poorer people are less
| willing to make that trade off since they need that
| capital for more basic necessities (eating, rent, having
| kids, etc).
| jandrese wrote:
| All of those are still just asking "how much is your life
| worth in dollar terms?" Not "how happy are you". The
| assumption is the more money you're willing to spend to
| stay alive the happier you must be.
|
| > Also, though this is a less important point: Life
| insurance is not only for paying off some fraction of
| your theoretical lifetime income. E.g., you can buy life
| insurance policies even after you have retired, even if
| you have no income. Obviously one reason why you would
| buy life insurance is to make up for loss of future
| income; but it could be e.g. that one thing you do is to
| care for other family members, and that if you died they
| would need someone else to do that who would need paying,
| and if you were buying life insurance that would be
| something you would take into account.
|
| If you have no income you can't buy life insurance. How
| would you pay for it?
|
| Retirement income is still income. You're still buying
| insurance to provide that income in the event you die
| before your dependents. It should be noted however that
| those polices tend to be very expensive as the insurance
| company calculates that you may not be paying into it for
| very long before they have to start paying out.
| vorpalhex wrote:
| How much is the harm, in dollars, of securities fraud?
|
| Well the equation would be the expected profit based on the
| average share price over the given time period. We can
| argue details but that gives us a pretty tight range.
|
| How much is the harm, in dollars, of being grossly
| disfigured?
|
| There is definitely harm there. Is it the loss of earnings
| of the prostitute assuming she would make less money?
| That's some of it - the amount is at least that much. Yet
| presumably she also has less quality of life too - and how
| much is that worth? Is the basis for the quality of life of
| a prostitute less or more than a CEO? What if the
| prostitute really enjoys life and has a rewarding life, but
| the CEO is very drab and dislikes living?
|
| That it's hard to put monetary figures on a harm isn't some
| failure in our understanding - it's because we comprehend
| money is not a universal salve. You can fix a business with
| cash, you can't fix a human life with it.
| acchow wrote:
| Shareholders own the free cash flow (roughly). But through
| lawsuits convert that to debt.
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