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Al Gore's Voodoo Economics



Earlier this week I wrote elsewhere about Al Gore's proposal, in the pages of the Wall Street Journal, to change our system of generally accepted accounting principles so that businesses were required to recognize the "negative externalities" they create in the form of pollution and so on.

For many reasons (only the most obvious of which I recounted earlier) it would be both illogical and impracticable to actually implement the change Gore proposed.

But as I wrote then, "Gore is not stupid." So why did he propose such an outrageous change in corporate accounting rules?

The answer lies in the end to which Gore's voodoo accounting would be used: to create the appearance of quantifiable impacts that serve as proxies for "negative externalities" (or environmental harms) which can then serve as the means to spawn litigation.

Sound far-fetched? Read on.

There is already at least one case filed by a putative class of plaintiffs who claim that the actions of various oil, insurance and home mortgage companies exacerbated the problem of global warming, thereby contributing to the destruction caused by Hurricane Katrina las year.

The trial court recently dismissed claims in that case against insurance and mortgage companies, ruling that the relevant claims would be too differentiated and dissimilar to form a class. The same court, however, allowed the plaintiffs' lawyers to replead their case against the oil companies.

The plaintiffs' lawyer, Gerald Maples of New Orleans, Louisiana, argues that the defendant oil companies engaged in a variety of practices that the knew would exacerbate global warming and produce "a storm of the strength and size of Hurricane Katrina [that] would inevitably form and strike the Mississippi Gulf Coast."

Maples promises that his amended complaint "will have a great deal more information and science as well as admissions by certain oil companies."

Despite allowing Maples another swing at the oil company defendants, the trial judge sounded skeptical when he gratuitously noted that Maples' global warming theory of liability posed "daunting evidentiary problems."

But what if the oil company defendants in this case were required by the Al Gore theory of externality accounting to have disclosed in their financial statements the environmental "costs" of their operations?

Plaintiffs' lawyers like Maples would have fewer "daunting evidentiary problems." They could structure suits on behalf of aggrieved investors claiming that oil company management failed to disclose adequately their companies' environmental costs.

In such a scenario, plaintiffs would not face the uphill battle of proving that a particular practice exacerbated global warming which, in turn, exacerbated naturally-occuring hurricans. Rather they would point to practices that contributed (somehow?) to environmental damage (including weather changes) and claim that the costs were not adequately disclosed.

Re-casting what is today (effectively) a toxic tort case into a shareholders' class action solves numerous tactical problems from the point of view of a plaintiffs' lawyer. The differentiated and dissimilar nature of toxic tort claims, for example, often make class actions difficult to sustain. That problem dissolves overnight when the claim is reformulated as a shareholder class action based on a theory of accounting fraud.

As threats to our legal system go, however, this one is probably more distant than others. The odds that Al Gore will succeed in changing the system of generally accepted accounting principles are low. Nevertheless, those who care about the rule of law and the efficiency of our legal system should remain watchful for rear-guard actions like these that attempt to supplant the legislative process with regulation through back-door liability by litigation.

 

 


Rafael Mangual
Project Manager,
Legal Policy
rmangual@manhattan-institute.org

Katherine Lazarski
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.