I am quoted in a Peter Lattman Dealbook story about the $2.43 billion Bank of America settlement. (Also: Reuters.) I'm adverse to Bernstein Litowitz in the Johnson & Johnson case (being argued tomorrow), but I'll give credit to them here for asking for "only" $150 million in fees (as opposed to the $400+ million requested and $285 million recently awarded in Delaware for a smaller settlement).
The settlement is unquestionably large; as Alison Frankel notes, it is about twenty cents on the dollar, after a government prosecution resulted in a much smaller nuisance settlement. (Of course, as Frankel also notes, Bank of America had reason to fear a jury trial in Manhattan after years of bad publicity over the financial crisis. Even if Bank of America was entirely innocent, could their defense attorneys say that they had an 80% chance of winning that jury trial?)
But I am troubled by one aspect of the settlement. There is a single class of beneficiaries, the class of shareholders who purchased during the pre-disclosure class period. But the settlement is paid for by Bank of America—i.e., current shareholders. And some of those current shareholders are class members. For that subclass of class members, not only are they receiving no benefit—money is simply being transferred from the left-hand pocket to the right-hand pocket—but they are paying a commission on the change in accounting entries to plaintiffs' attorneys. Combined with the costs of defense and settlement administration, it is far from clear to me that this unseparated and uncertified subclass of current shareholders has the same interests as the class members—or even that this lawsuit and settlement has not harmed them, rather than benefited them. To my knowledge, no court has ever addressed this fundamental intra-class conflict in securities litigation; to my knowledge, no defendant has even raised the issue as a reason against class certification without subclassing. Maybe some day a current-shareholder class member will object that separate representation is required under Rule 23(a)(4) in a securities litigation settlement, or intervene to protest a single-class certification; maybe securities defense firms in a future case will be half as creative and innovative as the plaintiffs' bar in the zealous representation of their clients.
That's aside from the fact that the alleged $10-$15 billion loss in this case isn't a $10-$15 billion social loss. Even if it is true, as plaintiffs allege, that prices were inflated $4.75/share during the class period, that $4.75 wasn't going to Bank of America or even, for the largest part, to current shareholders. It was going to former shareholders: for every investor allegedly out $4.75, another investor realized a windfall of $4.75. A diversified investor is just as likely to be a winner from these sorts of alleged disclosure mistakes as a loser. Now, let's concede that it's the case that confidence in disclosures would be expected to have a positive effect on stock prices (though that positive effect was realized by the investors holding shares when confidence in the markets originally improved in the 1930s, rather than by current investors who already paid that premium afterwards). It's far from clear that the litigation tax shareholders pay, both in direct payments to securities plaintiffs' and defense lawyers and in indirect costs of compliance and in executive time diverted by litigation (and in increased executive compensation to reflect the threat of personal civil and criminal liability errors), provides concomitant benefits at the margin that simple regulatory enforcement does not already accomplish. The $150 million fine BoA paid the SEC, and the tens of millions BoA spent on lawyers in the process of that investigation, combined with criminal penalties, is surely enough in terrorem expense to ensure a similar level of deterrence, especially given that executives who commit these sorts of errors are not likely to still be executives when it comes time to pay the civil-litigant piper several years later. Too, the overwhelming majority of shareholder litigation, well over 90% of cases, free-rides off of government investigations or corporate self-disclosure, rather than independently uncovering wrongdoing. But that particular public-policy question is a matter for the legislature, rather than for courts looking at securities litigation. And as we've seen, there have been those in Congress who want to make securities litigation more, rather than less, inefficient and costly to the economy. The October 13 Economist has a good story about the problem of overregulation and double jeopardy in the financial industry. More: Ronald Barusch. Related: my 2006 Congressional testimony; Olson on WorldCom.