Recently in Scientific Evidence Category
"A West Virginia jury found two members of a Pittsburgh law firm liable of civil racketeering for conspiring with a radiologist to fabricate evidence in asbestos lawsuits against railroad operator CSX." [Fisher @ Forbes; earlier on POL]
The verdict of $429,000, subject to possible trebling and attorneys' fees, is, of course, just a drop in the bucket of asbestos fraud, which has essentially gone unprosecuted criminally as it has sapped billions of dollars belonging to actual asbestos victims and to productive sectors of society. Congratulations to POL reader Marc Williams for his role in the victory. Lester Brickman, of course, has written widely on the problem of mass tort screening fraud.
More could be done to protect the innocent if Congress passed asbestos trust reform requiring more transparency in the notoriously corrupt process.
To prove securities fraud, one has to prove reliance upon the allegedly fraudulent statement. This would be a problem in a class action: individual shareholders have relied upon different things in their decision to purchase, and some have never even seen the allegedly fraudulent statement. Under normal circumstances, the individualized nature of this inquiry would prevent class certification.
There is a way around this, though. The efficient market hypothesis propounded by financial economists theorizes that information is automatically reflected within a stock market price. Thus, if fraudulent information was out in the marketplace, it would have artificially inflated the stock price; a stock purchaser who never even saw the fraudulent information could thus be said to have relied upon the fraudulent information—thus, "fraud on the market." We'll leave aside the academic debate over the degree of truth of the efficient market hypothesis. What's important for our purposes today is that the Supreme Court has endorsed the fraud-on-the-market theory in Basic v. Levinson, and billions of dollars have changed hands because of it.
Andrew Trask notes that in the Amgen Supreme Court argument Monday, Justice Scalia mused that perhaps the Supreme Court should reverse Basic. I agree with Trask that this is an unlikely outcome in the short run. But securities lawyers should be aware that a major plaintiffs' firm, Bernstein Litowitz, has successfully argued in a federal district court case that a court can ignore the efficient-market hypothesis, which would imply that Basic v. Levinson is wrongly decided.
You might remember that the Center for Class Action Fairness objected to a $0 settlement in Johnson & Johnson. The objector argued that the settlement provided no benefit to shareholders. Plaintiffs responded by putting forth an expert declaration from former SEC chair Harvey Pitt opining that the minor corporate governance changes would have dramatic benefits for shareholders. In response, CCAF put forward expert reports from Professors Todd Henderson and Kate Litvak noting that Pitt's say-so was not competent expert evidence of shareholder benefit. As the CCAF brief argued, if the settlement created benefit for shareholders, that benefit would be reflected in the price of the stock. But the plaintiffs provided no evidence that the marketplace positively reacted to the changes in corporate governance; indeed, the JNJ stock price declined relative to the rest of the market. In the absence of the market evidence, we argued, plaintiffs failed to carry their burden that the settlement was beneficial to shareholders, and had no claim for $10 million in fees.
The court, at plaintiffs' behest in briefing by Bernstein Litowitz, disagreed: Harvey Pitt was an expert, and if he said there was a benefit, there was a benefit, regardless of what the market said. [In re Johnson & Johnson (D.N.J. Oct. 26, 2012) via Smith @ Reuters]
This is remarkable for several reasons. As an initial matter, if Harvey Pitt's say-so can be conclusive on the question of shareholder value above and beyond what actual market value shows, and a district-court judge has the ability to divine the creation of shareholder value in the absence of empirical evidence, both Pitt and the district court judge are making a huge financial mistake in staying in their current line of work. Both of them should be finding work with hedge funds, and trading stocks based on their power to determine which corporate governance reforms the market is failing to appropriately value.
But more importantly, Bernstein Litowitz has successfully argued to a district court that the efficient market hypothesis is wrong. According to Bernstein Litowitz, the market price of JNJ doesn't reflect all public information about the value of the stock, and there exist people like Pitt and the district court judge, and presumably others, who can divine shareholder value in ways the market cannot. But if that is so, then Basic v. Levinson is wrongly decided, because it means that one can't assume reliance on public information because the price of the stock differs from the underlying value of the corporation. Thus, there is no such thing as fraud on the market. Either the district court decision in Johnson & Johnson is correct, or the Supreme Court decision in Basic v. Levinson is correct, but they cannot both be correct.
I leave to others smarter than me which is the right way to view things. (That Pitt isn't opening a hedge fund suggests which way Pitt actually thinks.) But it would be fascinating if it turned out that, in its effort to defend a requested $10-million fee in an abusive shareholder derivative case, Bernstein Litowitz killed the multi-billion-dollar golden goose—the fraud-on-the-market theory—that permits shareholder fraud class actions at all. If there's a securities defense firm out there that argues judicial estoppel against Bernstein Litowitz based on the Johnson & Johnson decision, please let me know, and I'll post about it.
(The Center for Class Action Fairness is not affiliated with the Manhattan Institute.)
Judicial hellhole Nevada has no Daubert standard for experts, or, indeed, any standards restricting the use of expert testimony whatsoever. This is especially problematic in criminal prosecutions, where prosecutors have been happy to use junk science such as blood-spatter and bite-mark analysis, with questionable results. A man convicted of sexual assault is complaining about the use of unmoored testimony about "grooming" in his trial, which will give the Nevada Supreme Court an opportunity to review the standard; this is unfortunate, as the other evidence for his conviction seems to have been overwhelming, and bad facts can make bad law. The legislature likely needs to step in. [LVRJ via Bashman]
I long ago predicted that the expansion of the 9/11 Victim Compensation Fund would lead to fraud and giveaways at the expense of taxpayers, and, unfortunately, I'm being proven right. Despite the complete lack of scientific evidence that the WTC site dust causes cancer, NIOSH director is letting politics trump science and opening the fund to claims from 50 different types of cancer. Oddly, the same Lancet studies that earlier showed no statistically significant evidence (no non-smoking firefighters have come down with lung cancer out of the 9000 firefighters who worked at Ground Zero) are being used to justify this raid on the federal fisc. The New York Times highlights the case of Ernest K. Matthews, who blames his lung cancer on cleaning Merrill Lynch elevators instead of on his smoking, and will be making a claim at taxpayers' expense. Similarly, Patricia Workman implausibly claims her 2001-03 exposure to Ground Zero caused her 2007 myeloma and skin cancer. The brief exposures of Ground Zero workers to common toxic substances are being used to rationalize the payments, though "Dr. Neugut, who is a principal investigator with the Long Island Breast Cancer Study Project, which was set up to look at environmental causes of breast cancer on Long Island, added that most studies of cancer risks 'are based on workers exposed for eight or nine hours a day to mammoth amounts of these things for 30 years. Even then it is hard to demonstrate a clear excess in cancer risk.'" This junk science should be a bigger scandal.
Tuesday, junk science led a Philadelphia jury to award three women (ages 66 to 68) verdicts ranging from $20M to $28.75M in suits alleging that Pfizer's Prempro caused their breast cancer. [Bloomberg; Phil. Inquirer]
Pfizer has won over 3000 of these cases, including 44 that were set for trial, but when juries can award $20M/plaintiff (plus potential punitive damages: Bloomberg discusses a "second phase" of the trial without being clear what that means), it's still profitable to bring long-shot cases like these were, especially when the state courts are less skeptical than federal courts about allowing experts to quack-ily apply one study's results to disparate facts. Which is perhaps why plaintiffs' lawyers have twisted themselves in knots to avoid federal court. Coincidentally, Monday's WSJ discusses the problem of forum shopping for the Philadelphia judicial hellhole.
As David Oliver points out, we correctly don't hold scientists liable for making mistakes in cutting-edge science; when an Italy even considers the issue, as they did in an unsuccessful criminal prosecution of scientists that failed to predict a deadly earthquake, we justifiably ridicule them. Science is a process of trial and error, and we want scientists to explore hypotheses that might be wrong without fear of legal consequence for failure. So why do we hold manufacturers liable for failing to anticipate the future judgments of lay juries evaluating the predictions of scientists presented at trial testimony, most of which are arguable at best?
Of course, this sort of double-standard is common. We don't hold lawyers liable for the larger effects on society when they use abusive litigation to make us less safe by driving safe and effective products from the marketplace. We let juries second-guess doctors when experts disagree over the correct course of medicine, but give that discretion to attorneys free from liability.
On Friday, the Center for Class Action Fairness LLC filed its opening brief in the Third Circuit case of Dewey v. Volkswagen (10-3618). The case presents some interesting jurisdictional issues as a side effect of Devlin, plus run-of-the-mill economic quackery and an inexplicable decision to arbitrarily include in the class a million vehicles without providing the same pecuniary reimbursement benefit available to the rest of the class. The settlement as a whole is inexplicable: the class counsel's economist calculated that defendant Volkswagen was going to spend $55 million on a service action that would prevent $24 million in future damage. This, the economist concluded, was worth $103 million to the class: the $55 million spent on repairs, plus the $24 million in future damage avoided, plus the $24 million in increased resale value from not being damaged!
Most entertaining, however, was the economist's insistence that the injunctive relief—a letter to the class informing them of a revised maintenance schedule—was worth millions of dollars to the class because now the class would get the benefits of purchasing maintenance. As we argued:
Imagine three hypothetical class-action settlements with Apple. In Hypothetical Apple Settlement #1, every class member receives a free $700 iPad. It is easy to conclude that the value of this settlement would be $700/per class member; even if a class member did not want the iPad, they could sell it on the market.
In Hypothetical Apple Settlement #2, every class member receives a brochure describing the iPad that contains a coupon for $50 off an iPad. Here, the Class Action Fairness Act dictates the valuation of the settlement: it is worth $50 times the number of coupons redeemed. 28 U.S.C. § 1712.
Now imagine Hypothetical Apple Settlement #3, where every class member simply receives the iPad brochure (or say "educational iPad information") without the coupon. How should that settlement be valued? According to Eads's methodology, the educational information tells a class member that an iPad exists (whether or not they already knew that: the Eads Report assumes 100% ignorance replaced by 100% knowledge), and could lead a class member to purchase an iPad worth $700 to the class member. Therefore, according to the Eads Report, Hypothetical Settlement #3 is worth $700 per class member, as much as Hypothetical Settlement #1, and more than a settlement that included a coupon.
The Center for Class Action Fairness LLC is not affiliated with the Manhattan Institute.
When family court reaches levels of self-parody: man's first wife kills his children. She pleads temporary insanity, implausibly blames Prozac for deaths, escapes criminal punishment. Man remarries, has more kids, divorces, takes up again with killer of his first children. Second ex-wife has no luck in family court expressing reluctance leaving kids with child-killer. [Alkon; AP/NYT]
Meanwhile, in the same jurisdiction, a horrifically crooked expert in the same family court jurisdiction got disciplinary records sealed, and had a reign of terror harassing women as an evaluator in child-custody cases. If he hadn't been caught videotaping his employees using the restroom, he might still be running amuck in family court. [Seattle Times via OL]
Father's Day special: In "facilitated communication," an aide helps a profoundly autistic child type answers to questions. This is pure quackery: in reality, it's the communicator who's answering the question, rather than the child, as demonstrated by experiments where the communicator is unable to hear the questions. But it provides enough false hope that some believe in it, and it can lead to false sex abuse allegations as happened in the case of the Wendover family. The Detroit Free Press runs an extraordinary six-part series (via @walterolson) on the trauma inflicted on this one family by junk science and gullible prosecutors. The Wendover family civil suit against government officials is pending, but they seem relatively fortunate that they were only separated from their children for 106 days before prosecutors dismissed the case (while covering their butts by claiming it was because the ostensible victim was too scared to testify); we've certainly seen other prosecutors (cough, cough, Martha Coakley) continue witch-hunts until they lead to prosecutions. Worth noting: Brian Dickerson's criticism of the "cowardice and cronyism" of judges who delayed matters for four weeks past when it was obvious prosecutors had no case.
The Abnormal Use blog points us to a quack expert report hypothesizing that a defective (rather than unattended) stove caused a fire that destroyed a home, defeating summary judgment, and likely leading to a settlement between the stove manufacturer and the home-owner's fire insurance. The subrogee likely won the battle, but insurance companies (and consumers as a whole) lose the war when they encourages nonsensical litigation unrelated to the facts for short-term profit. A collective action problem, to be sure.
Judging Science: Scientific Knowledge and the Federal Courts
Phantom Risk: Scientific Inference and the Law
Galileo's Revenge: Junk Science in the Courtroom
The Breast Implant Fiasco
On the Relevance of the Admissibility of Scientific Evidence: Tort System Outcomes Are Principally Determined by Lawyers' Rates of Return
The Myth of the Ford Pinto Case