Uh oh. Another write-up on on legal issues by dannye. Yes, an unscrupulous shyster deprived dannye of a lollipop when he was a wee lad, and they've been picking on him ever since, right? Well, sorry to disappoint you liberals, but dannye is right about this one.

Generally, the class-action procedure can actually be less expensive and more efficient. The representative plaintiffs do not bring a claim on behalf of “the general public”, but on behalf of everyone in class of people with something in common: people with asbestos-related illnesses, people with defective pvc pipe installed in their house, people who bought cars and trucks that blow up when they shouldn’t. It’s the only way to legally fight a small but unfair ripoff, like when your phone company puts some totally bogus charge for $2.50 on your bill. That’s too small to fight alone, but for ten million customers adds up to a big wad of cash. Everyone gets represented by the same lawyers and gets one trial.

Class actions, and especially securities litigation class actions, have got way out of hand . To understand why, you have to understand just how expensive big-time litigation can be, and why it might be cheaper to just pay off an extortionate lawyer and his clients, rather than fight it out.

A fool and his money are soon parted. When people offering investments fail to disclose important facts an investor should know, that’s called securities fraud. It happens all the time. Lately it’s been happening with some really big companies: Enron, for example.

Distinguishing a bogus securities fraud case from a real one can, however, be extremely difficult, time consuming and a money pit. Sometimes the legally required disclosures are buried in some damn prospectus that nobody reads and nobody couldn’t understand if they did read it. As investments are made more complicated (to hedge and distribute financial risk) who can say what an investor needs to know? Lots of firms will cave in and settle rather than fight it out. The potential for a quick shake-down settlement has attracted lots of scam artists.

So why not fight? Because it costs too much. Discovery, for example, can be extremely costly. What’s so expensive about discovery? You just have to answer some questions and cough up some documents, right? Well, all this has to be supervised by lawyers. Lawyers aren’t cheap.

I’m reminded of the scene in the Gene Hackman movie, Class Action, where Hackman and his assistants (the plaintiffs' lawyer and his team) are reviewing boxes of documents a car company gave them in a products liability case. Just as they about to begin, a curtain is drawn back in a window, and there in an adjoining room is an entire team of defense lawyers, sitting at a table, just there to watch them look at documents! Half a dozen lawyers are charging at least $100/hour to do essentially nothing. The response of Hackman’s character is to ask his partner for a hundred dollar bill, and light it on fire and taunt the lawyers behind the glass with it, saying “See? We can burn money, too!

And that’s just pre-trial manouvering. You don’t want to know how expensive a full-blown trial can be. In securities litigation, we’re talking about paying financial experts to testify, and if you thought lawyers were expensive, wait until you see these guys’ bills.

There has been some effort to stamp out securities litigation abuse. The federal Private Securities Litigation Reform Act (PSLRA) of 1995 --to my knowledge, the only part of the Republican “Contract with America” legislative initiative which actually became law-- was enacted over a presidential veto. It makes it harder for “professional plaintiffs” and securities lawyers to hold financial institutions hostage. Some of its features included discovery delayed until plaintiffs had made a prima facie case --in other words, you must show the judge you have a real case of securities fraud before the judge will allow discovery.

None of these reforms apply to state law in state courts, so guess where the class-action scam artists are plying their trade now?