Dumping and suing revisited

A few weeks ago I wrote about “dumping and suing” – the practice of plaintiffs and their attorneys short-selling the stock of the companies they intend to sue.

Overlawyered comments that “given securities regulators' goal of upholding what they call market integrity, it's hard to see why they would not want to prohibit the sleazy practice,” and refers to my “dissenting view.”

My view, in a nutshell, was that “allowing short-selling theoretically might compensate the plaintiff or the class lawyer for producing the information that led to the suit where capitalizing on the information before it becomes public otherwise might be difficult.”

There is an argument that this information doesn’t have enough value to encourage search for it – that it's just information that would be discovered anyway, so investments in search do not produce positive social value.

But if lawyers are just getting information that would be disclosed soon even without them, then why do we need the securities laws?  In other words, the pro-dumping-and-suing argument is that fraud is not very harmful because efficient markets would uncover it eventually. So this dumping and suing leads to a broader insight: if the securities laws are useful, we should allow dumping and suing.  If not, we should not have the securities laws, which would moot the issue of short-selling on litigation information.

Something to consider.

Comments

[markm]

It would seem to me that allowing this also encourages bogus lawsuits - since it makes it possible for the plaintiffs and lawyers to realize a large profit immediately after filing the suit, before presenting any evidence in court. Wasn't there a John Grisham novel where a lawyer was actually doing this?

One thing I don't understand: if the lawyer and plaintiff doesn't come under the insider trading law because they owe no fiduciary duty to the company, just how could Martha Stewart's trades in a company with which she had no relationship at all other than stockowner trigger an insider trading investigation?

[David Schwartz]

First, Martha Stewart's trades triggered an insider trading investigation because there was reason to believe she actually get information from an insider. Not because she was an insider.

Second, the possibility of winning is enough of an incentive to file a bogus lawsuit. If you want to discourage bogus lawsuits, you have to make the penalties for filing them commensurate with the damage done.

DS