Dumping and suing, redux

A hedge fund, Greenlight Capital, has sued Allied Capital under the False Claims Act, while also shorting the stock, as discussed in the WSJ, HT Overlawyered. I debated this issue on Point of Law, and then wrote an article with Bruce Kobayashi on this and other "outsider trading" practices.

Bruce and I note (pp. 50-65) that this practice can have positive incentive effects for the bringing, prosecution and settlement of litigation. We also discuss the weakness of alternative incentive devices, including the False Claims Act. The twist here is that Greenlight Capital has pursued both avenues.

Yes, I know that this practice can have perverse incentive effects as well, and won't produce positive results in all circumstances. Bruce and I cover all this fairly thoroughly. So I would urge skeptical readers to read our analysis.