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Commentary: Do Shareholder Class Actions Make Sense?

Publication Date: 
September 17, 2009
Business Week
Michael Orey

Professor Joseph Grundfest, an expert in corporate law, is quoted in this opinion piece that questions whether shareholder class actions make sense:

When New York Federal District Court Judge Jed S. Rakoff rejected a proposed $33 million securities fraud settlement between the Securities & Exchange Commission and Bank of America (BAC) on Sept. 14, he pointed out that the money would come out of the pockets of BofA investors—meaning that "shareholders who were the victims of the bank's alleged misconduct [would] now pay the penalty for that misconduct."

The settlement agreement aimed to resolve allegations that, during its acquisition of Merrill Lynch at the end of last year, BofA concealed information from investors about Merrill's plan to pay up to $5.8 billion in bonuses to its executives. Rakoff said the SEC didn't adequately explain why it had not pursued charges directly against the bank executives or lawyers allegedly responsible for issuing "false and misleading" proxy statements and instead targeted the corporation. In his order nixing the deal, he called it "unfair," "unreasonable," and "inadequate."


The age-old purpose of fraud claims is to force a wrongdoer to cough up ill-gotten gains to the person deceived. Shareholder lawsuits do no such thing. "An aftermarket fraud causes no transfer of wealth from an innocent victim to a guilty perpetrator of the fraud," noted Stanford University law professor and former SEC Commissioner Joseph A. Grundfest in a filing in an unrelated proceeding. "Instead, it causes a wealth transfer among equally innocent third parties." Other critics have referred to this as "circularity" or "pocket shifting."