The Fallacy Of Shareholder Lawsuits

I already mentioned that JP Morgan Chase lost $2B on derivative trades.  This article was interesting.  There may be shareholder lawsuits against JP Morgan Chase, regarding the $2B loss.

As I mentioned before, suing the government is pointless.  Government workers are protected by “sovereign immunity”, unless their crime is truly egregious.  When you sue the government, any victory is not paid by the government workers, but by the government’s general fund.  Everyone else pays higher taxes, to pay for the verdict.

For example, suppose that a policeman shoots and murders you, saying “I thought he had a gun!”  The district attorney says “It was a reasonable mistake!”, and refuses to pursue criminal charges.  Your relatives file a “wrongful death lawsuit”, and win $25M.  The $25M isn’t paid by the policeman who murdered you, or by the police department’s budget.  It’s paid from the government’s general fund.  In a city of 5M people, in effect, every person pays $5 more in taxes, to pay for your verdict.  Your relatives got $25M, but it’s functionally equivalent to stealing $5 from every other person living in the city.

The government workers don’t pay the damages themselves.  Therefore, suing the government provides zero incentive for government workers to behave.  Even if there is a lawsuit loss, they aren’t paying it themselves.

There shareholder lawsuits are similarly ridiculous.  Why?  The cost of the verdict is not paid by the CEO or Board of Directors or employees.  The cost is paid by the corporation!  In the fine print of a CEO or BoD contract, it says “The corporation will reimburse you, if you get sued based on your work for us.”

If JP Morgan Chase shareholders win $2B in a shareholder lawsuit, that money doesn’t come from the CEO or Board of Directors.  That money comes from JP Morgan Chase’s shareholders!  The shareholders are suing themselves!

It does make a slight difference, if you already sold your shares.  In that case, a former shareholder is suing the current shareholders.  However, the damages in these lawsuits tend to be pennies per share.  The only people who profit are the lawyers.

For another example, there’s a Bank of America class action lawsuit, regarding the buyout of Merrill Lynch and improper disclosure.  I own the same number of shares of Bank of America now as I did a few years ago during the merger.  In effect, I’m suing myself (with the lawyers getting a cut).  If I “win” $0.05 per share in that class action lawsuit, I’m losing $0.05 per share from the shares I already own. plus an additional loss of $0.05+ per share for legal expenses.

This story was interesting.  Executives at MF Global took out a $170M “insurance policy”, to cover their legal expenses if MF Global failed and they were sued.  The bankruptcy trustee claims that the $170M belongs to the customers.  That seems obvious to me, but a Statist judge might rule otherwise.

Before MF Global went bankrupt, the executives spent the shareholder’s money to buy insurance to cover themselves if MF Global went bankrupt and they were sued.  That’s crazy!  Due to the way insurance and bankruptcy law work, that enables the executives to set aside pre-bankruptcy money to pay themselves after the bankruptcy.  If the premium on the insurance policy were $200M, the executives would buy it anyway, because it provides money if the corporation goes bankrupt.

MF Global no longer exists, so MF Global can’t reimburse the executives for their loss.  Via that “insurance” loophole, the executives managed to save some money.  You shouldn’t be able to buy insurance that covers criminal negligence.

It is pointless to sue the government.  The money is not paid by the State employees who misbehave, but rather by all the other taxpayers.  Similarly, it’s pointless for shareholders to sue executives.  The money is not paid by the executives, but rather by the other shareholders.  In this manner, State insiders have nearly zero accountability when they do bad things.  This is true for people who work directly for the State, and for State insiders who control large corporations.

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