This is probably showing up because it showed up in Matt Levine’s newsletter which returned today. In the newsletter, Matt disagrees with one of the conclusions drawn in the paper that shareholders have a perverse incentive to invest in companies that do bad things because they are compensated their loses when the stock goes down. He disagrees because their are compensated with money that the company has which already belongs to the shareholders.
A securities fraud lawsuit against a company because the work environment is toxic reminds me of the movie Unforgiven. For those unaware, the movie starts with a cowboy disfiguring a prostitute with a knife because she laughed at him. After the incident, the guy who manages the brothel is financially compensated since he had invested money in bringing the prostitute to his place of business, money which he will presumably be unable to recover now that the woman has been disfigured. No compensation is ordered for the disfigured woman (another cowboy does try to compensate her out of guilt), instead, the perpetrator is flogged, and that's supposed to be enough for the woman.
There's a real gap in our understanding of capitalism and crime if it's easier to compensate shareholders of a toxic company than it is to compensate the direct victims of that toxic behavior. If a toxic culture would suppress stock prices, it seems that the same culture would suppress career advancement, physical health and general mental well being. The problem seems to be that an employee must not only prove criminality but also particularized harm, whereas the standard for a successful securities fraud lawsuit seems to be lower.
Given this type of scenario, it feels like the opposite should happen: Investors should be blocked from recovering losses and victims should be compensated.
That's a far better preventative measure.. to incentivise investors to be responsible in what they invest in rather than "just letting shit happen" and reclaiming money if necessary because it's easier. If harm comes to people due to their investment, they only get whatever is left over after victims are compensated.
>Investors should be blocked from recovering losses and victims should be compensated.
I think Levine's take is a bit more nuanced. It's not like shareholders are taking up the case for some altruistic reasons, it's just that for lawyers it's an easier case to litigate. To paraphrase Matt, if you had to sue the CEO, on behalf of victims, for sexual harassment, as a lawyer you would have to prove the damages by showing that maybe the CEO had a pattern, that the victim was actually traumatized and not just "regretting it" and any other of mountain of historically charged counter claims of sexual harassment. But securities fraud, all the lawyer has to do is point to a newspaper article about how the news came out and the stock went down.
In other words, investors being blocked from being compensated wouldn't solve the issue - it would just remove a possible disincentive for actors to act improperly.
Yeah this isn’t some textbook or ideological economics “what’s better for everyone” scenario where we can just push a button to choose the better one. It’s far more complicated.
It’s just a product of better lawyering but also critically access to information, not some easily controllable incentives system where regulators or some sort of centralized agency can effectively tip the balance back towards some abstract group of victims, in only a subset of cases (which cases do they help with? Proactively looking for ones they deem need the victims help the most? Etc it’s a hard solution to build and probably an unrealistic one).
The other option of arbitrarily downplaying investors power in the courts in general sounds like it could be full of unexpected downsides and false positives IRL. Consumer class action suits are already seedy and full of unfair ‘captain retrospect’ sort of policing and the lawyer groups again also make most of the money anyway (and often are the biggest motivator and resource backer too). Which at the end of the day doesn’t make the ‘bad’ companies operate any better in a realistic world.
The courts may be flawed but they tend to be way better than almost anything else available.
Any new ‘system’ or balancing act would have to deal with counter balancing certain parties having better motivation/resources/positioning/information. Which historically in other systems has been even more ripe for abuse by power holders who end up being pushed and prodded by the same groups with above said advantages.
A far better solution IMO is more and better organizations advocating for victims groups in such cases. An adaptation to the reality of the courts and the markets, rather than a rejection of them.
Otherwise we’re just pointing the overlaid lawyers in a new direction and nothing in the consumer world actually gets better through the process.
Economists like to talk about "utility" and the common good with their theories, but they tend to only measure money so unless you can put a price tag on it it is invisible to economists. The wellbeing of a prostitute is one of those things that has no market. The same is largely true of toxic workplace behavior. There is a tertiary effect from potential lawsuits, but those are almost impossible to price into a business model.
If your bro culture allows you to succeed over your competitors at the cost of a million dollar lawsuit a decade down the road then it probably doesn't make economic sense to change the culture. Wall Street banks and trading houses were (are) notoriously hostile workplaces, but if your profit margins are in the billions and you're getting good returns then a million dollar suit in the future is basically not a concern.
> The wellbeing of a prostitute is one of those things that has no market.
Sure it can. Everyday institutions make calculations that assign a standard monetary value to a human life.[1] And it's not just the market, the government and policymakers do it all the time as well.[2]
Heck, you even put a value on your own life. Do you drive the latest car model and live in a house that was built in the last two years? If not, you're trading off money against mortality, by increasing your risk of dying in a car accident or house fire.
That's not a measure of your wellbeing though. Usually they just assume that if you have more money you'll be happier.
Maybe a fancy car will increase your happiness, but there is no unit of measure you can divide the purchase price of that mid-life crisis car by.
The value of a life is roughly how much money they would have made if they had lived until some arbitrary end date. Happiness doesn't figure into it at all. It's calculated so life insurance companies know how to price their product, which is ultimately just paying off some fraction of the remainder of someone's theoretical lifetime income if they die early.
That isn't how the various things called "value of a life" are calculated.
The Wikipedia article linked above describes some ways to do it, and if you look at them you will see that with one exception they are not estimating, nor trying to estimate, expected future earning power or anything like it. (Though that might affect the answer.)
The first approach they describe: take N people and ask each of them how much they would pay to reduce their chance of dying in the next year by 1/M. Then the average of M times this figure is the group's estimate of the value of their lives. (The description in the article simplifies the calculation by taking N=M, but there is no need to.)
The second approach: look at what people are willing to forgo in order to reduce their chance of dying a bit, or willing to increase their chance of dying a bit in order to have. If you're willing to increase your chance of dying by X in order to get Y, that suggests you value your life at no more than (the value to you of Y) / X. Look at lots of different X and take some sort of average of the resulting estimates.
The third approach is looking at future earnings. The page adds this caveat: "Another potential issue when using wages to value life is that the calculation does not take into account the value of time that is not spent working, such as vacation or leisure."
The fourth approach is more or less the same as the first.
It's obvious that aside from the second these are not the same as a person's future earnings. And we shouldn't expect them to be; people generally value other things about their future lives besides the money they may earn.
(A kinda-artificial example that I think makes the point. Suppose the following things happen: 1. Economic growth stops or slows sufficiently that no one expects investments to grow appreciably an more. 2. You get rich. 3. You retire, intending to supply your needs and wants simply by spending some of your mountain of cash. In this situation your expected future income is zero. But I bet you would still be willing to pay something to reduce your chance of early death.)
Also, though this is a less important point: Life insurance is not only for paying off some fraction of your theoretical lifetime income. E.g., you can buy life insurance policies even after you have retired, even if you have no income. Obviously one reason why you would buy life insurance is to make up for loss of future income; but it could be e.g. that one thing you do is to care for other family members, and that if you died they would need someone else to do that who would need paying, and if you were buying life insurance that would be something you would take into account.
All of those are still just asking "how much is your life worth in dollar terms?" Not "how happy are you". The assumption is the more money you're willing to spend to stay alive the happier you must be.
> Also, though this is a less important point: Life insurance is not only for paying off some fraction of your theoretical lifetime income. E.g., you can buy life insurance policies even after you have retired, even if you have no income. Obviously one reason why you would buy life insurance is to make up for loss of future income; but it could be e.g. that one thing you do is to care for other family members, and that if you died they would need someone else to do that who would need paying, and if you were buying life insurance that would be something you would take into account.
If you have no income you can't buy life insurance. How would you pay for it?
Retirement income is still income. You're still buying insurance to provide that income in the event you die before your dependents. It should be noted however that those polices tend to be very expensive as the insurance company calculates that you may not be paying into it for very long before they have to start paying out.
I agree that "what is the monetary value of your life?" is not the same question as "how happy are you?", and so far as I can tell no one was saying otherwise.
Presumably the two are related; if you are miserable and expect to remain so, you will probably be less willing to pay for more life. Clearly the two are not the same; if you have no money, your ability to pay will be greatly constrained.
You can deal with that latter problem to some extent by asking hypothetical questions: suppose your net wealth were exactly $1M, then how much would you pay for a 0.1% reduction in your chance of dying this year? But of course people don't necessarily have that much insight into what they would do in hypothetical situations. Or by asking people what they would pay for other people's lives, which is kinda what e.g. national healthcare institutions like the NHS in the UK or Medicare in the US have to do to decide what treatments they are willing to pay for. But of course that also isn't measuring happiness, nor even other people's estimates of it.
Or, of course, you could use the same techniques as you use for calculating a "statistical value of a life" to put a value on things other than merely being alive or not. Ask people about things that trade off money against some probability of disfigurement, depression, being abandoned by their spouse, etc., etc. Or look at the tradeoffs they actually make.
----
If you have capital but no income then you can buy life insurance, at least until the capital runs out. Of course, if you have capital then you can also buy income.
I agree that retirement income is still income, which is why I bothered to add "even if you have no income". (Of course being retired and having no income of any sort is a highly unusual situation, because there are state pensions and the like.)
But, I repeat, it is simply not true that the only possible reason for buying life insurance is to make up for the loss of your income after you die. Here is a concrete situation to imagine:
You have some investment that provides income. It will continue to do so after you die. It's enough for you to live on, reasonably comfortably but not at all extravagantly. Your needs are few, so you don't take a job, you just live off your investment income.
The investment will not change as a result of your death. No one will be financially worse off when you die. But you have an aged parent who needs a lot of help: something like one person, full time. You do it for free -- you have plenty of time and you love them and care about them. But there is no one else who would be willing and able to do it for free.
So when you die, your parent will need a lot of help, and it will need to be paid for. They can inherit that investment and the income it brings, but that may not be enough to pay for the help they need. You are still fairly young and healthy, so you can get life insurance cheaply. That way, if you get hit by a bus or have an unexpected heart attack or something, your parent will be able to afford the care they need.
(This is a situation in which life insurance is bought for a reason other than replacing income. It is not a situation in which life insurance is bought by someone who has no income to be replaced. Those are separate possibilities, and I suspect there is no plausible scenario in which they both happen at once.)
If you ask a billionaire how much they’re willing to spend to save their life (or significantly improve their health) and you ask someone with a $1000 dollars in their bank account, is the answer to that question measuring the worth of a life or how much that capital is worth? Very wealthy people would be more willing to trade wealth for health/happiness whereas poorer people are less willing to make that trade off since they need that capital for more basic necessities (eating, rent, having kids, etc).
It's measuring the value of their life relative to the value of money, for them. In many situations that isn't the statistic you actually care about.
(For the avoidance of doubt: my previous comment wasn't trying to claim that the "statistical value of a life", measured in such a way, is a good measure of how much a person values their life in non-monetary terms, or anything like that. I was just objecting to the specific claim I was responding to, namely that the "statistical value of a life" is measuring only its value as a future income stream.)
Very very crudely, the value of a small gain in money is something like inversely proportional to the amount you have already, which means that the value of a given amount of wealth increases something like logarithmically with the amount of money, and either of these means that financial institutions like markets care about people's interests roughly proportionally to their wealth. Everything in this paragraph is pure handwaving, but I find it a useful intuition.
I imagine one could, in principle, look at how this varies (on average) with how much money a person has and/or their income.
Hm, if one did, then perhaps one could use this as a basis for expressing how much people value other things?
Though, I suppose there's the question of like, how would someone trade off risk of dieing within N years vs dying within 2N years. Like, if something would increase one's chances of dieing within 2N years by some quantity, but decrease one's chances of dieing withing N years by some other quantity, at what values would people make or not make that choice? (or, in the other direction).
Depending on how that works out, maybe that would mean that this isn't a great foundation for translating between "how much do they value this (in dollars), at their current income level" and "how much do they value this (in some other unit which is hopefully more natural in some sense)".
Is there something else that would be a better basis?
> Economists like to talk about "utility" and the common good with their theories, but they tend to only measure money
Yeah, that's the problem. The economic notion of value weights according to wealth while the moral notion of value does not. It's absolutely scandalous that we let economists conflate the two.
Feed a starving kid in Africa? Zero economic value. The kid doesn't have money. Figure out how to merge together a bunch of megacorps to build a monopoly, raise prices, reduce quality, and make the lives of millions strictly worse? The market will ejaculate capital all over your value-creating endeavor.
This is nonsense. It's not The Market™ or The System™. It turns out starving kids in Africa are of no value to anyone except to their parents, who have no means to provide commensurate to the child's value to them.
The blunt truth is that arbitrary lives are probably nearly valueless and certainly worth less than $1000. I have tested this hypothesis by describing GiveWell's mathematics to people at varying stages before they would spend money similar to that: in every case, people choose to spend the money rather than save arbitrary life.
I have tested this hypothesis on myself and it turns out that a pair of Zipp 606 carbon fibre wheels are worth way more to me than two African children.
The "moral notion of value" is a nonsensical concept invented to reinforce the notion of self-worth while not contributing to anything. Test it on yourself each time you spend: is a human life worth more to you than a hundred burritos? a set of car tyres? the higher trim on your car? The magic of this method is that it's memoryless. Irrespective of whether you give a million dollars a year or ten, the question applies to the next one thousand.
Your spending habits will prove it. No. Arbitrary life is valueless to you. And if you disagree, it should be easy to prove since GiveWell can save one arbitrary life per thousand dollars. Show me your spending and I will construct a way you could save a life by giving up non-essential parts of life.
> It turns out starving kids in Africa are of no value to anyone
Listen to yourself. This isn't normal, but on markets, it is.
> The "moral notion of value" is a nonsensical concept
No, it's the fundamental concept. Economic value should aspire to approximate it if we want the market to be a force for collective good. To the extent that economic value fails to approximate moral value, the economy fails to serve our collective interests.
In CS terms: greedy algorithms fail hard in predictable ways.
> [So why don't you give more through GiveWell?]
Because I'm stuck in a system that's designed to punish me for doing so above and beyond the intrinsic cost of providing for the kid. Here's a counter-proposal: I'd absolutely sign up for a wealth-proportional share of a tax for ending world hunger. I'm not poor, even by HN standards, so this isn't cheating, but the fact that this formulation of the solution wasn't obvious to you demonstrates how thoroughly you've been trained to see the world through the circus-house lens of wealth-weighted utility, and just how perversely that lens distorts the world.
>>It turns out starving kids in Africa are of no value to anyone
>Listen to yourself. This isn't normal, but on markets, it is.
If you treat starving kids as important then you will have more starving kids. If you treat starving kids as unimportant or undesirable you will try your best to prevent them from being created in the first place.
The vast majority of necessary policies that you need to change in the relevant countries have absolutely nothing to do with individual charity. A lot of what is needed is simple infrastructure projects. People waste their time acquiring water on foot instead of getting a water truck delivery. You can drive a water truck for 600 miles and it's still more economical than walking. The problem is often that there are no roads suitable for 20 ton trucks. You'll get stuck on the dirt roads so no delivery happens at all.
People think of complicated solutions like drone delivery of medicine because the government fails to maintain or set up basic infrastructure. It all boils down to government corruption and people's desire to work around it. It's not going to work out.
> If you treat starving kids as important then you will have more starving kids
If you care about cancer patients you will have more cancer patients? This is nonsense because you framed it wrong. Caring about [something] isn't necessarily about perpetuating or creating more [something], it's about solving (on of) the problem(s) behind it. And this can have solid economic value. On top of it you can have a layer of humanity where you do something purely for the the well being of another.
To the point, "caring about starving kids" means "caring about solving starvation". This has plenty of implications, not the least of which are that you developed tech that can be applied elsewhere, or that you just created a new market where the participants have a chance of actually paying because they have a chance at a disposable income. You "created" new valuable members of society capable of producing and consuming your products or services.
The reason starving kids don't pull that much attention is that "solving" starvation has a shaky business case, far from guaranteed success, and very unclear timeline. Things most businesses shy away from.
Why do you think Facebook is investing in internet in India or Africa? It's not because they care about people with no internet so by your reasoning they'll create more people with no internet. It's because they are untapped markets that need to be brought up just to the point where they become profitable. You have to spend money to make money. So far the case for solving world hunger has that threshold too high for today's "make money now" stock price driven business models.
Let me be honest: promises you make that take effect when highly unlikely events transpire do not convince me of your intentions. They are fairly typical of most proponents of this variant of "morality", since after all, their behaviour contradicts their stated intentions.
Ah, since $1000 will save a life, and you believe that giving $1000 will not make a significant difference, then one must logically conclude that it is untrue that saving a life is making a significant difference. From there, it does not take very much to conclude that human lives are not significant to you either.
Or you could opt not to be super pedantic just to score points against me.
When it comes to ridding the world of severe poverty, donating enough to help one person is not _________. If you object to the term "significant", then go ahead and pick a better term.
I don't object to the term. I think any thing that fills in the gap that implies value will lead to the same conclusion. I don't think that's surprising since the evidence is really strong in favour of that conclusion: arbitrary human life has very little value. It is certainly true that almost all individuals behave in a manner consistent with this being true, at least.
I personally believe it is nearer zero, but it is clearly less valuable than whatever value most individuals ascribe to ten hundred dollar bills.
The value depends on context. The punishment for hurting someone is much higher than the amount it takes to help someone. And spending a thousand dollars to help an anonymous person, who is in a sea of people not getting help, and will fall back into that sea soon enough, feels like tossing it into a black hole when the donation is all by itself. But if there's enough donations together, they feel more meaningful.
You're measuring value in just about the weakest possible context.
People want to make a difference that's visible when looking at the entire problem.
More like "there is so much less value in spending money for painkillers for you today when it could be spent for a cure for everybody forever". If a dentist never pulled out a tooth and just charged for morphine now and again you'd be pissed instead of being relieved that they made you feel well just for one day. Not only do you still suffer (but with timeouts), you also payed more long term.
If everyone just takes turns pushing a boulder up a mountain eventually you'll put in more effort than if everyone pushes at once, and have almost none of the results. Sometimes being even 99% there is not enough.
> More like "there is so much less value in spending money for painkillers for you today when it could be spent for a cure for everybody forever".
exactly! my suffering as an individual is simply not significant enough to motivate you.
> If a dentist never pulled out a tooth and just charged for morphine now and again you'd be pissed instead of being relieved that they made you feel well just for one day. Not only do you still suffer (but with timeouts), you also payed more long term.
I'd be especially pissed if he refused to pull my tooth on the grounds that other people would still suffer from toothaches.
> If everyone just takes turns pushing a boulder up a mountain eventually you'll put in more effort than if everyone pushes at once, and have almost none of the results. Sometimes being even 99% there is not enough.
If few people are willing to pay the cost of an incremental solution then how are we proposing to convince them that the much greater cost of a large scale solution is worth it?
Defensible if spending is appropriately directed or directed to savings/investments with that intended goal, but getting the Forester Touring vs the Forester Premium? That's 3 kids and it's hard to make the case that this argument applies.
I too have seen the Facebook chain letter about how we could end world poverty for only $XX billion. But yes, let's definitely not fund malaria relief in the meantime.
Besides the unwarranted and unhelpful snark, you also took the weaker interpretation of my comment so you can defend your point of view. Neither are good signs for your argument.
I said "less value" not "no value". In general there's less value in providing fragmented help in small chunks to individual people than there is in providing help via a large coordinated effort to entire populations. Even if the total is the same, the fact that it just trickled in and it lacked coordination can only hurt. I even gave an example, perhaps a better one would have been that you can't cross a canyon in 2 steps. And you won't effectively put out a big fire no matter how many cups of water you individually dump on it.
Fittingly even the example you chose is bad simply because "malaria relief" still involves quite the coordinated effort, not the least financial, not individual people independently sending small help to a single other person.
Value is subjective, you're just expressing the preference that there is less value to you.
> In general there's less value in providing fragmented help in small chunks to individual people than there is in providing help via a large coordinated effort to entire populations.
Only in the aggregate if less help is delivered. If the same amount of help gets there then the value is potentially the same, or more (or less).
> Even if the total is the same, the fact that it just trickled in and it lacked coordination can only hurt.
This is not true, the individual nature allows for more flexibility in meeting everyone's actual needs. "one size fits all" usually doesn't.
> And you won't effectively put out a big fire no matter how many cups of water you individually dump on it.
This is an inapt metaphor, probably because its physically false.
> Fittingly even the example you chose is bad simply because "malaria relief" still involves quite the coordinated effort, not the least financial, not individual people independently sending small help to a single other person.
Actually there are people sending malaria nets over there, the coordination problems you speak of are already solved.
You're the one using ridiculous examples: dentists, boulders, canyons, rolling rocks up hills, pouring water on fires.
The original topic was that various charities are saving lives in measurable ways, yet most people make excuses not to contribute, preferring to spend their money on additional luxuries for themselves.
Thank you for providing excellent examples of those excuses.
You describe pretty well here just one reason why economists study markets: They tell us what people actually value, and how much, not just what they claim to value. It turns out, there can be a large disparity between the two.
Most people would say they place a high value on human life, but we don't know how true that is until we see what costs they're willing to incur in the name of helping others.
>The blunt truth is that arbitrary lives are probably nearly valueless and certainly worth less than $1000. I have tested this hypothesis by describing GiveWell's mathematics to people at varying stages before they would spend money similar to that: in every case, people choose to spend the money rather than save arbitrary life.
Yeah it is pretty obvious that the value doesn't lie in the person but rather the relationships. In that context a job is just a beneficial relationship between an employee and employer. Parents and children form a strong relationship. Same with friends.
The idea that you value your own life and thus it gains inherent worth doesn't work out because how are you going to pay for that value if not from a currently ongoing or previous relationship? Are billionaires really a million times more productive than the average worker? Did they really do everything themselves?
I live nude in a barrel by a river, all I do is trade cryptocurrency on my phone collecting over 8 figures annually, and everything I don't spend on potatoes I donate to GiveWell. How could I save more lives?
If you wore clothes, you would probably increase your lifetime earnings by extending your useful lifetime by reduced risk of malnutrition, thus directing more money toward life-saving!
You are pushing a bit too far. GiveWell does raise many millions of dollars for those lives. It just doesn't raise all (or even nearly all) the money it would if people actually held the Communist or Utilitarian ideals they may half-profess.
The fact that they do raise money but not as much as they would if people adhered to these ideals indicates to me that the utility function is different. i.e. that it isn't just the life that is being paid for.
And that's fine. I think people should spend their money as they see fit.
It's the bit where people make arguments from fictional moral authority that needs some push back. It's just nonsensical outrage - the opium of the partly-informed.
It does seem to me that the rationalist/effective altruist position here reduces your ability to help in the future, not to mention your political power.
For instance, if you're the town treasurer and you donate all the town's funds to buy mosquito nets in Africa, the townspeople might have you killed, which would prevent you from buying more mosquito nets in the future.
Certainly that is true if all spend improved one's ability to help in the future. But I think if we all honestly looked within our monthly spending statements we would find ourselves hard-pressed to make that claim.
Even accounting for second-order effects I do not believe people act in a manner consistent with arbitrary human lives being valued above some small number (less than $1000).
But there's no reason for me to convince you. You may act according to a different model of mankind and I shall act according to this model and whichever one predicts behaviour better is better.
Donating/tithing 10% of your income seems to have a lot of historical support. Well, if you want to spend it on mosquito nets depends on if you think saving a life from malaria is the best thing anyone could do.
Note that Nigerian-Americans are one of the highest earning and most successful immigrant groups in America, and I'm sure some more countries will follow. So there probably is one if you're selfish, because their kids can be your doctor in a few decades.
But it doesn't make sense to blame economists for this. Economists take economic development in Africa seriously. The 2019 econ Nobel was for research in how to fight poverty in Africa.
It is also difficult to get a man to understand something when you are not familiar enough with the subject. I suspect that is the more common failure mode.
Well there are (at least) two issues you're glossing over here:
1) Toxic workplace behavior is measurable, you can simply measure the wage premium paid by the so-called "toxic" employers or managers.
2) Bro culture may contribute to business success. I don't like that kind of 'culture', but it may help foster improved productivity in certain industries, and the lawsuits may just be a cost of doing business that's worth paying. Again, this isn't how I live my life, but it is conceivable that this is a workable model.
How much is the harm, in dollars, of securities fraud?
Well the equation would be the expected profit based on the average share price over the given time period. We can argue details but that gives us a pretty tight range.
How much is the harm, in dollars, of being grossly disfigured?
There is definitely harm there. Is it the loss of earnings of the prostitute assuming she would make less money? That's some of it - the amount is at least that much. Yet presumably she also has less quality of life too - and how much is that worth? Is the basis for the quality of life of a prostitute less or more than a CEO? What if the prostitute really enjoys life and has a rewarding life, but the CEO is very drab and dislikes living?
That it's hard to put monetary figures on a harm isn't some failure in our understanding - it's because we comprehend money is not a universal salve. You can fix a business with cash, you can't fix a human life with it.
"There's a real gap in our understanding of capitalism and crime if it's easier tom compensate shareholders of a toxic company than it is to compensate the direct victims of that toxic behaviour."
Fortunately, the Strauss paper^1 on which this Levine newsletter entry is based does not suggest it is easier. Where did this idea come from. Instead, the author found that non-SEC regulators and primary victims generally received greater recoveries than investors and their securities fraud class-action plaintiffs lawyers, where the class-action lawyers were piggybacking on investigations by non-SEC regulators and litigation by primary, non-shareholder victims. (That is only based on available data; some primary victim settlements might be private.)
In this piggyback litigation the author reviewed, the vast majority of cases resulted were successful for both the primary victims (non-shareholders) and the securities fraud shareholder plaintiffs. In other words, the non-shareholder victims are getting compensated, and they are getting larger payouts than shareholders in piggyback securities fraud class-actions.
There is no suggestion anywhere in the paper that it is easier to be compensated in securities fraud class-actions than in actions brought by non-SEC regulators or non-shareholder victims of the corporation's conduct. In general, class-action securities fraud complaints have a very low probability of surviving a motion to dismiss. Rather, the paper suggests class-action securities fraud plaintiff's lawyers can increase their odds by piggybacking on non-SEC investigations and litigation by non-shareholders who are victim's of the corporation's conduct. That is not surprising.
> Finally, managers often pursue conduct that harms outside victims (whether by shoddy manufacturing, false advertising, or negligent safety measures) in order to bolster their share price. The fact that investor lawsuits under these circumstances are likely to be more successful and lucrative may reinforce shareholders’ potential preference for managers to continue externalizing costs to third parties, on the assumption that if the management is not caught, their shares will increase in value, and if the management is caught, they will be able to recoup at least some of their losses through settlements after the fact.
> [...] Moreover, securities class action settlements generally “target the wrong party for sanctions;”83typically, the firm pays the settlement while the manager who actually committed the fraud is, at worst, fired.
You mean like how we fine local government for malfeasance and the money comes out of taxes, meaning either we pay ourselves or we don't get a service we paid for?
I think the problem might have existed before articles of incorporation and we just never solved it.
"Matt disagrees with one of the conclusions drawn in the paper that shareholders have a perverse incentive to invest in companies that do bad things because they are compensated their loses when the stock goes down. He disagrees because their are compensated with money that the company has which already belongs to the shareholders."
This may be a romantic notion that I misunderstand but isn't there a mechanism wherein I, an aggrieved (citizen/neighbor/bystander/victim) can buy a single share in a public company and then, as a shareholder, speak and/or protest at the annual meeting and cause all manner of discomfort, public reckoning, etc.
Does that work the way I think it does or am I caught in some hollywood trope ?
It does and it doesn’t. Can you go to the shareholder meeting and speak? Sure. But your time will probably be limited and if you ask something contentious you’re likely to get a politicians non-answer.
For anything more meaningful you would need to meet one of the three criteria of Exchange Act Rule 14a-8 which the SEC recently “modernized”.[1] It used to be a requirement that a shareholder own $2,000 or 1% of the outstanding shares in order to bring a proposal. The new Rule is you must own $2,000 or 1% of the outstanding shares for three or more years in order to bring a proposal. There’s also criteria for a shareholder to bring a proposal in a shorter amount of time if they own a higher dollar amount of shares but I believe the shortest time period under the new rule is one year.
So one share probably isn’t going to cut it for most public companies other than AMZN and Berkshire Hathaway.
And even if you meet the requirements to bring a shareholder proposal it would very likely require advanced notice which is a whole big thing. Especially if management doesn’t agree with whatever it is you’re trying to do.
So I guess the answer is no, securities law is a lot more paperwork and a lot less exciting than in the movies.
Edit: It just occurred to me that your question about standing at a shareholder meeting is different from the topic of the article which is private lawsuits alleging securities fraud. Management’s duty is to the shareholders (collectively) so the “own one share” question doesn’t really apply the same way. You’d need to show that you purchased or sold the security in reliance on the fraudulent information (or undisclosed information).
> This may be a romantic notion that I misunderstand but isn't there a mechanism wherein I, an aggrieved (citizen/neighbor/bystander/victim) can buy a single share in a public company and then, as a shareholder, speak and/or protest at the annual meeting
Yes.
> and cause all manner of discomfort, public reckoning,
No.
The etiquette is to let people speak their piece while the board looks concerned, but as far as I know there have never been any actual consequences from this.
It depends on the company. At many companies any number of shares entitles you to attend, though many companies set a minimum number of shares in their bylaws (I think public companies can only limit this to a maximum of 1000 shares, and IIRC nearly all publicly-traded companies set a limit to avoid single-share troublemakers).
Speaking also depends on how the bylaws say the agenda is constructed, but I've never seen any where a share would entitle someone to a spot on the agenda. There are sometimes spaces for comment, and I think the rules for how those are selected/filtered are set in the bylaws.
That... is a good point. Actually, suing a company for securities fraud seems kind of strange when you put it that way. How could a shareholder derive net benefit from suing a company for a share of the assets they already own? Unless they've already sold the shares and they're suing to try and recover their loss? Is that allowed?
Do you still have to be a share holder when you sue?
Or can it play out like, I own xx shares in Y Corp. Y Corp does something bad and share price goes down, I sell my stake and sue Y Corp for securities fraud for making my shares go down during the time period I owned them?
That still seems strange to me; everyone's shares went down in value, not just yours. Should you be compensated for your loss by the remaining shareholders just because you decided to sell your shares and they didn't? If everyone sold their shares, wouldn't the price have gone down even _more_?
Could it be even worse -- that they are shorting the stock by the time the lawsuit goes to court?
The notices of class action lawsuits for stocks I've owned have only stipulated that you've owned the stock during some time window, as far as I recall.
IANAL, but I think you've right that you don't need to hold on to the shares, and you've pointed out the only groups of investors who would benefit from the judgement. The most benefited would be those who were harmed but sold their shares before the lawsuit was announced; shareholders who sold their shares before the matter was decided are likely to benefit to a lesser degree.
In reality, class-action lawyers go looking for class members to file suit on behalf of, and make special arrangements for them to receive additional compensation above and beyond what 'regular' class members get.
Yes, that's how it works, except you would rarely sue yourself.
I work for a hedge fund. Every year we send a list of all our transactions to a company. They recover money on our behalf from any legal action that may happen.
These things take a long time though. We are still getting payouts from stuff that happened in 2014.
>I work for a hedge fund. Every year we send a list of all our transactions to a company. They recover money on our behalf from any legal action that may happen.
Is there an equivelent for a passive investor that just holds ETFs? Or does the fund already do it for me?
If only a subset of shareholders are suing, e.g. shareholders who bought shares between date X and date Y, they are only losing a fraction of a dollar in share value for every dollar they win in the lawsuit. They are gaining at the expense of shareholders who are not part of the lawsuit.
(Ignoring court fees.. the suing shareholder is paying court fees on both ends, could end up being net negative.)
Possibly? I would have thought if the problem is artificially inflated price, shareholders who didn't buy or sell during the period are not affected, but to be honest I don't know how these suits work in details.
Just picking at random off Google, I looked at the Pinterest suit, and it's a big shareholder suing Pinterest Inc... on behalf of Pinterest Inc. So yeah you might be right. Sounds very odd.
Companies don't act, investors, board members, executives, and employees do; these decisions would only disincentivize executives if they hold un-exercised options, or their shares are somehow excluded from the judgement.
If the executives continually hold shares from the time of the 'wrongdoing' to the time of the judgement, and are included in the settlement or decision, the impact on them would be to transfer money from one pocket to another, minus some loss to the lawyers on both sides.
Logically speaking, it makes sense that any executive shareholders should be excluded from such lawsuit payouts. But I have no idea how it actually works.
The money doesn't actually belong to the shareholders, since a shareholder only owns the company stock not the company (stocks typically do not grant any ownership rights of any kind besides votes on management/corporate actions--many don't even do that). Companies can decide to re-allocate profits through dividends or buy-backs, but can also decide to re-allocate to other things that may not ultimately benefit the shareholder. Suing the company potentially gives shareholders access to money they may not be able to access otherwise.
As far as I know, everything you said is factually incorrect in the majority of cases.
Common stock is a security that represents ownership in a corporation. In a liquidation, common stockholders receive whatever assets remain after creditors, bondholders, and preferred stockholders are paid.
These aren't bold claims, it's literally how stocks work.
The belief of shareholders actually owning the company was just a side-effect of the marketing for shareholder primacy ideology. Even recent finance/management textbooks specifically call this out.
It seems to me that both descriptions are practically accurate. A compromise position is: lawsuits allow shareholders to receive company funds even in a situation where the majority of the (voting) shareholders would not otherwise authorize it. For some companies with dual-class voting structures, this might even be the only way that a common shareholder would ever see a payout.
So I didn't read the piece, but that money may belong to the shareholders but not be reflected on the stock price. When a company tanks stocks can be kind like "not really that liquid", because to get back the "true" value of the assets you own via your share of the company back you need to wait for it to go up again. If you sue you may get your money sooner and put it back to work on a functioning company or lower risk investment. Does he tackle that? Skimming the article it doesn't look like it, and the motivation to sue on some of this cases is to get the ROI shareholders were hoping for in a timely and less risky fashion after a company collapses due to malice or incompetence.
I understand where he is coming from but he does make a point in that many law firms simply use the process to generate wealth for themselves which in a way is similar to those patent sitting lawyers.
The don't produce anything, they just use the system to exploit it from others. I haven't googled it but I would love to know the cost to the economy of these types of actions, the companies that don't produce anything but exist simply by getting money from others through the courts or threat of using them
Only a few law journals do traditional peer review. Most law review articles are reviewed by law review editors, who are law students in their second and third years, not law professors.
In any case, you rightly point out that the author marked this private and preliminary. It's not a crazy idea. Nobody outside academe looks at SSRN ... until they do.
It just happened with QuantumScape allegedly because a speculator posted a negative opinion on Seeking Alpha. After the 40% drop in one day, litigation law offices jumped in.
as soon as I saw "key advance in solid state batteries" I knew immediately it raises red alarms because to execute a monopoly move in this sector, you absolutely need a vertically integrated corporation with a long experience of mass manufacturing, and there's only handful of conglomerates that can pull this off.
we are living in a golden age of securities fraud. We see fraudsters piggying off hot trends to sell hopes.
when the Cybertruck came out, someone raised billions and rolled a prototype down a hill to claim they were going to start shipping soon.
when cryptocurrency was hot in 2018, many companies like Kodak simply announced they were working with blockchain or cryptocurrency and saw immediate surge in stock prices.
This is some really strange stuff. Since shareholders own the company, wouldn't this mean that the shareholders who didn't sue are effectively paying the shareholders who did?
That makes sense if the shareholders who sued were somehow specifically affected, but if the effect is a drop in stock price, all shareholders were affected equally, so it doesn't make sense for some shareholders to compensate others.
The issue is that investors have money to sue and "the little guy" doesn't. That's why there is so much more legal activity from the investors.
Its a manifestation of inequality.
Ideally, the structures would be arranged to naturally handle this better. For example, more sophisticated forms of high-tech money. Or more efficient legal systems.
Not an easy problem but I believe it is structural.
Certainly although it is not completely safe to surf the Internet we should always try to follow all the recommendations in cyber security, for this one of the best blogs is https://demyo.com/
Will citi get the profits the hedge fund realises on the $900m while it's in the courts? I am guessing no, and the earnjngs will make money for everyone including both sides lawyers.
Who would own the private police force? Only shareholders have standing to sue for securities fraud. The scenario you are describing is more like users of a product suing the provider. Users of a product can’t sue for securities fraud but can sue for breach of warranty of tortious conduct like negligence.
We don’t need to privatize the police force to be able to sue them for the harm they cause. Police already get sued a lot for their misconduct in civil court [1]. Civil cases are easier to win because the burden of proof is lower. The citizens (analogous to the shareholders) have just been unable (or unwilling) to hold them accountable for the harm they’ve been causing.
