Why do I get the feeling there's a lot of this around?

South Knox Bubba complains about capitalism "cooking the books and lying to investors". The problem is, what he's complaining about has nothing to do with capitalism; it's a Supreme Court ruling on a matter of law.

"A private plaintiff who claims securities fraud must prove that the defendant's fraud caused an economic loss," Justice Stephen Breyer said in the court's opinion.

Breyer said the appeals court was wrong, "both in respect to what a plaintiff must prove and in respect to what the plaintiffs' complaint here must allege."

Or, more specifically, that you can't sue a company you own stock in just because their stock falls. You have to prove that the fraud was the cause of your own economic loss; that is to say, you must prove damages. This is hardly an indictment of capitalism! Buying stocks carries an inherent risk, because the value of the good changes based on market conditions and the performance of the company. (This is true of everything else -- including, perhaps especially, paper money). Ideally, the value of stock increases because the company is making money, but obviously things can't always be ideal.

If you have ever read some of the press releases put out by companies on matters like this, they often have a long and complex legal disclaimer at the bottom. That disclaimer is there (and, I believe, required by the SEC to be there) to warn people that projections and forward-looking statements may not pan out. Sometimes a company forecasts more sales than it can bring in. Sometimes it does this through ignorance, sometimes through optimism, sometimes through simple bad luck or unforeseen disaster. But it happens, and it doesn't automatically mean fraud, nor does it mean that stockholders can recover their losses.

If you buy stock you need to evaluate the company's prospects for yourself. If you're not prepared to do that, buy shares in a fund whose managers are. Don't come whining to the court about fraud, or complain on the net about capitalism, unless you really do have solid evidence of deliberate and maliciously false statements.

Posted on 2005-04-19 11:18:18.0 by matthew@triggerfinger.org

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