The Times Misses the Point about a Class Action

People, this isn't rocket science!  But it is amazing how often the good, grey lady misses the point on some fundamental  issues about money.  I've got a case in point this morning, but first a bit of background.  Here's a classic script: the debtor/defendant is a bad guy.  He has hundreds, maybe thousands, of claims outstanding against him.  He doesn't have--never will have--enough money to pay them all.  How to divvy up the swag?  There are really only two choices: one "race to the courthouse," where all the money goes to the folks who are first in the queue, and the rest get left empty handed.  The other is that you orchestrate the claims and make everybody share the pain--also known as "pennies on the dollar."

The key point here is that "there isn't enough to go around."  It's a fact of life down at the bankruptcy court.  We've seen the script played out in countless mass tort cases over the years, going back at least as far as Johns-Manville, the first of the asbestosis cases back in 1982.

Most serious people get the point now, but word seems not to have filtered through to The New York Times, which succeed in missing it this morning, in an affecting story about a befuddled old guy who drops all his stash on what sounds like a routine securities fraud.

The premise of the story is that there are two competing routes to compensation in his case: one a securities arbitration where he stands to collect maybe as much as half a million.  The other is a class action lawsuit, where he might get (per the Times) "around 10 cents on the dollar."

The Times says that the issue is one of "legal wrangling;" it adds that "arbitration is the preferred route for many investors" (that last, incidentally, will as a surprise to all those  who believe that arbitration is a malignant weapon of the securities industry, designed to rob them of their day in court).    The Times adds: "[T]he class  action lawyers...argue that the arbitration claims could threaten the financial position of [the defendant]."  Well hey--if (as seems likely) the defendant doesn't have money enough to pay all just claims, then of course the arbitration  awards would create a problem. Then again, so would the class action.  Either way, it sounds as if one day the cupboard will be bare. The real fight here is not creditor v. debtor; it is creditor v. creditor, jockeying for shares of a limited resource.

[I'd also quarrel with the reporter's assertion that the arbitrations could threaten the financial position of the company.  For aught that appears, these claims need not affect the company at all--though they might wipe out the owners of the company--the shareholders who, by definition, stand last in line.  Indeed if the shareholders are truly looking at nothing, then one way to move this case along is for the shareholders just to toss the keys on the table and let the creditors sort it out.  If the company is viable, then the creditors have a powerful motive to keep it alive; the difference is only that now they are owners.]

There's a second issue which argues in favor of the class action but for a different reason.  That is, evidently the class action proponents think they have a shot at reaching past the debtor-corporation itself and dipping into the pockets of some deep-pocket parent company.  Evidently there is no device by which an arbitration creditor could do that.  Well, terrific, but if so that means more money for the injured investors, not less.

I say that bankruptcy lawyers see this kind of thing all the time.  Strictly speaking, we don't have a bankruptcy here--we have a class action.  But for present purposes, a bankruptcy is a kind of class action--or, if you prefer, a class action is a kind of bankruptcy. I'm not even saying this case should be in bankruptcy.  It is just possible that bankruptcy might provide the creditors with better weapons than they have outside, but it is at least debatable, and in any event, at this stage it probably isn't worth the extra legal hassle.  But it would be nice if somebody at the Times could (have) figure(d) out what this fight is really about.