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Lawrence W. Schonbrun Headshot

The Class Action's Frankenstein Status Confirmed

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We all know the story of Dr. Frankenstein, whose well intentioned discovery of reviving the dead regrettably creates a monster who wreaks havoc on his creator and on society as whole. Like Frankenstein's monster, the class action system was created with the best of intentions - to protect consumers by allowing individuals with separate but similar small claims to be joined in one lawsuit filed on behalf of all plaintiffs. But unfortunately, it has become a stealth monster wreaking havoc on society by taking money from those it was meant to protect - consumers and shareholders - and making lawyers filthy rich.

What would you think of a legal system in which someone burglarizes your house, yet you are required to sue yourself and are on the hook for the damage caused by the burglar? And what would you think of a legal system that functioned such that if you were in a car accident and had a legitimate claim for $5,000 for damage to your automobile, the best your lawyer could do was get you $250 to $500 (a mere 5 to 10% of the damages) then took 30 percent of that for his fee plus expenses? Unless you were a lawyer, wouldn't you think these systems of "compensation" were monstrously flawed?

But this is how the securities class action system has worked for decades. In a typical securities class action, the lawyers file a lawsuit against a corporation on behalf of the shareholders for things like "false or misleading" this, "concealing" that, or "failing to disclose material adverse facts about" the other. Some litigation skirmishes ensue wherein the defendants are typically forced to settle in order the avoid the expense of a trial. The lawyers subsequently settle the case by taking money from the corporation by way of you, the shareholder, and putting a fraction of it back into your pocket as an individual (after the lawyers take their own fees of course). Rather than punishing the guilty corporate employees who are responsible for the alleged wrongdoing, the settlements are actually paid for by the company's insurance which is paid for by, guess who, the shareholders. Thus shareholders are essentially suing themselves and then paying the penalty when they were the victims of the misconduct! This is exactly like the homeowner who has to pay for the burglar's crime.

Now a recent class action settlement confirms that there is indeed a class action Frankenstein's monster on the loose in the country. In a recent SEC class action with Bank of America U.S. District Court Judge Jed S. Rakoff initially refused, in no uncertain terms, to approve the initial proposed settlement of $33 million because innocent bank shareholders were going to be paying for it. "This [settlement] proposal," he said, "[which has] the victims of the violation pay an additional penalty for their own victimization, [gives the court pause]." The reason for Judge Rakoff's concern was that Bank of America's shareholders were being ripped off a second time because although it was the corporation's executives that caused the harm, the same shareholders who suffered the harm were being required to foot the bill. This was not some technical legal issue, Judge Rakoff spoke about this situation in the most fundamental terms when he said, "[The settlement] is not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality, in that it proposes that the the shareholders who were the victims of the Bank's alleged misconduct now pay the penalty for that misconduct." Well, talk about adding insult to injury, after Judge Rakoff refused to approve this settlement, a second settlement was negotiated and brought to him for approval. This time Judge Rakoff "reluctantly" approved it explaining that he was giving deference to the settling parties, and to the SEC in particular. "Does not comport with the most elementary notions of justice and morality" - forgetaboutit. But now, instead of the shareholders having to pay $33 million for their own settlement, under the new agreement they will be paying $150 million! A monster of Frankenstein proportions don't you think?

When will it end? The words of Dr. Frankenstein are eerily relevant, "You seek for knowledge and wisdom, as I once did; and I ardently hope that the gratification of your wishes may not be a serpent to sting you, as mine has been." The class action monster continues to grow stronger, forever insatiable, preying on the people it was designed to protect.