Floyd Norris has a piece in the NYT under the headline “When Law Obscures The Facts.” In it he describes a — fill in a word that is the opposite of a loophole — in the 1995 Private Securities Litigation Reform Act. The law was passed at the urging of corporations to limit what they saw as “frivolous” investor lawsuits. One of its provisions, according to Norris, is investor lawsuits that allege fraud must be highly specific and concrete about what the fraud was or be subject to summary dismissal.
This means the suit can be dismissed before the plaintiff gets to do any discovery. And so there’s this Catch-22: you can’t sue unless you can detail the fraud, but you can’t detail the fraud unless you can force the defendant to disclose information.
The irony that drives Norris’ article is that in the wake of the 2008 collapse of the auction-rate securities market a lot of corporate investors that had purchased these securities are being excluded from settlements in which Wall Street is reimbursing other investors.
There are various theories about what happened in this market. The guy who invented it, Ron Gallatin, thinks it was a matter of salespersons simply not understanding what they were selling. Others think it was more explicitly fraud that led to investors buying things that they didn’t know what they were.
As Norris puts it:
If there ever is a wide-ranging trial, we might get to see which issues of auction-rate securities were owned by Wall Street firms in the summer and fall of 2007, and how much they sold before the collapse. We might learn if the firms understood risks they did not mention to customers.
But that will not happen if judges continue to prevent such cases from proceeding even to the discovery process. Corporations that cheered the 1995 law may discover it keeps them from having a chance to recover their own losses.
This episode goes into the file for my chapter on “the social organization of ignorance” — another example of how institutions and structures can systematically reduce the amount of information available in the social world. It’s related to “democracy and the information order,” as Gillian Hadfield and I have written about (also the subject of several other posts in this blog: here and here), reminds us a bit of Robert Proctor’s concept of “agnotology,” and resonates at least a little with some points raised by Mark Danner in an NYRB article about torture last spring (where he argued that we need to know the answer to the question “did it work?” in order to have a responsible political discussion)
- Danner, Mark. 2009. “US Torture: Voices from the Black Sites: ICRC Report on the Treatment of Fourteen “High Value Detainees” in CIA Custody by the International Committee of the Red Cross” New York Review of Books Volume 56, Number 6 · April 9, 2009
- Hadfield, Gillian and Dan Ryan. 2008. “Democracy and the Information Order”
- Proctor, Robert N. and Londa Schiebinger (eds.). 2008. Agnotology: The Making and Unmaking of Ignorance. Stanford University Press.