Friday, March 11, 2005

Who You Really Suing Anyway?

I am a fairly novice stock investor. During my last year in college I took my first plunge with stock-trading by taking a little bit of money I had saved up and putting it into an account I opened up with an online broker. After I made my first fifty bucks on Ford stock, I was hooked. So I don't make much money on this hobby, but I enjoy doing it and I think I have become better at it since I started in the Fall of 2003. Yeah, I could have just put all of this money in a broad-based index fund and made more money, but that would be too easy and lack the risk and strategy that I enjoy with stock-picking.

So anyway, I don't pay for any elaborate research for my stocks. I just kind of go with my gut: looking for companies I believe are undervalued, buying them and then selling them after modest upticks. Well, at least I try to act that conservatively. When I start taking dumb and large risks on companies I know very little about I have lost a lot of money. Being overly risky has bit me in the ass thus far. But anyway, back to the whole research thing....

Back to my point, (yes, I do have a point, I think).... So you go to Yahoo's finance section or pretty much any free site and look up a stock. You'll find any and all news-releases on a specific stock. More often than not, nowadays, you will see a press-release for a law firm that says that they are suing the company. Off and on I have owned Krispy Kreme since the bottom fell out of the stock. This is one of those stocks that is constantly being sued now. There keep on being class-action lawsuits brought by large law firms either on behalf of investors or employees. At first glance, this might seem a reasonable enough development. A lot of these corporations have used questionable accounting practices in order to prop up the price of the stock. It certainly sucks if you invested in Krispy Kreme at its price peak and now that initial investment has a value of less than a fifth of that. I have already had my share of large stock losses along the way, and I can understand the frustration. Additionally, I can understand that employees, who may not have been making much to begin with, get very upset if much of their pension/401K was tied up in their company's stock. The drop in stock price has jeopardized their future retirement and they want someone to pay. I will assume, despite large doubts on the subject, that actual aggrieved parties are seeking out lawyers to take their case and not vice versa.

After further thought, though, I wonder what good suing companies like Krispy Kreme actually does for anyone besides the lawyers. Contrary to popular belief, corporations aren't some sort of monster that exists outside the people who own and work for the company. A corporation is an organized business made of people: stockholders, employees, etc. So when you sue the company the only people you are hurting are those that own the company (the stockholders) and the people who work for the company (the employees). With any successful suit, money is simply changing hands, from some stockholders to old stockholders. From current employees to former employees, etc. Lawyers also receive their massive fees. The company has less money, is worth less, cannot hire as many employees and a lot of innocent people are hurt. Civil damages against the is not the way to punish companies for their actions that hurt stockholders and employee pension funds. All they do is enrich lawyers bringing the questionable suits and hurt those still involved in the company and nothing to do with the accounting violations. We have criminal statutes to govern accounting abuse for a reason. The executives and accountants who committed these acts should be the ones punished with criminal sanctions, and, if it makes sense, civil damages as well. All of this is much preferable to suing the company, but the practice still continues. Considering the fatter coffers of the company compared to the corrupt executives I suppose these trial lawyers won't be looking forward to any change.

...When a big class-action suit is announced, the stock price often takes a large plunge. Seems like a situation ripe for insider-trading.

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