Where Is Judge Pollack Taking Us?

An interesting column by Michael Carroll in yesterday’s Wall Street Journal (subscrip. required) about the potential ramifications of Judge Pollack’s decision in the Merrill Lynch cases. The author questions whether private securities class actions, as opposed to regulatory actions by the S.E.C., are the right method for remedying the societal costs of misleading market information.

Quote of note: “The judge’s ruling draws on ideas which, if they are followed by other courts, could change the world of securities class actions as we know it. As Judge Pollack put it, when plaintiffs are a class of disappointed investors who lost money in trades on the secondary market, there is another class of lucky investors who were on the other side of those trades. In the language of economics, the losses that class plaintiffs were seeking to recover in the Merrill Lynch case were transfer payments that had been made to other investors in the market. Judge Pollack decided that Merrill Lynch did not have to underwrite those transfer payments.”

Quote of note II: “Transfer payments among investors based on false or misleading market information impose a cost on society, but it is not a cost that is best measured by the total of all transfer payments or that is best remedied by private lawsuits. The societal cost imposed by bad market information is a lessening of market confidence and the decrease in investment activity that can follow. These are macro results that can be addressed by regulatory agencies such as the Securities and Exchange Commission, whose job it is to protect market confidence by policing information in the market.”

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