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May 22, 2006

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Todd Henderson

Interesting questions with perhaps uninteresting answers.

As to the size of the kickbacks, a plausible explanation is that size is correlated with silence. A stalking plaintiff paid $1 million per instance is less likely to disclose his role in the scheme than one paid just a few thousand. Sure this is all dependent somewhat on the marginal utility of each additional dollar, but there might be some minimum level required to attractive "quality" plaintiffs -- that is ones that know what is going on (most of the plaintiffs were lawyers), seem like plausible investors in these companies, and so on. It is also possible that the payments didn't start out at such high levels, but increased over time, as the plaintiffs demanded more and more.

As for the rules of engagement, this analysis might make sense in a world in which our views about these suits and these firms were not so clouded by our policy priors. Take the Dura Pharmaceuticals case from the Supreme Court's last term. This opinion is completely nonsensical unless one believes that these suits are almost completely worthless and without merit. This was also the view of Congress in 1995 when it passed the PSLRA, and it seems like the executive branch is just following the lead of the two other branches. So the indictments don’t speak to the social value of the activity of paying kickbacks but rather to the activity of engaging in these suits in the first place. While this indictment doesn’t necessarily deter other firms from litigating securities fraud class actions, it does perhaps destroy the most powerful of these firms and send a signal that the entire bar will be more closely scrutinized when engaging in these suits.

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