(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Reynolds Holding

NEW YORK, May 15 (Reuters Breakingviews) – Are insider
traders guilty if they don’t know whether a source was paid? Is
it securities fraud if a lie creates no personal gain? In New
York, it all depends on the judge presiding. With the fates of
SAC Capital hedgies, a former Citigroup (C.N: Quote, Profile, Research) banker and others
hanging in the balance, Wall Street could use some consistency
from the courts.

As with so many hot-button legal issues, Judge Jed Rakoff is
the man in the middle. During last year’s insider trading trial
of hedge fund manager Doug Whitman, for instance, he demanded
proof that sources inside Google (GOOG.O: Quote, Profile, Research) and elsewhere were
compensated for indirectly tipping Whitman. Rakoff was following
the lead of the judge in the trial of Galleon Group founder Raj
Rajaratnam. Both cases ended with convictions.

In December, however, Judge Richard Sullivan veered from
precedent and refused to require such proof in the
insider-trading case against Todd Newman, a hedge fund manager
at Diamondback Capital. Newman contends in the appeal of his
conviction that Sullivan erred.

Rakoff and Sullivan are also at odds over Securities and
Exchange lawsuits that allege another sort of fraud. Rakoff
rejected former Citigroup banker Brian Stoker’s claim last year
that he couldn’t be found liable for an allegedly misleading
mortgage-bond deal unless he personally benefited from any
deception. The judge said it was enough that the bank
profited. Stoker was cleared anyhow.

Last March, though, Sullivan took the opposite view,
bouncing a fraud claim against two former Freddie Mac (FMCC.OB: Quote, Profile, Research)
honchos because the SEC hadn’t alleged a personal benefit. The
case is still pending.

These courthouse clashes over legal nuance are causing
frustration across Wall Street. Compensation for tipping
confidential information is a big issue in the insider trading
action against SAC Capital manager Michael Steinberg, and much
to the chagrin of his lawyers, prosecutors got the case in front
of Sullivan. The SEC’s lawsuit against former Goldman Sachs
(GS.N: Quote, Profile, Research) banker Fabrice Tourre over the Abacus CDO also raises the
personal benefit issue.

Insider trading and other financial frauds aren’t
necessarily well defined. Ideally, Congress would clarify
matters. Partisan gridlock probably means the task will rest
with judges. It would be nice if they could at least agree among
themselves.

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CONTEXT NEWS

– Former Diamondback Capital manager Todd Newman on May 10
requested release from prison during the appeal of his insider
trading conviction last December. He argued that an errant jury
instruction raises a substantial question of law, which is a
condition for release. Newman claims the jury should have been
told conviction requires proof that an insider trader knew that
the original source of confidential information disclosed it for
a personal benefit. U.S. district judges in New York have
disagreed over whether such knowledge is required.

– Separately, former Freddie Mac executives Richard Syron
and Patricia Cook on March 28 won their bid for dismissal of one
Securities and Exchange Commission claim that they fraudulently
misled investors about the housing agency’s subprime mortgage
portfolio. U.S. District Judge Richard Sullivan ruled that the
SEC had failed to allege that the two officials received money
or property in exchange for their alleged deceptions, even
though their employer may have benefited. Other judges on the
court have ruled differently, saying essentially that an
employer’s gain is enough to hold an employee liable for fraud.

– Reuters: U.S. ex-fund manager sentenced to prison for
insider trading [ID:nL2N0DJ1FW]

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Getting a nibble [ID:nL1E8MKEDE]

– For previous columns by the author, Reuters customers can
click on [HOLDING/]

(Editing by Jeffrey Goldfarb and Martin Langfield)

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Keywords: BREAKINGVIEWS INSIDER/JUDGES

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(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Reynolds Holding

NEW YORK, May 8 (Reuters Breakingviews) – Jeffrey Skilling’s
shorter sentence could put America’s financial watchdogs in the
hot seat. The former Enron chief executive may get a decade
sliced from his 24-year prison term. But he’ll still serve more
time than just about anyone behind the financial crisis. Unlike
Skilling’s conduct, Wall Street’s misdeeds may not have been
criminal. That won’t stop critics of the U.S. Justice Department
from baying for banker blood.

The ex-CEO’s punishment was probably excessive to begin
with. Former Enron Chairman Kenneth Lay died before he could be
sentenced for his ringmaster role in the energy-trading
company’s fraud and 2001 collapse. Finance chief Andrew Fastow
got off with only six years in the slammer after helping the
government to nail Lay and Skilling.

So it makes sense for prosecutors to recommend a reduction
for Skilling, especially since at least two federal courts
questioned his sentence’s length. The punishment also suggested
that he was four times worse than Fastow, who personally gained
from Enron’s shenanigans to an extent his superiors did not.

Even the shorter term, however, contrasts sharply with the
absence of serious jail time for financial crisis rogues. The
Enron debacle was unique, but it bears at least some resemblance
to several recent scandals. Lehman Brothers [LEHMB.UL], for
instance, papered over serious problems with dodgy accounting
that temporarily shifted assets off the balance sheet. That
sounds a lot like Enron’s use of off-balance sheet partnerships.
Despite a court investigator’s finding that senior Lehman
executives could be liable for fraud, former chief Dick Fuld and
company haven’t been charged.

Such cases are tough to win, requiring proof of intentional
or reckless wrongdoing. And federal prosecutors haven’t come up
completely empty. For example, they recently extracted guilty
pleas from three Credit Suisse (CSGN.VX: Quote, Profile, Research) traders for
artificially boosting the prices of subprime mortgage-backed
bonds.

But that’s about it for prosecutions related to the
financial crisis. The Justice Department has instead focused on
splashy insider-trading cases while the Securities and Exchange
Commission has been busy losing trials against the founders of
money market firm Reserve Primary Fund and middling Citigroup
(C.N: Quote, Profile, Research) banker Brian Stoker. It’s a disappointing record that,
after Skilling’s likely resentencing, may look even less
impressive.

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CONTEXT NEWS

– Former Enron Chief Executive Jeffrey Skilling may have his
24-year prison term cut by a decade if a federal judge approves
a deal proposed by prosecutors. That would mean that Skilling
could be released as early as 2017. The arrangement calls for
the ex-CEO to drop litigation over his conviction and pay more
than $40 million to victims of the fraud that brought down the
world’s largest energy trader.

– Reuters: Enron’s Skilling reaches deal for shortened
sentence [ID:nL2N0DP2DP]

– For previous columns by the author, Reuters customers can
click on [HOLDING/]

(Editing by Rob Cox and Martin Langfield)

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Keywords: BREAKINGVIEWS SKILLING/

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Google is shooting blanks in the smartphone patent wars. Buying Motorola Mobility and its cache of inventions was meant to shield the search giant’s Android operating system from legal attack. But judges and regulators are defusing the patent arsenal, saying the underlying technology must be licensed on reasonable terms. While bad for Google shareholders, it’s a bonus for innovation.

The Motorola deal was born of necessity, if not desperation. An Apple-Microsoft consortium’s $4.5 billion purchase of Nortel patents in 2011 meant rivals could extract steep royalties from Android device manufacturers – and possibly block the gadgets altogether. So Google, with few patents of its own, shelled out $12.5 billion for Motorola and its 17,000 patents.

It seemed a smart acquisition at the time. The portfolio consisted largely of standard essential patents, rights so important to the industry that their holders agree to share them. Motorola had done so at lofty prices, giving Google a tidy revenue stream along with a stout defense.

But a shift in the law and some weaker-than-expected patents prompted a losing streak. The rights weren’t powerful enough to dissuade Apple from successfully challenging two in a federal trial last August, or the U.S. International Trade Commission from invalidating several last month. And with prodding from Apple and Microsoft, jurists and regulators started questioning Motorola’s licensing practices.

In 2012, the European Union and then the U.S. Federal Trade Commission began investigating whether the practices were anticompetitive. The EU probe continues, but in January the FTC made Google promise to stop seeking court orders essentially blocking use of its patents.

Meanwhile, a Chicago federal judge slapped down Motorola’s request for such an order, as well as royalties, against Apple, while a U.S. court in Wisconsin affirmed that those royalties must be reasonable. The latest blow came last week: A Seattle federal judge slashed Motorola’s royalty demand of Microsoft from as much as $4 billion to less than $2 million.

It’s a stretch to call the Motorola deal a bust. The patents have probably boosted leverage in licensing negotiations and smoothed Android’s path to operating-system dominance. But Google might have anticipated that courts would bristle at Motorola’s royalty overreach, which can stifle technology innovation and, ultimately, consumer choice. That’s not only bad legal strategy, but an affront to Google’s aspirations not to be evil.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Reynolds Holding

NEW YORK, May 2 (Reuters Breakingviews) – Google (GOOG.O: Quote, Profile, Research) is
shooting blanks in the smartphone patent wars. Buying Motorola
Mobility and its cache of inventions was meant to shield the
search giant’s Android operating system from legal attack. But
judges and regulators are defusing the patent arsenal, saying
the underlying technology must be licensed on reasonable terms.
While bad for Google shareholders, it’s a bonus for innovation.

The Motorola deal was born of necessity, if not desperation.
An Apple-Microsoft (AAPL.O: Quote, Profile, Research)(MSFT.O: Quote, Profile, Research) consortium’s $4.5 billion
purchase of Nortel NRTLQ.PK patents in 2011 meant rivals could
extract steep royalties from Android device manufacturers – and
possibly block the gadgets altogether. So Google, with few
patents of its own, shelled out $12.5 billion for Motorola and
its 17,000 patents.

It seemed a smart acquisition at the time. The portfolio
consisted largely of standard essential patents, rights so
important to the industry that their holders agree to share
them. Motorola had done so at lofty prices, giving Google a tidy
revenue stream along with a stout defense.

But a shift in the law and some weaker-than-expected patents
prompted a losing streak. The rights weren’t powerful enough to
dissuade Apple from successfully challenging two in a federal
trial last August, or the U.S. International Trade Commission
from invalidating several last month. And with prodding from
Apple and Microsoft, jurists and regulators started questioning
Motorola’s licensing practices.

In 2012, the European Union and then the U.S. Federal Trade
Commission began investigating whether the practices were
anticompetitive. The EU probe continues, but in January the FTC
made Google promise to stop seeking court orders essentially
blocking use of its patents.

Meanwhile, a Chicago federal judge slapped down Motorola’s
request for such an order, as well as royalties, against Apple,
while a U.S. court in Wisconsin affirmed that those royalties
must be reasonable. The latest blow came last week: A Seattle
federal judge slashed Motorola’s royalty demand of Microsoft
from as much as $4 billion to less than $2 million.

It’s a stretch to call the Motorola deal a bust. The patents
have probably boosted leverage in licensing negotiations and
smoothed Android’s path to operating-system dominance. But
Google might have anticipated that courts would bristle at
Motorola’s royalty overreach, which can stifle technology
innovation and, ultimately, consumer choice. That’s not only bad
legal strategy, but an affront to Google’s aspirations not to be
evil.

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CONTEXT NEWS

– A U.S. district judge in Seattle ruled on April 26 that
Google’s Motorola Mobility deserved only a small fraction -
about $1.8 million – of the $4 billion it had demanded for use
of its wireless and video technology in Microsoft’s Xbox
console. It was the latest of multiple legal setbacks for
Google, which in 2011 paid $12.5 billion for the smartphone
maker largely to acquire its patents. The decision lowers the
value of those patents as bargaining chips in negotiating
licensing agreements with Apple, Microsoft and other rivals.

– Reuters: Microsoft gets upper hand in first Google patent
trial [ID:nL2N0DD27M]

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click on [HOLDING/]

(Editing by Rob Cox and Martin Langfield)

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Keywords: BREAKINGVIEWS MOTOROLA/PATENTS

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(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Reynolds Holding

NEW YORK, April 22 (Reuters Breakingviews) – U.S. courts
have made a clear mark in Argentina’s spat with holdout
creditors. Judges have, unusually, tried to broker a deal
between the Latin American nation and hedge funds still
objecting to debt swaps last decade. Ordering Argentina to honor
its agreements and pushing other countries to clarify theirs
were also useful moves. Elliott Management affiliate NML Capital
and other hedgies are winning this case, but the rule of law is
coming out ahead.

The courts’ creativity has shown through since Argentina’s
historic $100 billion default on sovereign debt in 2002. Judge
Thomas Griesa used his powers in a way that encouraged most
creditors to agree on a bond exchange in 2005 and 2010. Later,
after a standoff, he ordered Buenos Aires to cough up the $1.3
billion still owed to the holdouts – taking more literally than
many expected the nation’s standardized promise to treat all
creditors equally. And last year he devised a clever ruling that
makes it difficult for Argentina to pay creditors who exchanged
bonds without also paying Elliott and the other holdouts.

That aspect is still on appeal, but will probably be upheld.
In the meantime, appellate judges encouraged a settlement by
delaying Griesa’s order to pay. They even invited Buenos Aires
last month to propose a repayment plan, though Argentina merely
repackaged its old exchange offer and the holdouts predictably
rejected it. The appeals court’s effort at compromise, which
several experts said was unprecedented in sovereign debt cases,
suggests a new and useful role for jurists in resolving such
disputes.

The judges broke new ground in other ways as well. They
called Argentina on its contract breach, despite earlier
decisions that had rendered typical equal-treatment or “pari
passu” provisions essentially meaningless. And their rulings
have already had knock-on effects. Italy and Belize, for
instance, recently changed their sovereign debt arrangements to
clarify when bondholders are on equal footing and when they
aren’t.

The U.S. government is among critics who oppose the recent
rulings as rocking the boat for foreign policy, the financial
payments system and sovereign debt workouts in general. But the
courts have concluded that something important is at stake. When
other nations co-opt the credibility of American markets and
U.S. law – notably New York’s regime – to raise money, they
should play by the rules. Griesa and the appellate judges are
making sure that happens.

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CONTEXT NEWS

– Elliott Management affiliate NML Capital and other holdout
creditors on April 19 rejected Argentina’s offer to resolve
litigation over $1.33 billion in overdue sovereign debt by
swapping heavily discounted bonds for the debt, on which
Argentina defaulted in 2002. The creditors said the offer is
less than the deal given bondholders who exchanged their debt
for new bonds in 2005 and 2010. Those bondholders received 25
cents to 29 cents on the dollar. The new offer “would be worth
less than 15 percent of what Argentina owes,” the holdouts wrote
in a document filed with the U.S. Court of Appeals in New York.

– The court has already upheld an order for Argentina to pay
the holdouts in full, but asked Argentina to propose a repayment
method.

– Reuters: Argentine debt holdouts make final plea to U.S.
court for payment [ID:nL2N0D62L0]

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(Editing by Richard Beales and Martin Langfield)

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It’s time to pull the plug on New York’s lawsuit against Hank Greenberg. The case accusing the former AIG boss of defrauding investors has already outlasted two of the state’s attorneys general. After losing a ruling Wednesday, a third should call it quits. His office is plenty busy pursuing financial-crisis cases and other scams. It doesn’t need this eight-year-old distraction.

The suit involves what seemed at the time to be innocuous reinsurance deals. But in 2005, then-Attorney General Eliot Spitzer contended they were illegal schemes to hide losses and inflate AIG’s insurance claim reserves. Though a judge at one point called the case “devastating,” it languished for years as Spitzer and his successor, now-Governor Andrew Cuomo, struggled to connect Greenberg with the alleged fraud.

On Wednesday, a court approved the former CEO’s settlement with AIG investors in a parallel federal lawsuit, making the state’s case essentially moot. With nothing to show after all this time, current Attorney General Eric Schneiderman ought to drop it.

He doesn’t have much to lose. Schneiderman has already put federal prosecutors to shame by suing JPMorgan last October in a multibillion-dollar mortgage security case. And as co-chair of a national mortgage task force, he’s touting more suits to come. Backing off a case that most people have already forgotten wouldn’t diminish his reputation for holding Wall Street’s feet to the fire.

A judge may force his hand in any event. Five years ago, a New York court ruled that the attorney general couldn’t pursue damages for victims of an alleged credit card fraud when a judge had already approved a class action settlement over the same scandal. The precedent probably means that Schneiderman’s lawsuit is toast. He may try to keep it alive by arguing that he can extract additional compensation, but that hardly seems worth the effort.

Greenberg, meanwhile, probably deserves a break. Litigation starts to look abusive after nearly a decade, depriving the former CEO of the certainty that the law requires. Besides, Greenberg has a lot on his docket. The 88-year-old recently doubled to $55 billion the size of his class-action lawsuit against the government over AIG’s 2008 bailout.

Americans should have the right to resell their property, be it books, digital bytes or beans. Yet U.S. courts are all over the map on the issue of what can be sold and resold. Judges have ruled that peddling dusty old tomes is fine, but digital tunes are different. The jury is still out on genetically altered legumes. Why so complicated? The relevant law is broad enough to satisfy consumers and rights holders alike.

Copyrights give creative types the exclusive right to sell or reproduce their works. Patents grant similar privileges to inventors. The “first sale” exception permits transactions in used items, and “fair use” allows copyrighted works to be quoted or otherwise copied in reasonable ways. Those concepts may sound simple, but newfangled technologies and global marketplaces are making them harder to enforce.

Selling American-made used books, for instance, is uncontroversial. But the legality of peddling volumes printed abroad was in doubt until last month, when the Supreme Court ruled that a student could buy U.S. textbooks published in Thailand and resell them in America.

The issues get stickier with digital works. Start-up ReDigi relied on the first-sale doctrine to run an online marketplace for swapping “pre-owned” music purchased from Apple’s iTunes. But last week, a federal judge ruled the service illegal, because digital tunes can’t be physically transferred but only copied from one server to another. That copying constitutes infringement, the judge held, even though ReDigi ensures the original copy is erased.

Yet another legal twist involves soybeans. Monsanto genetically modified seeds to withstand weed killer and made farmers agree to grow a single crop and not plant harvested seeds. One farmer breached the agreement, arguing he couldn’t be stopped from reselling a patented product. The Supreme Court is mulling the company’s lawsuit.

It’s understandable that Monsanto wouldn’t want anyone freeloading on its investment. But raising soybeans is itself resource-intensive, and having bought seeds, farmers – like Monsanto – shouldn’t be denied the fruits of their investment.

ReDigi has a good case, too. The technical violation of copying shouldn’t matter when one copy is destroyed. Courts have cited “fair use” to allow incidental copying in other circumstances, like the creation of search engines. They can do so here as well. With the pace of progress accelerating, judges should, when possible, stay out of the way.

America’s corporate boards could use a Martin Lipton 2.0. Over a long career, the New York lawyer has become synonymous on Wall Street with takeover defense. But with shareholder activism ascendant and often on target, his contrarian screeds sound increasingly dated. This week’s M&A confab in New Orleans could put them further to the test.

Strident views are nothing new for the 81-year-old granddaddy of the poison pill. In a 1988 memo, for instance, Lipton warned that the nation was “blindly rushing to the precipice” on a wave of hostile acquisitions. Today, he bemoans activist hedge funds “preying on American corporations” through “extortion.”

The Wachtell, Lipton, Rosen & Katz founding partner’s tone hasn’t changed, but the M&A world has. Gone are junk bond-fueled hostile bids – think the 1980s, RJR Nabisco and “Barbarians at the Gate.” Today’s activists more typically acquire small stakes in companies. They often work with institutional investors to negotiate for changes in strategy and in the boardroom.

Evidence is also mounting that activism benefits shareholders. A recent study published by Cornell University, for instance, found that companies are typically more productive and profitable two years after hedge funds push them on reforms.

Anecdotally, consider campaigns like hedge fund TPG-Axon’s recent maneuvers at SandRidge Energy. Efforts to tighten strategic discipline and rein in a spendthrift chief executive can only benefit the company’s owners over the long term. Even Greenlight Capital founder David Einhorn’s dig at Apple, although flawed, aimed at the right target – the giant technology group’s huge cash balance – and exposed shortcomings in the company’s processes.

Knee-jerk resistance and more obstacles to takeovers and shareholder activism, Lipton-style, no longer seem adequate responses. They can make company managers look shifty and occasionally protect indefensible practices. Calling today’s relatively polite activism “extortion” could also undermine what should be debates about the best interests of a company and its owners.

Lipton insists that, even if activists’ tactics have changed, their objectives still come “at the expense of long-term value.” He has a point – at least in some cases – and it’s one that his partner, David Katz, will get a chance to defend before his colleagues on a panel in New Orleans.

But as the current season of annual meetings shows, shareholders’ voices are only growing louder. Simply trying to shout them down is beginning to seem more like entertainment than useful advice.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Reynolds Holding

NEW YORK, Feb 14 (Reuters Breakingviews) – The U.S. Supreme
Court’s hefty docket of intellectual property lawsuits is
patently logical. The justices are reviewing fewer total cases
but more involving IP. That makes sense. Patent law is badly
muddled, as next week’s oral argument on rights to altered
soybean seeds is likely to demonstrate.

The case involves seeds that Monsanto genetically modified
to withstand weed killer. They were sold on the condition that
farmers would grow a single crop and not plant any harvested
seeds. But one farmer exploited a loophole to raise a second
crop, arguing that, like any patent holder, the agriculture
giant couldn’t block the resale of a patented product. Two
courts backed Monsanto, however, and the Supreme Court agreed to
hear the case.

Confusion over a company’s patent rights is distressingly
common. Many software patents, for instance, are so broad and
fuzzy that it’s hard to tell exactly what they cover. That
provokes overlapping claims to some of high tech’s most valuable
ideas — and costly litigation over smartphones and other
gadgets. The biotech industry also struggles with uncertainty
over gene patents and methods for reading blood tests.

The U.S. Court of Appeals for the Federal Circuit, the
nation’s top patent court, is largely to blame. In 1994, for
example, it stopped requiring that patents be tied to specific
uses and allowed protections for virtually any software with a
practical purpose. The court may have been trying to promote
technological advances, but it ended up gutting the rule against
patenting abstract ideas.

The Supreme Court has started to rein in the Federal
Circuit. While the justices’ total docket has shrunk — from
almost 150 cases a year two decades ago to about 75 in 2012 —
the share of intellectual property lawsuits has risen, from 2
percent in 1992 to 6 percent in 2010. Many of those suits
reversed the Federal Circuit’s decisions. This term, seven of
the 76 cases before the justices involve intellectual property
issues.

Beyond fixing a lower court’s mistakes, however, rulings in
those cases should promote innovation by making the law more
predictable. With the importance of patents growing, that could
be crucial for the economy’s future.

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CONTEXT NEWS

– The U.S. Supreme Court on Feb. 19 will hear arguments
about whether Monsanto’s patent on genetically modified soybean
seeds prohibits a farmer from using them to grow crops and then
planting the harvested seeds.

– The farmer, Vernon Bowman of Indiana, argued that the
giant agriculture company only has the right to control the
first generation of seeds but not the second generation, just as
patent holders generally cannot stop the resale of a patented
product. But Monsanto says growing new plants from the harvested
seeds is like making unauthorized copies of a patented items.
Bowman is appealing a 2011 ruling in favor of Monsanto by the
U.S. Court of Appeals for the Federal Circuit.

– Reuters: U.S. Supreme Court to review Monsanto seed
patents [ID:nL1E8L5B8C]

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(Editing by Antony Currie and Martin Langfield)

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(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Reynolds Holding

NEW YORK, Feb 12 (Reuters Breakingviews) – Shareholder
watchdogs should be unmuzzled. Complaints from aggrieved groups
often get bounced from court because of overly strict rules on
evidence. The ones that do survive have proven effective at
deterring fraud, leading influential U.S. District Judge Jed
Rakoff to suggest that the law ease up. It would be useful
policy.

The crackdown on securities fraud class action lawsuits
began in 1995, when Congress said shareholders must show at the
outset that a company intended to mislead them. In 2005, the
U.S. Supreme Court said such collective allegations also have to
demonstrate that disclosure of a company’s lies – and not, say,
an economic downturn – caused the stock to lose value. The high
court stiffened standards again in 2007.

Predictably, the number of such cases roughly halved in a
decade, to about 260 in 2010, according to a Lewis & Clark Law
School study. Last year, their number fell to 43, reported NERA
Economic Consulting.

Public companies benefited, but deterrence may have
suffered. Recent research from New York University and the
University of Michigan found that shareholder class actions
punish fraud harshly. They prompt more and bigger settlements
from companies and the exit of more senior executives than
Securities and Exchange Commission investigations do. They also
provoke a more negative reaction from markets.

Even courts are acknowledging their value and the folly of
limiting them too strictly. In considering whether to dismiss a
securities fraud class action against Boston hedge fund Sonar
Capital Management, for instance, Rakoff complained that many
“meritorious” suits get “knocked out” because Congress wanted to
curb supposedly frivolous litigation. He called it “lousy
policy.”

The jurist’s reputation for speaking out on controversial
matters has spread, so it’s tempting to dismiss these latest
comments as more Rakoff being Rakoff. In this case, though, he’s
not just being cranky, he’s right. Giving plaintiffs at least
some access to information from defendants at the beginning of a
lawsuit would be a narrow but helpful opening.

The lack of post-crisis financial prosecutions has heaped
pressure on the SEC and other regulators. Investors probably
could add useful bite to their bark.

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CONTEXT NEWS

– U.S. District Judge Jed Rakoff on Feb. 8 dismissed a
securities fraud class action lawsuit that claimed a former
manager at Sonar Capital gave the hedge fund inside information
that was the basis for illegal trades.

– The judge suggested at a hearing that the investors who
filed the lawsuit had failed to meet the initial-proof standards
established by the 1995 Private Securities Litigation Reform Act
and other laws designed to curb shareholder litigation. “The
result of the PSLRA is that many suits that are meritorious get
knocked out,” Rakoff said at the hearing. He added that the act
might be “lousy policy, but that’s the law.”

– Court decision: link.reuters.com/cem85t

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(Editing by Jeffrey Goldfarb and Martin Langfield)

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