Sunday, 8 July 2007

Stoneridge case could damage US trade

The US isn’t big on welfare, but then who needs welfare (state sanctioned theft) when you have dubious class-action compensation (court sanctioned theft)?

The Supreme Court is now considering whether third-party suppliers, legal firms, accountants, or banks that have dealt with the offending companies could be sucked in through that connection and end up facing claims, with the offenders, from defrauded investors and shareholders.

Scientific-Atlanta is being sued for supplying cable TV boxes to Stoneridge, a company that is alleged to have filed false financial statements.

Stoneridge's shareholders were unwise, or unlucky, in that they invested in Stoneridge and then failed, or were unable, to keep a sufficient eye on what was going on.

Now either the securities fraud was sufficiently obvious for the shareholders to be irresponsible not to have seen it, or sufficiently well hidden to be more likely to fool a third party supplier to a company, than it’s own shareholders. In either case it is dubious practice to try to extract ‘compensation’ from third party suppliers in these circumstances.

It's wrong if Shareholders have been ripped off. But it is also wrong if they should seek to make up that loss from some innocent third party.

This lot though? They need ‘compensation’ so they sued, not only their company bosses and accountants - They also went after the unfortunate suppliers of the cable boxes, claiming that they effectively took part.

If the Supreme Court rules in favour of the plaintiffs in the case, it will be an invitation to "abusive litigation" and given that possible payouts are up there with national lottery wins companies have to settle out of court, adding a massive financial burden to business costs.

John Engler, President of the National Association of Manufacturers, pointed out that a victory for the plaintiffs would give "unscrupulous lawyers a hunting licence to stalk any company that did any business with any publicly traded firm".

A recent study showed the excessive risk of litigation was already the main reason foreign companies declined to join the New York stock exchange.

Peter Wallison, of the American Enterprise Institute, said: "For the New York Stock Exchange, this is like going bullfighting with your cape behind your back. It will drive up the cost of doing business here.". He explained, if suppliers and advisers can be dragged into class actions, it would then no longer even be necessary to issue shares in the US to incur securities liability.

Any firm, anywhere, doing business with American companies would be taking the risk that the transaction could later be portrayed as fraudulent, or deceptive.

If this case goes the way the plaintiffs want you could end up with a UK company being sued by shareholders of a US company simply because they may have supplied a chip to the US company. An enormous disincentive for the rest of the world to avoid dealing with US firms.