Securities Law and Insurance

tags: [ src:money_stuff , finance , insurance ]

Relevant to my interests:

Insurers who sell directors’ and officers’ liability policies particularly hate it, since they often pay out these settlements: They thought they were insuring companies against the risk of accounting misstatements, but it turned out they were also insuring them against the risk of climate change and data breaches and everything else that can go wrong. There is a feeling that this can’t all be securities fraud, that securities fraud cases should be about securities fraud, and that climate change or sexual harassment should be litigated somewhere else.

The argument for how everything that affects stock prices is securities fraud is pretty straightforward:

The shareholders claim that they relied on Goldman’s statements—about managing conflicts, putting customers first, etc.—in buying Goldman’s stock; they also claim that every shareholder who bought Goldman stock between early 2007 and mid-2010 effectively relied on those statements, because those statements were incorporated into the price of Goldman’s stock. That is, if Goldman had instead said “we have lots of conflicts of interest but we don’t care, and we gouge our customers ruthlessly and illegally,” its stock would have been lower,[5] so anyone who bought during the class period was defrauded by paying too high a price. (This is called the “fraud-on-the-market” theory and comes from a 1988 Supreme Court case called Basic v. Levinson.)

How delightful. Basically, since stock prices reflect all information that’s available, this gives lawyers an avenue to form class-action lawsuits.

Matt summarises:

If it’s securities fraud to (1) have a code of ethics (or a policy on environmental, social and governance issues) and (2) also do something bad, then some companies will respond by not having codes of ethics. (Since that is easier and more reliable than not doing anything bad.) That is not an entirely good result! You want companies to promise to do good things! Ideally to do them too, but that is harder.