... but you never find any rich folks in jail.
Thus, a law perceived to be neutral, e.g., against the stealing of bread, actually hammers down on certain people harder than others and fails to take into account the mitigating circumstances that would lead most people, on further reflection, to conclude that the stealing of bread by poor people ought to be decriminalized or, at the very least, carry punishments less severe than we are wont to apply.
It's been argued that this aspect of our legal order reflects and mitigates class conflict. Specifically, its implementation illustrates class conflict (only poor people go to jail) while, on its face, it appears completely neutral (it's not a class thing, it applies to everyone equally). Thus the law, because of its superficial neutrality, serves to quell moral outrage at the disparate way we treat rich people and poor people.
Well, that's a bit drastic -- there's not some cabal of evildoers sitting around a board table on the 100th floor of some high rise plotting this stuff out. But there's something to it.
For example. This phenomenon reveals itself most explicitly when we consider that rich folks who steal stuff -- by peddling assets worth pennies for thousands -- usually get away scott free. They certainly don't go to prison. Why's that? Well, the law against stealing stuff doesn't apply to what they're doing. The laws that apply to this kind of behavior are embedded into our labrynthine codex of securities regulation.
This tendency to apply the same legal standard to vastly different circumstances, or to apply different legal principles to similar circumstances, depending on what those circumstances happen to be and who they happen to most often -- also reveals itself in the securities fraud context.
In plain vanilla commercial litigation, breach of disclosure cases are more common than Applebees chains in strip mall suburban communities. In these cases, where one company buys another, there's usually a claim that the seller breached its represesntations and warranties about its financial condition.
Usually there's nothing very nefarious going on. Usually, there's no outright fraud. Sure, you get seller representatives "spinning" bad situations, and perhaps not emphasizing the weaker part of their business. Inevitably, however, when the buyer finds out that its new company isn't as spiffy as it thought it would be, it sues to get some or all of its money back.
It's sort of the same thing as a consumer going to the grocer's to buy a diet drink that promises to remove the extra bags on the saddle. When, lo and behold, not all the bags are gone after a few weeks, the consumer marches back into the store, with guns blazing and trumpets sounding, to waste a good part of the weekend afternoon stewing in a customer service line.
But really, no one ever expected the bags to really disappear.
So it is in deal litigation. Except that in the M&A case, the buyer hires an army of pricy lawyers and spends a couple million bucks litigating the deal before courts.
And courts and the law expect commercial parties, like the diet drink consumer, to figure out what kinds of representations are just commercial fluff and spin, and which are supposed to be hard facts. You can't lie about those hard facts -- especially if you warranted, in your contract, that you provided all of them, and all of them accurately.
Does this work the same when it comes to misrepresentation in securities fraud cases?
Well, the courts certainly think it does. So you get shareholders and bondholders suing because their broker sold them a bunch of toxic assets. And you get courts saying, well, so long as those brokers didn't make any hard promises and turned over all their balance sheets, you're on your own when it comes to protecting your interests. you've got to do your own due diligence to figure out if it's a good deal. The only caveat: the broker can't outright lie. But they don't have to point out for you the weak parts of their P&Ls for you.
It seems logical or, at least, consistent.
Until one considers that investors, in reality, trust their brokers to fish out good deals for them. Add on top of that the fact that the "investors" are really just a bunch of working stiffs who rely upon their investment managers to do a good job avoiding risk and fishing out productive investments. Of course, those managers -- who get paid via bonuses based on short term performance -- perhaps don't pay as much attention to what they're buying with other peoples' money as they ought.
And suddenly the "buyer beware" mentality, when it comes to securities fraud, maybe isn't such a neutral and objective rule. The "buyer" -- the auto factory worker with the pension plan -- physically *can't* beware. He likely doesn't know that his pension fund was even looking to buy anything. And the two intermediaries standing between him and the bad investment deal -- the broker and the investment manager -- aren't "bewaring" either.
And "buyer beware" works only if there's a buyer actually, um, capable of "bewaring."
So, just like a law against stealing bread, the law that governs mispreprentation and disclosure cases reflects something about our society. Its implementation harms working stiffs more than it harms corporate M&A counterparties, and thus reflects a difference between the way our society values workers versus corporations. And its superficial neutrality -- applying equally to both securities fraud cases and to M&A litigation -- mitigates that tension.
