Just this month I tried to get the following published as an op/ed piece in The Wall Street Journal and other newspapers:
Tyco: On Snookering Clients Out Of $460 Million
So the plaintiffs’ lawyers in the Tyco class action litigation are putting in for $460,000,000 of attorneys fees for their handiwork in shepherding that case through the legal system.
A little thought and analysis will reveal that the end result is wildly disparate treatment of four groups of innocent Tyco shareholders. One group (not represented by the lawyers) is running off with a windfall, that windfall was at the loss and expense of other Tyco shareholders, and the plaintiffs lawyers are achieving a shuffling around of the losses among such other shareholders, decreasing the loss of some of them (maybe even turning it into a gain), and augmenting the losses of others of them. For this work the plaintiffs lawyers want $460,000,000 from the shareholders for whom the lawyers shuffled around the losses (which aggregate losses are increased by said $460 million).
The gist of the class action lawsuit is that Tyco, some of its officers and directors, its accountants and other defendants allegedly did nefarious things that resulted in the price of Tyco stock being artificially inflated during the period from December 13, 1999 to June 6, 2002 (the “Artificially Inflated Period”). That allegedly caused losses to shareholders who bought Tyco stock during the Artificially Inflated Period. To compensate them, under the settlement agreement, Tyco will pay into the settlement fund $2,975,000,000, and Price Waterhouse will pay $225,000,000. The total settlement fund is then to be distributed to shareholders who bought Tyco stock during the Artificially Inflated Period in proportion to the respective amounts of losses they suffered. For this purpose the settlement agreement sets forth a day by day schedule of the amount by which Tyco stock is deemed to have been artificially inflated as of each day in the Artificially Inflated Period. A shareholder’s loss is basically the amount, according to the schedule, by which the Tyco stock was inflated as of the date on which the stockholder purchased his Tyco stock.
So what does that result in for Tyco shareholders who have been affected by the allegedly nefarious things that were done?
First let’s take shareholders who bought their stock before December 13, 1999 and sold it during the period from December 13, 1999 through June 6, 2002. They are in luck and have reaped a windfall by obtaining the benefit of a stock sale price that was artificially inflated, and they do not have to return a dime of it to anyone. How much in total is that windfall? It is very likely that no one in the courtroom knows at this time, since it is dependent on identifying beneficial owners in billions of dollars of “street name” transactions during the Artificially Inflated Period. That information is only now being collected through claim forms that shareholders who are claiming losses must submit before December 28, 2007. (The “lucky” shareholders themselves will not be submitting any such information.) In the absence of definite information, it would not be unreasonable to speculate that the total amount of the windfall gain is at least $2,975,000,000, and it could be a lot, lot more, maybe $10,000,000,000, that has been dropped on the plates of the lucky stockholders who purchased their stock before December 13, 1999, sold it an artificially inflated price between December 13, 1999 and June 6, 2002, and who don’t have to return a dime of it to anyone. (It should be noted that this “lucky” group of Tyco shareholders should also be considered to include Tyco shareholders who bought stock during the Artificially Inflated Period at one inflated price and sold it during the Artificially Inflated Period at a higher artificially inflated price.)
The very large windfall that the lucky Tyco stockholders have received and get to keep, whatever the total amount of that is, came out of the pockets of the hapless investors who purchased their Tyco stock between December 13, 1999 and June 6, 2002 at artificially inflated prices. (and who did not get in the “lucky” group by selling it during the Artificially Inflated Period at a higher inflated price than the inflated price they purchased it for).. What happens with the unlucky Tyco stockholders?.
The unlucky shareholders need to be differentiated between those who sold before June 6, 2002 and those who sold after June 6, 2002 (or never sold at all.) Further, consideration needs to given to shareholders who purchased before December 13, 1999 and held their stock the entire time and also stockholders who purchased after June 6, 2002 (the acquisitions in both cases being presumably at non-inflated prices).
Well, Tyco is having to pay $2,975,000,000 into the settlement fund. This payment is coming out of the pockets of all of Tyco’s current shareholders. The portion that comes from shareholders who purchased their Tyco stock between December 13, 1999 and June 6, 2002 and continued to hold their Tyco shares will be paid into the settlement fund, and they will receive in the settlement their calculated share of the fund. That share could be less than or could be greater than their share of the $2,975,000,000 that Tyco pays into the fund, or in other words they may have a net loss or a net gain from the settlement. Further, the individual net gains (or net losses) for each shareholder in this group are not going to be proportionate across the group, but no one in courtroom would be able to know anything definite about this at the current time, and no one may ever bother to find out about it.
Shareholders who bought after December 13, 1999 and sold prior to June 26, 2002 will not contribute anything into the settlement fund, but will receive an amount from the settlement fund and will gain from the settlement.
Finally, shareholders who purchased before December 13, 1999 and who continued to hold their shares, as well as shareholders who purchased after June 6, 2002, and who thus experienced no loss due to the artificially inflated stock price during the Artificially Inflated Period, will receive nothing from the settlement fund but will make a contribution to the settlement fund and hence experience a loss from the settlement.
Wow, there you have it. Four groups of Tyco shareholders who are innocent of any wrongdoing, and four disparate treatments that has not a wit of rationality to it, namely a very lucky group of shareholders who get a huge windfall, a second group who may have a net gain or a net loss from the settlement, a third group that will have a gain from the settlement, and a fourth group that will only suffer an unjustified loss from the settlement.
And further wow: For their participation in shepherding through the legal system the foregoing irrational outcome for the four groups of innocent Tyco shareholders, the plaintiffs lawyers are requesting to be subtracted from the settlement fund $460,000,000 in attorney’s fees for themselves. There is the further cost coming out of the pockets of current Tyco shareholders the legal fees that Tyco has to pay to its attorneys for having represented Tyco. These hundreds of millions of dollars of attorneys fees in no way affect the lucky group of Tyco shareholders who received and get to keep the their multibillion dollar windfall, but the fees may tip a potential net gain into a net loss for the second group of shareholders, they reduce the compensation the third group receives for their losses, and they increase the unjustified loss of the fourth group of shareholders.
Now that is world class client snookering. No two ways about it.
[my address and telephone number]