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NEW YORK ( TheStreet) -- It didn't get much attention, but a seminal event in financial history took place the other day. A much-ballyhooed, six-year $6 billion legal assault against prominent U.S. financial institutions by Fairfax Financial Holdings, a Canadian insurance company, finally, anticlimactically, fizzled out.
Fairfax had accused prominent financiers, led by Steven Cohen's SAC Capital, of conspiring to drive down its share price. Cohen and the others, including Morgan Keegan, vigorously denied the allegations. On its face, it looked like a David and Goliath battle, with the hedge fund giant SAC and other defendants looking superficially like big, bullying market manipulators.
SAC, a secretive firm with an aggressive reputation, was not exactly the most sympathetic of defendants. But the more you scratched below the surface, the more it looked like a case of a troubled company seeking to cast blame on others for its own misfortunes.
Appearances also deceived as the suit was thrown out yesterday. There's no question that Fairfax waged an expensive legal battle, and at the end of the day it didn't get anything in return -- at least nothing tangible. As reporter Roddy Boyd pointed out in a
Reuters column last week, the cost to Fairfax was an estimated $100 million in legal and public relations fees.
So what did the company get in return? Boyd noted that "Fairfax's efforts drove its share price up, forced shorts to cover their trades and, save for a few reporters, ceased virtually all media investigation into the company's operations."
In other words, by the standards of critic-crunching lawsuits, it was a smashing success. And if the outcome of the Fairfax suit wasn't clear enough, it was proven just a few days later, when an OTC company called Revolutions Medical Corp.
filed suit on Monday, claiming that it was victimized by some guy posting mean stuff about it on the Internet.
If you're a company that wants its critics to STFU, lawsuits seem to work pretty well no matter how good or bad the company may be, and no matter what eventually happens in court.
That's the dilemma posed by suits like the Fairfax litigation. Sure, we don't want hedge funds to conspire among themselves to drive down share prices. Short-side manipulation is just as pernicious, and illegal, as stock manipulation by people seeking to drive up share prices. But the problem is that there's a thin, hard-to-distinguish dividing line between an innocent company seeking to defend itself and a corporate bully seeking to stifle its critics.
Fairness, the First Amendment and the proper function of the markets require that the courts draw strict rules against the abuse of the legal system by bullies masquerading as victims. Above all, we in the media have to be sensitive to such distinctions. All too often, we are not.
Fairfax is but one example of media naiveté, which has been on display over the years in
articles like this one, which gave sympathetic treatment to the Fairfax suit and similar suits filed by the troubled retailer Overstock.com and investors in Novastar Financial. Novastar was a subprime lender that later collapsed, not because of short-sellers, but because of its own lending practices.
A similar suit by the Canadian biotech company Biovail also received sympathetic press treatment, notably a segment on
60 Minutes. But the CBS News magazine show failed to follow up in 2008, when the company
pleaded guilty to criminal charges of accounting fraud, essentially demolishing the
60 Minutes coverage.
As Columbia Journalism Review's Audit column pointed at the time, the
60 Minutes segment was a "trainwreck." Yet it was never corrected, and at the end of the day, the harsh condemnation of
60 Minutes in journalism circles amounted to nothing. What's finger-wagging to an audience of a few thousand when a few million viewers have been exposed to hogwash?
That's why litigation like the Fairfax suit succeeds, even when it, ostensibly, fails. The primary audience for such suits is really narrow -- the shareholders of the company, with the aim of preventing them from losing faith in management and selling their stock. The secondary audience is the members of the media who might be tempted to investigate such companies, and are less likely to do so, especially in this horrid media environment, if confronted with the possibility of litigation.
In 2008, CJR's Dean Starkman pointed out that "when
60 Minutes decided to do a business piece, it went after two of the few market participants -- shorts and independent researchers -- that actually have an incentive to counter the Wall Street sales machine."
This is what's known as "issuer retaliation," and it's not exactly a high priority, not even among its victims. Independent analysts have grown inured to it. I once spoke at a gathering of independent analysts a few years ago, and I was struck by the degree to which the menace of issuer retaliation was greeted with shrugs by the analysts in attendance. Similarly, the Securities and Exchange Commission, under chairperson Mary Schapiro, has shown no interest in pursuing cases against companies that seek to silence their critics. She is actually worse on this issue than her predecessor, Chris Cox, who at least paid lip service to the possibility of pursuing companies that go after their critics.
So that leaves the job of policing issuer retaliation to the media. The ball is back in our court.
Now, I don't expect the media to set up an
Arizona Project every time a company seeks to suppress its critics, whether they are analysts or short-sellers or fellow members of the media. But I do think that it's not too much to ask that we not become pawns of issuer retaliation schemes, which has happened much too often. We need to approach such suits with skepticism and a willingness to apply scrutiny to such tactics, and the companies applying them.
Until that happens, companies are going to continue to use the courts to intimidate and silence their critics. And they will win, no matter how many times they get thrashed in court.
Gary Weiss's most recent book is AYN RAND NATION: The Hidden Struggle for America's Soul, published by St. Martin's Press. Follow him on Twitter: @gary_weiss