Air
date: January 28, 2005
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Tort reform
GEOFF COLVIN: Remember the infamous lawsuit in which McDonald's got sued for making people fat? A judge threw that suit out -- but this past week another judge reinstated it. And once again all America is talking about whether lawsuits are going way too far, just as President Bush launches his big initiative to rein them in. Proponents of tort reform say out-of-control plaintiffs' lawyers are terrorizing small business owners, doctors, and even giant corporations, costing every American thousands of dollars a year. Lawyers respond that big business and insurance companies just want to save money by restricting your right to sue. The two sides are fighting over billions of dollars, so things could get ugly as Congress takes this up.
Michael Baroody is executive vice president of the National Association of Manufacturers, which strongly favors tort reform. Richard Scruggs is America's most successful plaintiffs' lawyer and was the lead plaintiffs' negotiator in the historic $200 billion settlement of the tobacco litigation.
Mr. Baroody, you believe we need to change the rules for lawsuits, but why should Americans see your efforts as anything other than a self-serving campaign by companies, such as those you represent, that just don't like to get sued?
MICHAEL BAROODY: Well, because it isn't self-serving. It's in the interest of the entire economy and an awful lot of people who have been victims of true wrongs that can't get fair compensation in the dysfunctional legal system we now have. I think first in that regard of asbestos litigation, where people who are genuinely sick because of asbestos have been muscled aside in terms of their ability to get fair compensation by thousands of people who are not sick and who have clever lawyers who've been able to get them awards that dry up the resources available to people who are truly sick. It has affected the overall economy of this country and continues by the tens of billions of dollars a year.
COLVIN: Part of the President's argument for pushing this as a reform and devoting a lot of political capital to it is that he says our tort system makes America unproductive, that it costs the country over $200 billion a year in unnecessary costs, and in a global economy, we just can't afford to be uncompetitive that way. Do you think that's not true?
RICHARD SCRUGGS: Yes, I do think it's not true. I think lawsuits are trending down, not up. I do not know why the President would say something like that, because it's just not true because of the downward trend in the number of lawsuits and in the number of verdicts for plaintiffs.
BAROODY: We know why he would say it. It is true, and the NAM did a study about a year ago of the costs that American manufacturers face that our competitors around the world don't face. We find that we've got a 22 percent cost disadvantage against our leading competitors around the world, and 3 percentage points, almost 4 percentage points of that cost disadvantage is owing to our dysfunctional legal system and the costs that attend to it. We've got to get all those costs down. Tort reform would get a big chunk of those costs down in terms of legal costs.
COLVIN: A lot of the popular anger over lawsuits comes from stories of outrageous verdicts. You know, you hear the story of the man who used his lawnmower as a hedge clipper and got a big settlement, or the woman who climbed through the bathroom window of a nightclub to avoid paying the cover charge, broke her teeth, and successfully sued the nightclub. The thing is a lot of these stories, including those two, turn out not to be true, but they are widely circulated. Mr. Scruggs, do you suspect that business or the media try to propagate these stories?
SCRUGGS: No, I just think that these myths sort of take on a life of their own and they're easily exploited by those who are in favor of federalizing state law. I think that really the argument is against the jury system. It's a sort of an anti-Democratic argument that somehow a federal judge or somehow a judge in somewhere else is smarter and brighter and fairer than a jury of peers. And these cases and these awards, even the ones that may be portrayed as wacky, are either cut back by judges or appellate judges or the juries through most of them out. I mean I trust the jury system and I trust the American people and their common sense far more than the National Association of Manufacturers to protect the American public.
COLVIN: Well, do you think that any reform of the tort system, any changes in it are necessary?
SCRUGGS: Well, there can always be changes that make things better. Democracy can be made better. But remember the famous words of Winston Churchill, Democracy is the worst system, except for all the others.
COLVIN: There was a speech you gave famously a couple of years ago where you described the magic jurisdiction, and if I may quote you, you said they've got large populations of voters who are in on the deal, it's almost impossible to get a fair trial if you're a defendant in some of these places. Now if a defendant can't get a fair trial, isn't that a serious problem that ought to be fixed?
SCRUGGS: For every jurisdiction like that, and there are a few around, and it's unfortunate because it's like this infamous now McDonald's case that's being held out as the poster child in being typical when it's totally atypical of the justice system, there are a few magic jurisdictions out there, and I think that's deplorable. However, for every one jurisdiction like that, there are probably a hundred where a victim, a deserving victim, can't get a fair trial because of the influence of the National Association of Manufacturers and groups like that, the American Tort Reform Association, in convincing the American public that all lawsuits are frivolous.
BAROODY: We don't maintain that all lawsuits are frivolous by a long shot, and we certainly aren't against a well-constructed legal system. As a matter of fact, we're as strongly in defense of that as anyone. But all it takes is a few of those magic jurisdictions to distort the whole system. There's the famous Blockbuster case where, as I understand it…
COLVIN: The video rental company.
BAROODY: That's correct. And as I understand it, there was an argument about whether people had been informed about late fees of all things. And the plaintiffs' lawyers, who sought to bring a really spurious class action case, had to go to 10 different jurisdictions before they could find a judge who took the case. They finally found one in Beaumont, Texas. A minor change in the procedures, the class action reform bill now pending before the Congress, would make that impossible by driving those kinds of mass claims into federal courts.
SCRUGGS: I feel a little bit like Rip Van Winkle, that I've woken up in a parallel universe here, that now all of a sudden the Republicans say that the federal government can do this better. Let's take all these class action cases and all these cases and let's federalize them and put them all in federal courts, but let's don't fund the federal courts because, as the Chief Justice said, they don't have enough money to handle the cases they have now, and yet the Republicans want to federalize that and say we're the federal government and we're hear to help. The states do a good job.
COLVIN: Of course the bill that has been introduced and a large part of the proposed tort reform would do as Mr. Scruggs said, and class actions would have to go into federal court rather than state. Why is that a good idea?
BAROODY: Well, it's what the founders intended. That's why they set up, it's in part why they set up a federal courts system. And the thing is it's not just Republicans, first of all, who favor tort reform. There are some discerning Democrats who feel just as strongly that this is long overdue tort reform. And federalism isn't supposed to be like the kid's arcade game of Whack-a-Mole, where if one state reforms itself, as Mississippi just has, for example, or Ohio, that the state senator in Oklahoma can say to the trial bar, "Ya'll come. We're open for business."
COLVIN: Let's look at the other main proposal in tort reform, which is a cap, I think $250,000, on the non-economic damages, pain and suffering and things like that. What's wrong with that?
SCRUGGS: That's probably aimed at the medical malpractice issues, which is indeed a manufactured crisis. There are more doctors and health care professionals today than there ever have been. They are growing faster than the general population. At the same time, the number of suits against physicians and medical providers are going down, judgments are going down. There was a recent study by the Journal of the American Medical Association, which as you know is the American Medical Association's principal journal, that showed that the number of medical errors causing death is going up. It was north of 200,000 a year according to the doctors' own survey, and yet the lawsuits against physicians are going down and judgments are going down. I don't, again I don't think that the federal government is the answer to this. If you like the way the FDA is protecting the American public from rogue pharmaceutical companies, you'll love the way an under-funded federal judiciary handles class actions.
COLVIN: Mr. Baroody, malpractice has been a big part of President Bush's argument. He gave a speech earlier this month against a backdrop of white-coated doctors. Is it, as Mr. Scruggs says, a manufactured crisis?
BAROODY: No, it's not at all. I mean the fact that pleadings may be going down nationwide, it's small consolation if most of that is in areas unaffected. And one other point, you talked about limitations. Back to the asbestos context, we've spent $70 billion as a society on asbestos claims over the last say 30 years. About half of that has actually gone to claimants, and the rest has gone to what we call transaction fees. By and large, that's a euphemism for lawyers' fees, attorneys' fees.
SCRUGGS: Asbestos was a very, very dangerous product. It ruined the lives of hundreds of thousands, if not more, Americans, particularly workers who were totally unaware of the health affects of it. But the companies who sold it, some of the leading companies in America, were fully aware of it and sold it as long as they could get away with it. And to hear them squealing now that they've been caught is a bit disingenuous and a bit hollow.
COLVIN: We could go on and on, but we have to stop. So Richard Scruggs, Michael Baroody, thanks for your views.
Analyzing the analysts
KAREN GIBBS: Wall Street analysts are known, sometimes infamously, for their many "buy" recommendations, but all investors really care about is making money. While stock picking may be an art, assessing the results is a science. Zacks Investment Research has tracked the stock picking abilities of the major Wall Street brokerage firms over the years, and today Mitch Zacks joins us from Chicago to talk about the winners.
Well, Mitch, has the brokerage industry improved after two years ago of course the accusations and the settlement of them misleading investors?
MITCH ZACKS: Well, if you look at the returns of a brokerage firm's buy list, which represent the brokerage firm's best ideas to individual investors, over the last year there have been some brokerage firms that have delivered returns, and substantial brokerage firms, that have delivered returns that have beaten the return of the S&P 500.
GIBBS: Well, what makes a winner?
ZACKS: Well, what makes a winner, what we do is at Zacks we have a division that analyzes the performance of the recommendations made by over 4,000 analysts employed throughout hundreds of brokerage firms in the U.S. and in Canada. And what happens is these research reports are given in the brokerage firm to the director of research, and usually what that director of research does is he narrows those, you know, 100 or 200 buy ideas down to a portfolio of what is representing the best ideas. This is called the brokerage firm's buy list or the brokerage firm's focus list. And we track the performance not only of all the analysts' recommendations, but also the performance of the brokerage firm buy list. And looking at the returns of the brokerage firm buy list, we see that over the last one-, three-, five-, and seven-year periods, you do see brokerage firm buy lists outperforming the S&P 500 on an equal-weighted and market-cap weighted basis.
GIBBS: All right. Let's take a look at the winners of 2004. Topping the list: Morgan Keegan, followed by Bear Stearns, Charles Schwab, Bank of America and Smith Barney. Is there a common trait among these five winners?
ZACKS: The common theme in 2004 was to get small. The smaller stocks that were, the smaller the market capitalization of the stocks that were on the brokerage firm buy list, the better the firm tended to do. So what's common amongst those top performers was recommending stocks that tended to be energy stocks and also stocks that tended to be smaller capitalization stocks.
GIBBS: When you look at the recommendations of the top-rated brokerages, are you seeing any themes for 2005? Will small-cap continue to dominate large-cap?
ZACKS: Well, in terms of what the brokerage firms are saying from their buy lists, they are still seeing, they do still see small-cap firms as being attractive, although they have reduced their exposure. The other group of stocks that we're seeing coming on and filtering on to this list are stocks that would benefit from a declining dollar. Now they may be a little bit late to the party in terms of buying stocks that are going to benefit from a declining dollar, but those are the two themes that are coming out for 2005, a reduction in exposure to small-cap stocks and an increase in the exposure to stocks that will benefit from a declining dollar.
GIBBS: Well, let's look at Morgan Keegan's portfolio. In fact, some of the stocks that did very, very well for them: Mission Resources Corporation, up 118 percent, while Ultra Petroleum Corp., better by 107 percent. But there was some interesting companies. We of course had Wal-Mart and FedEx, but Panera Bread made it. You would think in this low-carb environment Panera Bread wouldn't do so well.
ZACKS: Yes, you would. And the point here is that it's not the individual stock so much as what is common across the stocks that are being recommended. What you recommended there, you know, one was a smaller-cap stock, Panera Bread, and the other two were energy companies, and those were the two sectors or segments of the market that tended to outperform. So what you're seeing is that those brokerage firms that sort of caught the trends in 2004 had their buy list do better than the market.
GIBBS: Well, they caught the trend because it was just a one-year snapshot. When we widen it out and look at three years, Charles Schwab is the best performer. In fact, two years in a row they did the best. What was behind Charles Schwab's theory?
ZACKS: Again, with the Schwab performance what you're finding is that they have a very large list of almost I believe 100 stocks that are equal weighted. And when you have such a large list, your exposure to market-cap or high market-cap stocks is significantly less than in the S&P 500. There's been a very large disparity over the last five years between the returns of a market-cap weighted index and an equal-weighted index. So focus lists that were broader in scope tended to do slightly better over the last two to three year period.
GIBBS: How about when we pull out looking at a five-year window? In fact, Raymond James, another regional brokerage, comes up. Is there some difference that you've found between New York big city brokerages versus regional brokerages?
ZACKS: I don't want to say, you know, pejoratively whether it's better to be at a big city brokerage or a small, regional firm. I will say that it is interesting that you do see regional firms coming up and generating very, very good returns. And part of the reason may be because the stocks that they tend to put on their focus list tend to be stocks that are followed by fewer analysts. And statistically over time, stocks that are followed by fewer analysts tend to outperform stocks that are followed by a large number of analysts. So by looking at the performance of a regional brokerage firm, what you can find is that they're more likely to go with sort of under-followed, unknown stocks, and statistically over time those are the types of stocks that tend to outperform.
GIBBS: Looking at a longer-term snapshot, looking at seven years, Bear Stearns comes up a winner, and they have companies such as Hilton Hotels and Sirius Satellite Corporation in their mix. Tell us about that.
ZACKS: Well, I think Hilton was a recent addition to the Bear Stearns list. Bear Stearns has had tremendous performance in their focus lists, both over the seven-year period and over the five-, three-, and one-year period. And if you had to point to a large firm that is doing a very, very good job at constructing focus lists, it would have to be Bear Stearns.
GIBBS: Now, when you look at the whole picture from one-year out to seven-year, no one company rises to the top. What's an individual investor to do?
ZACKS: I think the best information that an individual investor can take from this is to look across multiple focus lists and look for stocks that are on the focus list or the buy list of not just one firm but multiple firms, and that we do have at our web site zacks.com, where we have what's called our brokerage firm buy list, which represent stocks that are on three or more of the focus lists of the major, the 15 largest brokerage firms in the country. And if you look at the performance of these types of strategies, they actually outperform the average return of any given brokerage firm. So the key is not to look at just one brokerage firm's buy list, but to look at multiple brokerage firm buy lists and look at the overlap between those lists.
GIBBS: Isn't it true, though, that individual investors can get hurt following the crowd?
ZACKS: It is true that they can be hurt following the crowd, but when you see stocks that are on multiple firms' buy lists, it usually means that there's support for that stock at multiple brokerage firms and that stock will outperform not only in the short term but in the immediate term as well. You definitely don't want to be following the crowd, and that would actually be an argument against forms of market-cap weighted indices such as the S&P 500. In these market-cap weighted indices, the crowd rushes into a sector or a segment of the market, such as technology, and technology stocks' weighting in the index become substantially out of whack with what they should be in reality. By buying the index, you're buying the irrationality to some extent of the crowd.
GIBBS: Mitch Zacks, always a pleasure. Thanks for joining us.
ZACKS: Karen, it's always a pleasure to see you.
Bing on CEO corruption
GEOFF COLVIN: The latest corporate scandal trials are getting nastier by the minute, with prosecutors charging that WorldCom's Bernard Ebbers and HealthSouth's Richard Scrushy basically used code words to order subordinates to commit fraud. Those CEOs counter that their subordinates were incompetent boobs who cooked the books to hide their own failures. Sorting through it all, we wondered who could be our expert guide to corporate lying, backstabbing, treachery, and deception? The answer was obvious: Stanley Bing, author of several books, including What Would Machiavelli Do? also a FORTUNE columnist, and under his real name, a top executive at a major multinational corporation that we will not name. His new book is called Sun Tzu was a Sissy: Conquer Your Enemies, Promote Your Friends, and Wage the Real Art of War. He joins us from New York.
Mr. Bing, right now three former CEOs are on trial simultaneously: Bernard Ebbers of WorldCom, Richard Scrushy of HealthSouth, and Dennis Kozlowski of Tyco. Now they all seemed at one time like the ultimate corporate warriors. Now they could go to jail for years. Were they in fact sissies?
STANLEY BING: Well, no. I think they were actually overly, I think we have a case of maybe too much testosterone in the case of all three, not enough strategic thinking on the part of any of them. But we have to remember that, although they've been thoroughly tried and convicted in the media, and I think all of us are convinced of their guilt, they still have to have a trial. And that's conceivably the most entertaining thing, particularly since the rules seem to have changed a bit, and now the private lives of those who are testifying against them may in fact be grist for the mill in the trial.
COLVIN: Well, precisely, and now we're really getting into the world of strategy and so forth. Because as you say, some of the witnesses, in particular in Richard Scrushy's case, his lawyers are already trying to smear the witnesses against him, who are former employees, by the way, saying they are known to have engaged in unsavory conduct, such as adultery, wife-swapping, drinking and drug use. Now all this must have been known back when they were all part of one big, happy family there at HealthSouth.
BING: Well, I guess so. I mean my misfortune is never to have worked in any of those corporations and I missed what was going on, because my professional career has been relatively boring. I mean the most they could get anybody for in companies that I've worked in has been drunkenness.
COLVIN: Yeah, well, and that's, you know, not all that exciting, as you say.
BING: No, it generally ends in sleep. So these guys have really, they were having some kind of fun. And in Ebbers' case, apparently there's the question of adultery also, right? Sullivan, the guy that's testifying against him.
COLVIN: Yes, the former CFO who is going to testify against him has admitted in some kind of court papers that he was unfaithful to this wife, and this now they say may be admitted into evidence.
BING: Absolutely. I mean it's very strange. It really is sort of a question of the rules changing in the middle of the game I think, you know. Because when you're part of a company, people do know things about you, and the idea that that may one day be used against you in court is, it's disquieting to say the least. It changes the rules of corporate behavior I think and puts everybody on their guard in a different way. I mean we know now that anything we write in an e-mail is absolutely grist for any future action that may happen, but the idea that if you are a bad person on a corporate retreat, which is what they're pretty much made for, that it could be called up against you later, you're going to have a lot of people playing Scrabble down there in Boca.
COLVIN: Well, now you're really getting into the essence of your most recent book, which is strategy in corporate behavior. First of all, there may be a few people who actually don't know who Sun Tzu was. He was this Chinese general who wrote a book an awful long time ago.
BING: He was actually an advisor. He was an advisor to generals, who generally, you know, like a Walt Rostow or one of those guys, who plans wars but doesn't necessarily have to go put on the fatigues. And his philosophy was very often that the prepared general, the one who is the best suited up, has the most armor, deploys his troops the most intelligently may never have to fight at all. And my position on that is that that's a sissy point of view, and that in the 21st century the people who win are usually the most aggressive, tough, mean and assertive among us, and that people who are overly strategic tend to lose.
COLVIN: It sounds like your basic thesis then is that decent, hardworking people are going to lose out because they're too decent and hardworking. Is that fair?
BING: Yeah, well, they can do fine. It isn't that people don't do fine. It's just that to really win and to conquer territory and to move and, you know, cut a swath wherever you go and to get things your way, you have to play by the rules that the big guys play by. And I think what these trials do actually is give us a little peek into the kind of egotism and narcissism that produces victory, in business anyway, and I think it's true in sports, I think it's true in a lot of venues. You know, I think it's the most aggressive and least considerate person that does well. And this is my best effort to date I think, this book on how to train people who aren't natively that self-involved how to succeed in that kind of environment.
COLVIN: Words to live by. Stanley Bing, thank you.
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