When companies file lawsuits, free speech is muzzled

Business journalist Roddy Boyd writes about how some companies that are criticized by the media and investors file lawsuits to shut their critics up.

Boyd writes, “Unsurprisingly, Fairfax does not agree with the notion that its lawsuit was primarily designed to stifle critics. Approached for comment, Michael Bowe, the Kasowitz Benson partner directing the litigation, emailed the following statement:

Fairfax sued not for “criticism,” but because people were spreading false claims that Fairfax was an insolvent, Enron-like fraud in order, in defendants’ own words, to “kill” the company. The Court found that there was “absolutely no question” that this intentional conduct caused Fairfax to “suffer … massive pecuniary/economic loss.” The Court’s ultimate conclusion that the law provided no legal redress for such massive losses is unfortunate and incorrect and will, we are confident, be reversed on appeal.

“Nonetheless, let’s look at the math: The hedge funds sued in the Fairfax case each spent $3 million to $4 million per year on legal fees. They were able to absorb it because they were large. But a small hedge fund likely does not have an extra $4 million in cash flow to pay lawyers – and fund investors are loath to invest in smaller funds with ongoing litigation. That creates a powerful disincentive for small-fund managers to speak publicly, even if they believe their research has uncovered significant fraud.

“Financial journalists, too, have incentives to keep quiet. The financial media’s ability to play a meaningful watchdog role has declined as rapidly as its economic health. The result has been shrinking staffs, bigger workloads and decreased appetites for potential conflict. Journalistically the result is a non-threatening palaver that faithfully recaps a conflict between a company and a critic, but does nothing to advance any understanding of the fight.

“Ultimately, the only people who are safe speaking up in this scenario are the rich. Even though hedge fund managers like Greenlight Capital’s David Einhorn or Kynikos’s Jim Chanos have spent many millions of dollars in legal fees fighting off pointless litigation, their headaches are just that: headaches. They are profoundly wealthy and going to stay that way.”

Read more here.