- The Washington Times - Sunday, February 20, 2005

At President Bush’s urging, Congress has just passed a major reform of class-action lawsuits. While Mr. Bush has been widely recognized for proclaiming freedom the most important political value, it has been less noticed he has also said it must be “sustained by the rule of law” to thrive.

At one of his earlier White House “discussions” this month, the president noted “a capitalist society depends on the capacity for people willing to take risk and to say there is a better future, and I want to take a risk toward that future. And I am deeply concerned too many lawsuits make it too difficult for people to do that.” The World Bank has been trying for years to understand what brings prosperity to nations.

After analyzing 40 years of data from just about every existing nation, its main study found that having a sound rule of law was the No. 1 prerequisite for prosperity, much more than trade, education, democracy, or higher government spending (which had a negative effect).

Yet, just this year, the authoritative Heritage Foundation/ Wall Street Journal “Index of Economic Freedom” study, which includes many measures of rule of law, found the U.S. for the first time dropped out of the top 10 countries on these measures. That is why the president has made legal reform, and especially tort reform, one of his top priorities. Dealing with class actions was the first step.

In 2003, the tort system cost $246 billion, or $845 in higher costs for goods, services and medical care per year for each American. Less than half of the funds went to the injured plaintiffs and an incredible 54 percent went to administration, with 33 percent going directly to the lawyers.

Rather than the seriousness of the injury, the make-up of the jury and the availability of deep pockets determine how much plaintiffs get. If settlements are haphazard rather than based on known standards or hit the richest party nearby even if not at fault, companies or medical doctors do not know how to change their procedures to avoid further injuries and suits.

The problems with the law go well beyond torts to fraud generally. Collapse of the Houston energy trader Enron in 2001 provided a convenient opportunity for government prosecutors.

Enron was fast and loose with contracts and undoubtedly engaged in fraud. Prosecutors won plea agreements from its chief financial officer, who apparently was the guilty mastermind behind the scheme by threatening a longer sentence for his wife. Enron Chairman Kenneth L. Lay, was better known, smoother and richer, and so made a better target even though Columbia University law professor John C. Coffee Jr. says Mr. Lay was “a distant, hands-off manager who had resigned and come back” and was unlikely to have known the details of the fraud. The Wall Street Journal estimates he and his directors lost an incredible $250 million on stock sales.

The problem is, according to another law professor, Robert Weisberg of Stanford University: “It’s hard to remember a major fraud case that went to a jury trial and led to an acquittal.” Just recently, WorldCom’s Bernard Ebbers was indicted too, as 10 of his directors reached tentative settlement by paying more than $18 million each from their own pockets — without being able to use directors’ insurance — representing one-fifth of their collective net worth.

A few days later, 10 former Enron directors agreed to pay $13 million each of their own money to settle a shareholder suit, despite a federal judge’s ruling there were no grounds to seek redress from the directors on fraud or insider-trading charges. But they were easy targets; one a former U.S. senator’s wife.

As President Bush noted, this type of law discourages risk-taking. Since even insurance offer no protection, it is financially dangerous to be a mere director. One faces prison for making poor decisions as a chief executive officer. This lack of fair rules has kept most World Bank countries economically unsuccessful.

Fraud should be rooted out but poor business judgment should not be a crime. And those who are most guilty should pay, not those who garner the greatest media attention.

Extorting pleas by threatening wives (as happened with Mr. Ebbers too) is probably not the most edifying approach for those supposed to represent dignity of the law.

Yet, as important as it is to prosperity, a rule of law is even more important as the foundation of our government based on popular consent and our very freedom, as Mr. Bush was kind enough to reminded us.

Donald Devine, former director of the U.S. Office of Personnel Management, is editor of the American Conservative Union Foundation’s www.ConservativeBattleline.com.

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