ASK DR MONEY

Your suit could be costly

BY LARRY HAVERKAMP
mail@AskDrMoney.com
Jan 11, 2005 

DID you catch this interesting story in The Straits Times on Dec 28? 

Two women partying at the Devils Bar on Tanglin Road were molested by the same man on Sept 18.

'Sales executive Han Kwan Siew, 33, was jailed for two weeks after he admitted touching the buttocks of the women. 

'He was also fined $11,000.'

I'm pretty sure Mr Han has learnt his lesson and won't be touching any more women's buttocks when 
he goes out drinking with the boys.

In mitigation, Mr Han said he was drunk, it happened at 2:30am and, according to his lawyer, 'he had initially approached the victims with the intention of befriending them'.

This story contains important lessons about the law. 

First, who gets the $11,000 fine?

Answer: It's a criminal case so the fine goes to the Government.

In a civil case, the women whose buttocks got touched (plaintiffs) could sue Mr Han (defendant) for 
$11,000 or even more.

WHY NOT SUE? 

The women can sue, but there is a risk.

The costs of going to trial include fees of both parties' lawyers, and the court's daily hearing fees, since this is a civil matter.

Who pays for these costs depends on who wins the case.

The losing party could end up with the bill, including part of the winning party's legal fees.

The risk of losing and paying all costs often discourages plaintiffs from suing.

A society like ours - with fewer lawsuits - has a BIG advantage: It is more efficient because people 
don't spend a lot of time suing one another.

Contrast this with the United States where court costs are low and lawyers are free. It makes for a HUGE number of lawsuits.

FREE LAWYERS? HOW CAN? 

It's because US lawyers are permitted to work on a 'contingency basis' which means the lawyer gets paid ONLY if you win. 

If you lose, your lawyer gets nothing.

US lawyers typically take 20 to 40 per cent of the money awarded. 

In a $10 million judgment, the lawyer would collect $2m to $4m. 

It makes for a lot of rich lawyers.

Contingency lawsuits are not permitted in Singapore and you must pay your lawyer, 
win or lose.

In the US, a benefit from all the lawsuits is companies are VERY careful not to 
violate the law.

They know thousands of money-hungry lawyers are waiting to pounce if they sense the slightest harm to shareholders or consumers.

It's not just companies that are worried.

The threat of lawsuits extends to auditors and investment bankers. 

These act as 'firewalls' to insure that only truthful information filters through to investors.

Auditors inspect financial statements to make sure we get the whole truth about a company's sales, costs and profits.

Investment bankers do similar work, but they specialise in companies raising new 
money like through initial public offerings (IPOs).

Both are highly-paid professions which you might want to consider for your career.

Beneath the surface, however, are two big problems.

Problem 1: Conflicts of interest.

Who do you think pays auditors and investment bankers? The fees are paid by the companies they audit.

Is this a conflict? I think so. 

It is a bit like asking one football team to pay the umpires (auditors) and then expect the umpires to remain impartial.

Auditing has been like that for a long time everywhere in the world.

Surprisingly, it works because auditors follow a 'code of honour'.

This honour system worked well until the 1990s when some employees in the world's largest auditing firm, Arthur Andersen & Co, gave in to temptation and performed 'easy audits'.

The truth came out when the world learned that WorldCom, Enron and others had been lying about their earnings.

In the US, claims quickly ran into the billions. 

Arthur Andersen & Co saw the handwriting on the wall and declared bankruptcy. 

Today it no longer exists.

However the companies it audited - like WorldCom and Enron - are still in business.

Problem 2: Expensive lawsuits.

In Singapore, funding a class-action lawsuit can be an expensive affair.

There has been only one successful class-action lawsuit. It was brought by members of Raffles Town 
Club against its owners.

We almost had a second class-action lawsuit. AIA's critical-year policyholders wanted to sue the insurance company but AIA settled that case before it went to 
trial.

Therein lies the tradeoff. We have fewer lawsuits, which contributes to our high 
productivity. That's good.

But fewer lawsuits reduces the pressure on auditors and underwriters to dig deeply and expose creative accounting or fraud. That's bad.