Last week a pack of lawyers (a term to which they gained rights as part of the tobacco settlement) set upon Red Hat, Inc., as earlier they had infested and continue to infest VA Linux. They will soon be seeking other publicly traded Linux companies. What to think?

Let me state up front that I carry no water for Red Hat, which I think has done some pretty silly things, or for VA Linux, with whom I've had few contacts, or for any other Linux company, most of whom have yet to provide any rational explanation of how they plan to make money on free software. Let me further note that the wider variety of plaintiff's lawyers would look mighty good to me covered with honey and staked over an ant hill.

But just about everybody has picked a side in this dispute, when the fact is that no one's hands are clean. To understand this, we need to understand a unique set of circumstances and a unique set of players.

There's lots of talk currently of the late, lamented "new economy." This was, looked at one way, the emergence of an information society that promised untold wealth. The flip side was a whole lot of people, many of them wet-behind-the-ears fund managers, throwing all kinds of other people's money at things they didn't understand (as far as they knew, "broadband" was an all-female orchestra), while all kinds of businesses went berserk getting online when they had no business doing so -- the local convenience store's sign "Visit us on the Web at . . ." was and remains laughable, and a whole lot of companies with hare-brained business plans that no one asked them to defend were lined up to receive baskets of money. It's pretty obvious and always has been that this wasn't going to work out happily.

A huge bubble was created. It was going to burst, as bubbles always do. The lone question was "When?" It lasted longer than anyone thought, causing companies and investment houses to believe their own p.r. Companies hired people from all over the place. Web designers actually made money. Investors were eager, no desperate, to get in at the start, and most of them having missed it were increasingly frantic to put their money in any startup, no matter how ridiculous.

At the same time, in keeping with the current thinking that anyone who has a dollar more than I do is "rich," and in keeping with the current societal deification of anyone who can be styled a "victim," the lawyers started planning. It is no coincidence that California was the state chosen by class-action lawyers as the site of their ballot initiative that would have made it easier to bring shareholder lawsuits, for much of the "new economy" was headquartered in that state. (California also makes initiatives easy.)

The bubble burst. Share prices plummeted. Red Hat was trading at about 4 percent of its peak. (I use Red Hat as an example, but it has happened with many companies.) The rational analysis of it all is this: Companies that may or may not have had sensible reasons for going public did so, fueled in part by an investment community in search of product -- equities -- to sell. Investors, either individually or through their surrogates in mutual funds and retirement plans, snapped up these securities, driving prices to levels that scrutiny revealed were much too high. (This was made worse by the purchase of "sectors" rather than individual companies. This caused the bad companies to rise with the good ones, and, now, the good ones to crash with the bad.) When the obvious was finally seen, when the emperor's nudity and shortcomings became apparent, the rush away was as quick and as irrational as the rush into these shares had been.

Having prepared to do so, the lawyers pounced, filing shareholder lawsuits. It should be understood that, as attractive as the phrase "class-action" sounds to those of a collective bent, class-action lawsuits exist solely to enrich lawyers. That's why they file suit and then go looking for plaintiffs -- surely you've seen the advertisements on television, for instance, seeking people to join in a class-action lawsuit. (There are even a few counties in the country, most of them in southern states, that have become almost class-action theme parks, having made it known that they look favorably on that kind of litigation and are possessed of "soak the rich" -- anybody who has a dollar more than they do, which is almost everybody -- juries. Because securities lawsuits are usually based on federal law, it doesn't often matter where they are filed, which is why the VA and Red Hat suits won't be tried in the sunny south.)

So on first blush, it seems that no one is entirely in the wrong and no one is entirely in the right, but the suits seek to place blame wherever the money is, anyway.

This time, though, there appears to be another factor.

Next: Crossing the Line »