The securities-fraud lawsuit business has now become one of America's biggest industries.

In late September, a federal judge in Manhattan certified a securities fraud class action against JPMorgan with potential damages of up to $10 billion. This is about the entire economic output of Nicaragua, and would make the damages alone here larger than the GDP of more than sixty countries. JPMorgan is not alone: since 1996, nearly 4,000 similar suits have been filed. The settlements of the biggest ten cases alone totaled $35 billion, and this doesn't count the billions spent defending these cases.

If these suits deterred fraud, the costs might be worth it. But defendants' have strong reasons to settle, even if they are confident they would win at trial. The math is simple: even if JPMorgan thinks it is 99 percent likely to prevail at trial it is economically rational for them to cut a check for $100 million, even ignoring the massive costs of mounting a defense. Even supremely confident defendants will settle meritless cases. This encourages plaintiffs' lawyers to bring too many suits.

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