A handful of conservative AGs file unusual lawsuit

Index funds are wildly popular with retirees and people investing in their future retirement.

Instead of picking individual stocks, investors can choose blocks of stocks — like the whole S&P 500, the Dow Jones Industrial Average, the top 100 companies in NASDAQ, and so on — avoiding some of the volatility of individual stocks while making a long-term bet on the growth and performance of equities markets and the economy.  Studies have found that diversifying investments through passive vehicles, such as index funds and ETFs “can help reduce portfolio risk and increase returns over the long term.”

But the top government lawyers from several states, led by Texas Attorney General Ken Paxton, are suing three companies with some of the most popular and successful index funds – a politically motivated move that could harm their own citizens’ investments in some of the most successful funds on the planet.

They’ve accused those three companies — BlackRock, State Street Corp., and The Vanguard Group — of investing in coal companies, then cutting production and benefitting from higher prices that resulted as supplies of coal fell. To win that point, they’ll have to prove the coal market wasn’t just a victim of falling natural gas prices, or the pandemic driven reductions in energy consumption, or environmental regulations, or any of the other numerous reasons that various energy sources increase and decrease on a regular basis.

But notably, the companies’ investments that the suit is focused on were made on behalf of their index funds, invested primarily on behalf of thousands if not millions of individual investors saving for their futures, and not for shareholders.

The lawsuit from the group of state attorneys general demands the companies divest from coal – a move that would perversely disrupt the coal industry – decreasing investment in it, while also preventing the three companies from offering popular index funds to the millions of current and future American retirees who depend on them.

Interestingly though, the AGs, along with high profile trial lawyers that the state of Texas outsourced (reportedly for up to $3,780 an hour, or 10 percent contingency fees) to handle the case, don’t think the companies did it for the money. The investment profits from cutting the supply of coal aren’t their target. Rather, the AGs contend the three companies limited coal production (if, in fact, the firms were the reason production fell) because they believe “that concern for the climate confers a license to suppress competition.”

The lead attorney in the case is Houston’s Tony Buzbee, who represented Texas AG Ken Paxton in a successful impeachment defense in front of the Texas legislature last year. Politico Pro set the table this way: “That means Buzbee, a Houston-based attorney known more for his high-profile representation of celebrities entangled in personal injury litigation than his grasp of antitrust law, will lead the case against the finance giants in federal court.”

So, in many ways, this suit that could upend the retirement vehicle utilized by many Americans may not actually be about the “M-O-N-E-Y.” It’s about the “E-S-G.” That’s the acronym for using environment, social, and governance factors in investment decisions, a bugaboo in conservative political circles right now.

All of the elected government lawyers who joined the lawsuit are Republicans, unaccountably breaking from their conservative states’ pro-business reputations and the interest of their own consumers — not to mention the millions of their citizens depending on these index funds for some, or all, of their retirement savings.

The legal theories they’re leaning on seem to be both novel and unprecedented. Antitrust claims involving index managers’ minority stakes are exceedingly rare. And the complaint mirrors others that federal courts have examined and struck down over the past year.

That could be an expensive and embarrassing mistake: Some of those earlier actions resulted in taxpayers covering millions in legal fees and penalties.

State pensions, investments, and public finance are ultimately controlled by state officials themselves, and the three companies they’re suing are among the  most popular competitors for management of government pension funds.

It’s peculiar, to say the least, that they would launch legal attacks on companies their governments hired to invest on behalf of their own public employees and other citizens; that they would seemingly inadvertently attack a coal industry that is a major economic asset in many of their states; and that they would risk their own legal reputations on such an unproven and irregular interpretation of state and federal antitrust law.

Based on their efforts to win publicity for the lawsuit, the AGs are confident that this is a political win. But they seem to have forgotten about the welfare of the citizens they were elected to represent — and to protect.