The Big Short Lawsuit: Subprime CDO Manager Takes A Calculated Legal Risk In Suing Michael Lewis
As I have written many times before on this blog, and as I know from my own experience, defamation lawsuits against major media outlets are no joke. Defamation law across the United States has been mostly settled for the past generation, and so most newspapers, television stations, publishing houses, and film production companies have editors and lawyers who know how to make sure they have just enough support for their allegations to fend off a defamation lawsuit.
In my own cases, I have seen examples where a media outlet, in the course of “fact-checking” and editing an article, we will discover that one of the assertions made by the author in a draft article is outrageously false. Rather than remove the outrageously false statement from the article, the media company will instead introduce linguistic ambiguity into the article to create a defamatory inference (to make the article more sensational) while leaving them the ability, if they happen to be sued, to claim the literal phrasing is not defamatory.
At the bottom of every defamation case, though, is often not the specific language used but really the factual sources for the accusations, inferences, and innuendos created by the article. In the prototypical defamation case, a publisher asserts something false about the plaintiff without any reasonable basis to believe the statement is true. Those types of defamation cases happen every now and then, but it’s rare these days, courtesy of those well-trained editors and publishing company lawyers (the latter of whom routinely described themselves as “First Amendment” lawyers when they’re really “massage the language enough to avoid a defamation suit” lawyers). They know when they can claim to have just enough proof, and when they should just fold up their tent and hunt for another story.
In most actual defamation cases, though, the situation is a lot more complicated. The publishing company arguably had some reason to believe in what they published, but deep down knew it probably wasn’t true. That’s the theory underlying the defamation suit brought by a CDO fund manager against Michael Lewis for his tell-all about the subprime financial meltdown, The Big Short:
Author Michael Lewis and hedge fund manager Steven Eisman have been sued by a New Jersey asset manager for defamation over Lewis’s bestseller on the mortgage meltdown.
Wing Chau, who runs New Jersey asset management firm Harding Advisory LLC, claims “The Big Short: Inside The Doomsday Machine” falsely depicts him as one of the “villains” behind the U.S. financial crisis. Click here for the complaint.
It’s a thorough and well-written complaint, with an interesting theory underlying the claim: Wing Chau claims that Steven Eisman lied to Michael Lewis about a conversation Eisman and Chau had at a financial conference in Las Vegas, and that Lewis should have known Eisman was lying based upon his history and odd behavior.
There are thus two independent claims going on here: a claim against Eisman for lying to Lewis and a claim against Lewis and his publishing for publishing it.
As for the claim against Eisman, I of course have no idea what Chau said to Eisman other than what I read in The Big Short and Chau’s complaint, but if Chau didn’t actually say any of those things, a jury could indeed find Eisman’s remarks were defamatory, since they may have implied Chau knowingly providing less-than-forthright services to his clients. Although courts are supposed to let defamation claims go to trial if there is any conceivable reading of the statements which is defamatory, courts have increasingly taken it upon themselves to decide which statements are, or are not, defamatory, and have decided cases accordingly without letting a jury hear them. It’s possible that a court would dismiss Chau’s claims on the grounds that Eisman’s admittedly vague recollection was not defamatory, but my hunch is that the court would let the claims go to a jury trial.
Assuming the claims against Eisman go to trial, there’s an interesting issue relating to damages. It’s not like everyone thought Chau was the greatest money manager in the world until The Big Short came out: Chau’s entire market, subprime CDOs, imploded. Chau’s reputation as a financial wizard has most likely already been tarnished from his connection to CDOs. That doesn’t preclude him from suing for defamation, but it will be tricky for his lawyer to convince the jury as to how much of Chau’s reputational damage stems from the quotes in the book and how much stems from the fact that, regardless of his faut in the matter, his primary line of business nonetheless imploded and his clients lost a ton of money.
As for the case against Lewis, the primary argument made by Chau’s complaint — that Lewis should have suspected Eisman was lying, and should have doubted his version of events — is, ironically, the strongest defense that Lewis has. The Big Short provides a painstakingly detailed account of Eisman’s life, including many of his personal failings, and describes unambiguously how Eisman was the source of all of Lewis’ information about the alleged conversation with Chau.
That makes a defamation claim against Lewis much harder to sustain, since Lewis not only disclosed the source of all this information (and, presumably, accurately reported what Eisman told him), but even disclosed all of the same reasons to doubt Eisman as alleged by Chau’s complaint. The Big Short thus put its readers in the same shoes as Lewis, which will make it much harder to show that Lewis recklessly or maliciously defamed Chau.
Of course, a lurking issue near the heart of this case is the same reason why Mark Zuckerberg didn’t sue The Social Network: truth is an absolute defense to defamation, and by bringing suit Chau opens up a world of discovery into his entire way of doing business. Maybe he genuinely believes he has nothing to hide, or maybe he is taking a calculated risk (that is what financial managers do) that a judge will not permit thorough discovery into his subprime CDO business. There is nonetheless a substantial possibility that the court will allow Eisman and Lewis to dig deep into Chau’s business to find out exactly how it was managed and thereby prove to the jury that the statements of the book were truthful.
When all is said and done, Chau may have just given Lewis his next bestseller.
[UPDATE: Business Insider says, "In reality, Chau isn't portrayed well, but he doesn't look like a villain. He looks like the dummy." Felix Salmon says, "I’ve suspected since March 1 of last year that although The Big Short is a spectacular book and a superlative piece of narrative financial journalism, Lewis was all too willing to simply accept whatever he was told by Eisman without checking his facts particularly assiduously."]