Richard Booth is the Marbury Research Professor of Law at the University of Maryland School of Law. In this fine Washington Post op-ed (hat tip Ted Frank), Professor Booth explains that the US securities fraud litigation framework is fundamentally flawed in that investors collectively end up worse off as a result of securities litigation and that a coherent system would protect reasonable investors (that is, ones who diversify their portfolios) rather than unreasonable ones (betting the farm on one company):

For diversified investors who do happen to trade during the fraud period, there are no benefits from class action suits over the long haul. A diversified investor is equally likely to be on the winning side of a given trade as on the losing side. Indeed, diversified investors are net losers from class action because of the costs of litigation. So it is no wonder that an investor would need a little inducement to sue.
Undiversified investors may suffer significantly more harm from securities fraud, possibly losing thier entire investment. But it does not follow that an undiversified investor should have a remedy if they voluntarily assume the unnecessary risk that goes with failure to diversify. Through diversification, an investor can eliminate the risk that goes with investing in a single stock without any sacrifice of expected return. The only risk that remains is market risk.
Moreover, . . . it is so cheap and easy for investors to diversify that it is simply unnecessary for investors to take company-specific risk. Given that the fundamental goal of investing is to generate the greatest possible return at the lowest possible risk, it is irrational for an investor, not to diversify.
The Supreme Court has clearly stated that securities law should be interpreted consistent with the needs of reasonable investors. Plaintiff class members should thus be presumed to be diversified and such actions should be dismissed for lack of harm . . .

Meanwhile, in the face of such lucid analysis, chief NY Times securities regulation advocate Gretchen Morgenson contributes to this article that breathlessly reports that the SEC may be firing employees who take up the good fight of attempting to protect unsuspecting investors from those shady hedge funds. The notion that anyone who invests in a hedge fund in the first place should not be unsuspecting (and, thus, not in need of government protection) is noticeably absent from Ms. Morgenson’s analysis.