OAKMARK FUNDS'
BILL NYGREN & HENRY BERGHOEF

(continued from preceding page)

Of course the brokerage firms have their conflicts.

OID: My question is about litigation risk as it pertains to the investment environment. I know that you guys suffered through USG - and asbestos seems to be its own particular nightmare. But with H&R Block, there was a flap over a lawsuit in Texas recently. Didn't they resolve that?

Berghoef: The Texas one - yes.

OID: It seems to be an attribute of down markets that this legal activity increases as people lose money in the market. I'm just curious about your thoughts on that?

Nygren: I'll make some brief comments on litigation generally. And Henry's the analyst who covers H&R Block, so I'll let him talk about that one specifically.

I think we're in an environment today led by people like Eliot Spitzer that is focused on, "What are the conflicts that people have who are publishing research?" It's been very focused on the large investment companies and the investment banking conflict. Well, that's a real conflict - and a well known conflict. So you shouldn't be surprised when you see a firm's report on a company that's an investment banking client have a more positive spin than one on a company that's not an investment-banking client.

You think brokers are conflicted? The independent firms….

Nygren: But there's a whole set of other conflicts out there that aren't attracting nearly that level of attention today. Independent research firms have been vaulted - they've been put on a pedestal - today because they're independent of investment banking relationships. However, they might be very dependent on relationships with others - like short-sellers, for example. As a result, their reports probably tend to be more negative in the spin and misinformation that they put out than are even the brokerage firms with their investment banking conflicts on the positive side.

Independent ≠ quality. Don't believe everything you read.

Berghoef: Yeah. The quaint thing about Wall Street is that it always takes things to excess - good ideas become bad ideas fast. Just because something is independent research or it's not from an investment bank doesn't mean it's quality. It doesn't mean it's credible. And it doesn't mean it ought to appear on the front page of the business section of The New York Times.

But that's where we get a bit of an edge, I think - because some people read those things and it scares the heck out of them. And as a result, they do things that aren't necessarily rational.

Touting with high pressure sales techniques in reverse….

Nygren: And H&R Block is a perfect example of that. This so-called independent firm comes out and puts out a report saying that, "We talked to the plaintiff's attorney - and there could be $2 billion of damages. And that's more than the net worth of H&R Block."

And then they get a bunch of salespeople on the phone who use high pressure tactics telling you that you're imprudent if you don't sell the stock immediately. Well, obviously, that can have a tremendously negative impact in the short term on a stock's price.

You know it's out of control when….

Nygren: We weren't specifically concerned about the H&R Block litigation, although Henry can get into that. But in terms of litigation in general, we don't like to get into stories where the outcome is tremendously dependent on litigation. That stems a lot from my fear of USG - where I thought that a few states with a very unlevel playing field took advantage of the fact that USG had some capital and basically milked them dry. There were only something like six states where the company lost almost all of their cases. But the cases from those six states ended up putting them into bankruptcy.

And it put them into bankruptcy over an issue that we felt had been handled reasonably well by the company. As soon as there was evidence that asbestos was harmful, they stopped producing it. But USG was losing cases involving people who were sick before the company even started making a product containing asbestos. So it was a ridiculous outcome.

That's why we tend to shy away from those cases - except in a case like H&R Block where we believe it's confined and the history has been so much on their side.

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