Yet in my completely SCIENTIFIC BITCHES! anecdotal and sporadic observations, stock prices usually take a meaningful hit as soon as the case is announced just because people get scared or don't really understand anything beyond "Securities Fraud Suit Filed By SEC re Company X Stock". There's generally a relatively quick recovery as cooler heads prevails and the market digests the fact that the suit says absolutely nothing relevant to the investment case for the company. Anyway, if one of you .001%ers want to bankroll such a fund and need a GC, give me a ring.
I used to work on cases like this a lot. Generally one of the things we would look for was the positive impact of the alleged fraud on the stock before it was uncovered.
If the stock is going to drop 15% in response to fraud being uncovered and having to restate financials...then you would expect that the fraudulent statements helped improve the stock performance by a comparable amount. E.g. a bank releases false and misleading mortgage numbers for a few quarters, causing their stock price to climb (or at least not fall as much in a downturn)...when the true numbers come out, the stock equalizes back to where it would have been but for the fraud (and minus any fines or reputation loss).
Outside of blatant fraud (like a pharma company saying "We have a cure for X" and it turning out to be false), I remember it being fairly rare to observe a statistically significant impact from the perpetuation of the alleged fraud. Then again, I don't think we were in the habit of taking unwinnable cases.
That would suggest that lawyerdad's theory has merit. The panicked selloff lowers prices far below the actual impact of any accounting shenanigans. Also, remember that every trade has two sides...I wonder if the big drop in price has more to do with outside buyers who know that people are panicking on the bad news and know that they can turn that fear into a low entry price to the stock. Normal buyers who would be interested in the stock at a fair price are wary due to the bad news...but strategic investors like lawyerdad's hypothetical fund are happy to sit there on the low end of the bid-ask spread and hope for someone who simply wants out of their position.
I know there have been many "bad news" stocks that I have worked with that I would have loved to own if it had been ethical (although as a counterpoint...I've also worked with bad news stocks that I absolutely wouldn't have wanted to touch with a 10ft pole and we had to hope they would still be around long enough to pay our bills).