Saturday, October 31, 2009

OSHA Levies Record $87 Million Fine Against Oil Giant BP

The Occupational Safety and Health Administration (“OSHA”) levied a record $87 million fine against oil giant BP. The fine stems from events that took place in 2005, in connection with an explosion at a Texas City, Texas oil refinery owned and operated by BP. At the time of the explosion(in 2005), 15 workers were killed and 170 other workers were injured. Ironcially, Texas City is also the site of a 1947 ammunition explosion that killed 581. The 1947 Texas City Disaster is acknowledged as the largest industrial disaster on American soil.

The fine comes on the heels of OSHA’s 6-month inspection of the Texas City facility that revealed hundreds of violations of a 2005 settlement agreement to repair hazards at the refinery. OSHA officials found and cited 270 violations totaling $56.7 million in penalties on BP’s part in failing to correct violations indentified and required to be correct as part of the 2005 settlement agreement with OSHA. Additionally, OSHA inspectors uncovered 439 new willful violations which totaled $30.7 million. The new fines stem from BP’s failure to repair pressure relief valves and safety devices at the refinery.

This is the largest fine that OSHA has levied in its entire history. BP has 15 days to agree to pay the fines and take corrective measures. Alternatively, BP has the option of contesting the fines through a hearing process. BP has indicated that it might appeal the decision.

Friday, October 30, 2009

Too Big To Fail Legislation Introduced

Representative Barney Frank and Treasury Secretary Timothy Geithner introduced and defended this week new federal legislation that seeks to address the "too big to fail" financial firm problem that we've discussed on this blog several times previously. In short, the bill would create an executive branch council, the Financial Services Oversight Council, which would be delegated broad powers to oversee and promulgate regulations over firms designated as "too big to fail." This oversight council would be composed of representatives from the Treasury Department, the Federal Deposit Insurance Corp., the Securities and Exchange Commission, and other various bank regulators that would be given the power to "invoke the authority" to provide funds to "wind down" insolvent institutions.

The proposed legislation, which set off a firestorm of criticism in Congressional hearings yesterday, would give power to the Financial Services Oversight Council to establish capital asset requirements and "be responsible for identifying companies and financial activities that pose a systemic threat to the markets and subject those institutions to greater oversight, capital standards and other regulations," including winding them down if the systemic threat would damage the national and global economy. Three of the most contentious issues already raised include (1) who will pay for the winding down of the failing behemoth institutions, (2) what cap might be set as an asset figure that will make a firm "too big to fail," and (3) whether the Government's list of potential "too big to fail" firms will be made public.

As to the first issue, who will pay for the winding down, the bill proposes that "financial institutions would not be required to pay fees in advance to fund a pool of capital. Rather, the government would first borrow taxpayer dollars from the Treasury Department and afterwards recoup the costs from assessments on financial institutions with $10 billion or more in capital." This proposal has critics up in arms suggesting that regional banks will become the new "taxpayer bailout" target as regional banks with assets of $10 billion or more will foot the bill if enormous financial institutions fail. Critics argue that an up-front insurance tax on all "too big to fail" financial institutions makes much more sense than an "after the fact" taxpayer funded bailout (through the Federal Reserve) to be reimbursed later by financial firms with net assets of $10 billion or more.

As to the second issue, whether a cap on assets is necessary to properly regulate "too big to fail," a number currently debated is capping assets at $100 billion. This number is, according to critics, just one tenth the size of some already existing financial institutions. In addition, Fed Reserve chair Ben Bernanke does not seem to think that any cap is mandatory, as it might hinder the borrowing needs of global institutions.

To the third, issue, whether to make public those firms identified by the Government as potentially "too big to fail," the proposed legislation seems to be contradictory as to when and if these firms should be made public. Critics suggest that a potential public identification could have deleterious impact on financially sound firms that just happen to have an enormous amount of assets on its books and might imply to the public that these firms would assuredly be bailed out by the government in the event of overleveraging and reckless management.

As argued by Steve Ramirez yesterday, now that the bill has been proposed and defended, critics, lobbyists and opponents will no doubt line-up with great purpose in order to kill the legislation. Whatever the merit of the proposal, the amount of lobbying and money that will be spent to kill this bill will be amazing.

For more on Too Big To Fail, see:

Professor Barclift: Too Big To Fail, Too Big Not to Know

Professor Ramirez: Subprime Bailouts and the Predator State

Professor Painter: Bailouts: An Essay on Conflicts of Interest and Ethics When Government Pays the Tab

Thursday, October 29, 2009

Reform Delayed is Reform Denied?

On August 28, 2009 dre cummings blogged on SEC proxy reform. The SEC proposed reform was revolutionary in granting broad access to shareholders of their corporation's proxy statement to nominate directors and encourage some degree of contested elections. Unfortunately, the proposal inspired powerful opposition. Most recently the SEC has delayed the vote on the reforms.

So, here is my question: doesn't delay always work in favor of entrenched interests against real reform (defined to mean a true redistribution of power)? Delay always diffuses the political energy of the moment--whether the moment is a financial crisis or a recent election. Recall that FDR struck quickly enacting a dizzying array of reforms in the famous 100 days. It may be true that Congress was poised to cooperate after four years of unrelenting economic pain.

Nevertheless, perhaps it is simply a truism that true reform comes through a blitz and any delay simply gives well-financed elites time to mobilize their resources. Time also deadens fear. And, elite fear may itself be essential to reform. Fear of communist ascendancy drove the Supreme Court in Brown to overturn Plessy. Fear of reversion to Depression caused the revolutionary GI Bill.

Thus, my fear. This delay by the SEC simply allows reform energy to dissipate and elites time to organize.

And, by inference, the time that has passed since the energizing election of Barack Obama may well suggest the the full array of reforms will atrophy.

Here's hoping I am wrong.

Tuesday, October 27, 2009

80th Anniversary of the Great Crash of 1929 Symposium

Beginning on October 24, 1929, the New York Stock Exchange dove nearly forty percent, beginning a sequence of market events that ultimately lead to the Great Depression. In recognition of the 80th anniversary of the Great Crash of 1929, Chapman University School of Law will host the 80th Anniversary of the Great Crash of 1929: Law, Markets, and the Role of the State on Friday, October 30, 2009. The symposium will address the similarities between the historical and modern financial markets. NeXus: Chapman’s Journal of Law and Public Policy will publish the provocative presentations in a symposium issue.

The morning panel presentations include:

(1) The Economic & Regulatory Landscape in the Aftermath of the "Great Recession"

(2) Keynote Presentation:
The Impact of the Recession on California & the Local Economy will be presented by Professor Tom Campbell with introductory remarks by Congresswoman Loretta Sanchez

The afternoon panel presentations include:

(1) Federal Financial Regulatory Reform

(2) Practical and Theoretical Implications of Public Sector Financial Reform

If you are in the Orange County area, please consider stopping by to join us for a provocative discussion of the Great Stock Market Crash and financial regulation.

Additional information regarding the symposium including registration can be addressed to Chris Lewis at Chapman University School of Law, One University Drive, Orange, CA 92866. Mr. Lewis’ number is 714-628-2605, and fax number is 714-628-2564. Mr. Lewis’ email is

The symposium website can be viewed here.

There will be a live webcast of the symposium available at

Lydie Nadia Cabrera Pierre-Louis
St. Thomas University School of Law

Friday, October 23, 2009

Another Example of CEO Compensation Run Amok?

Drexel University Professors Eliezer Fich, Jie Cai and Anh Tran have authored a research paper and study that purports to show that Chief Executive Officers of companies targeted for takeover routinely receive unscheduled option grants during private merger negotiations that serve to enrich the CEO's at the expense of their company shareholders once a merger is consummated. The paper, entitled "Stock Option Grants to Target CEOs During Private Merger Negotiations," describes its purpose and findings as follows:

"Abstract: Many publicly traded targets grant their CEOs unscheduled options during private merger negotiations. Such grants, which become exercisable when acquisitions consummate, are systematically timed to benefit target CEOs. Such favorable timing persists even after Sarbanes-Oxley passes. Conversely, we show that the same target CEOs negotiate lower than expected acquisition offers. Consequently, shareholders of targets that grant their CEOs unscheduled options during private merger negotiations lose about 307 million dollars when their firms are sold. These losses trigger non-trivial wealth effects; on average, target value drops by 54 dollars for every dollar target CEOs receive from these unscheduled options. Our results have public policy implications related to executive compensation, corporate governance and securities laws."

As merger and acquisition activity has resurfaced in recent months after a period of dormancy based on the global meltdown, this CEO enrichment practice seemingly continues unabated. At bottom, this study suggests that CEOs are being incentivized to consider takeover overtures from potential acquirors through the grant of options that allow million dollar paydays once the CEO considers, accepts, negotiates and consummates a merger. But why incentivize a CEO that should be acting in the best interest of his or her shareholders by seriously considering all takeover overtures that may benefit the corporation's shareholders? Additionally, the study suggests that the CEO that receives the unscheduled option grant is less vigilant in negotiating the best takeover price for shareholders as presumably he or she is working to protect the million dollar payday by ensuring that the acquisition closes, rather than negotiating hard with the acquiror by pushing for greater value for shares.

As reported in the Wall Street Journal last week, in June 2009, top executives at Omniture Inc. received new unscheduled options just weeks after the software firm received takeover feelers from Adobe Systems Inc. Adobe eventually agreed to buy Omniture for $1.8 billion with profits to the top Omniture executives tallying $9.7 million on their newly granted options.

Marvel Entertainment Inc.'s CEO stands to reap $34 million from unscheduled options granted to him in the weeks after acquisition talks were opened with the Walt Disney Co., that ultimately led to the consummation of a merger between Disney and Marvel.

According to the Wall Street Journal: "For shareholders, such grants can cut two ways. Critics say that insiders at some companies are unfairly benefiting from nonpublic information, and that issuing extra shares to executives dilutes the value of existing shares. On the other hand, such options could provide further incentive to executives to entertain takeover bids, benefiting all shareholders."

I find this WSJ explanation outrageous. Granting unscheduled stock options to top company executives is necessary to incentivize executives to actually entertain takeover bids, thus benefiting all shareholders?! It is a fiduciary responsibility of corporate executives to entertain takeover bids. If additional compensation is necessary to provide incentive to caretake an important fiduciary responsibility, then we have truly lost our way in connection with executive compensation.

Once again, are Corporate Executives and Corporate Boards, enriching themselves at the expense of the shareholders they are charged to represent and protect? This study certainly seems to indicate yet another example of CEO compensation run amok.

Wednesday, October 21, 2009


I just finished watching Frontline: The Warning, which I highly recommend to anyone interested in financial regulation. The basic storyline should now be familiar to all: in good times the lessons of past financial crises fade quickly; those with economic power co-opt political leaders; regulations are rolled back and new activities are left to market forces; isolated voices may sound alarms but they are ignored or silenced; a new crisis emerges that teaches once again that laissez-faire is an economic dead end. The lesson typically costs trillions. Here the hero is Brooksley Born, the brilliant head of the CFTC, and the antagonists are Alan Greenspan, Lawrence Summers, Robert Rubin and Timothy Geithner. The issue is the regulation of derivatives, which Born pushed hard for and which ultimately led to her resignation.

The interview with Joseph Stiglitz is a classic. Arthur Levitt's regret at failing to support the effort for regulation is rather poignant. Greenspan's famous admission that his laissez-faire views were "flawed," is also a classic moment.

But perhaps the most important part of the documentary is when it traces the propagation of the deregulation mania from Reagan to Clinton to Bush II to the present day Obama administration. It seems like changes in administrations are meaningless when it comes to the power of entrenched elites.

Another disturbing message is that the time for reform is fading. As Paul Krugman recently recognized, Stiglitz too worries that the political energy towards regulatory reform has dissipated. Joe Grant's excellent post on this reality echoes this fact.

Brooksley Born's final statement is downright chilling. She warns that the failure to address gaps in our financial regulatory infrastructure will lead to crisis after crisis until we get regulation right.

I am today more skeptical than ever that future financial crises can be averted. First, the Obama reform proposals were weak at inception. Second, the banks are pulling out all the stops to kill even these weak proposals. Finally, time is certainly on the side of the banks. Since it is now over a year after the collapse of Lehman and the multi-trillion dollar bailouts, the probability of real reform is now receding on a daily basis.

Fasten your seat belts! "There will be significant financial downturns and disasters attributed to this regulatory gap."

PS: dre cummings wrote a prophetic paper on all this available for free download here.

Tuesday, October 20, 2009

America's New Class Warfare? NEPOC 2009 Conference

The Northeast People of Color Legal Scholarship Conference (NEPOC) is holding its annual conference at the University at Buffalo Law School on October 23-24, 2009. The theme of the conference is America's New Class Warfare, which broadly encompasses many possible topics and perspectives. For instance, the invisibility of the wealthy, scrutiny of the relationships among the wealthy, the disappearing middle class, the working class, and the poor, in light of the current financial crisis.

Additional topics include how the intersectional analysis of race, gender, class, sexuality, assist in our understanding of the economic theories and forces that are currently in play.

And finally, what role law is playing in shaping the structures, power, interests, resource uses, individual and group identities and distributions of wealth and recovery?

Presenters include: Professors Anthony Paul Farley, Angela P. Harris, Athena D. Mutua, Lenese Herbert, Nancy Ota, Christian B. Sundquist, Donna E. Young, Sanford Schram, Elvia R. Arriola, Deborah W. Post, Matthew L.M. Fletcherand, Rick T. Su, David Freund, Audrey McFarlane, James C. Smith, Sudha Setty, Leonard Baynes, Alafair S. Burke, James Forman, Jr, Marjorie Florestal, Neil Williams, Michael Selmi, James Forman, Jr., Paula C. Johnson, Janis D. McDonald, Teresa A. Miller, and Lydie Nadia Cabrera Pierre-Louis.

Additionally, several work-in-progress sessions are scheduled throughout the program to highlight the wonderful junior scholars in the academy. As is typical at the people of color conferences, professional development sessions are also included in the program.

The Haywood Burns – Shanara Gilbert Awards Ceremony Dinner will also be held.

This year's conference, promises to be provocative, welcoming and informative. If you are in the Buffalo area, please consider stopping by to join us. Professor Elaine M. Chiu of St. John's University is the Chairperson, NEPOC Planning Committee. For further information please contact Professor Chiu. Her email address is The website for the NEPOC 2009 conference provides registration information and is linked here.

Lydie Nadia Cabrera Pierre-Louis
St. Thomas University School of Law

Saturday, October 17, 2009

The Tough Task of Financial Regulatory Reform: Those Ungrateful Banks

This week the Dow surged past 10,000 points. JPMorgan Chase and Citigroup reported earnings that exceeded analyst’s estimates. These are all positive indicators. However, structural and regulatory problems that caused the current financial crisis have remained unaddressed to this point.

The Obama Administration has proposed major overhauls to the financial regulatory system. In the past year taxpayer’s have provided vast sums of money to bailout banks. For the most part, these bailed out banks have been restored to profitability and are providing record compensation for their executives. In the midst of President Obama’s push to reform and overhaul financial regulations, guess who’s pushing back the hardest? If you said banks, you’re correct. Yes, the very industry that the federal government saved is lobbying the hardest to thwart overhaul and regulation of their industry.

This week, the Obama Administration voiced frustration with the banking industry. Administration officials noted that the banking industry is returning to a sounder footing because of government bailout, and that lobbying efforts to kill regulation run counter to the nation’s longer term interests. Valerie Jarrett, a senior advisor to President Obama noted: “We are disappointed by the lobbying of anyone in the financial industry against regulatory reform, considering the obvious need for change on that front.”

The banking industry misses the point. Some banks are reporting record compensation and a return to pre-financial crisis meltdown profits. This is the picture on Wall Street. On Main Street, unemployment is close to 10%. Foreclosures over the last year have jumped close to 30%. If Main Street is hurting Wall Street should be more conscious of that fact. Quite honestly, Wall Street, and banks and the financial services industry in particular, should be more thankful and grateful for the lifeline extended to them by taxpayer’s.

Keep an eye on the Sunday morning talk shows. The Obama Administration has promised to send a tough message to the financial services industry regarding the industry’s pushback on regulation. We shall see.

Friday, October 16, 2009

Provocative Symposium Webstream Available

The Financial Crisis symposium held at the University of Utah S. J. Quinney College of Law on September 25, 2009 is now available for viewing via webstream. At this symposium, commentators and law professors from around the United States gathered in Salt Lake City, Utah to take stock and assess the current status and standing of the financial meltdown that threatened the very stability of the global economy just 12 months ago. The purpose of this forum was to examine, debate and explore the reasons that the crisis occurred, the measures being taken to avoid a similar cataclysmic event and to examine whether the Obama administration's proposed resolutions and new regulations might lead to the kind of security that "main street" and U.S. taxpayers need and require.

The morning panel which debated Corporate Governance and Corporate Board Diversity in light of the global meltdown featured Professors Steven Ramirez, Cheryl Wade, Regina Burch and Todd Clark, with an introduction by Dean Christopher Peterson. That very provocative session can be viewed here:

Financial Crisis Symposium, morning session:

The afternoon panel, which examined the myriad "causes" for the financial crisis and proposed forward thinking resolutions and fixes, was entitled "Regulatory Failures" and featured Professors Timothy Canova, andré douglas pond cummings, Joseph Grant, Christian Johnson and Jena Martin-Amerson. That informative session can be viewed here:

Financial Crisis Symposium, afternoon session:

The live webstream to this symposium also included a live chat that streamed aside the forum speakers and commented directly on the information that was being debated, real time.

Thursday, October 15, 2009

Too Big to Fail, Too Big Not to Know

Corporate Justice Blog Posting 10/15/09

Too Big to Fail, Too Big Not to Know[i]

We are all more than familiar with the financial crisis in the fall of 2008 where the US and global economies experienced a financial crisis of cataclysmic proportions. Beginning with the failure of several Wall Street financial firms, the financial markets reacted to the crisis by freezing the credit markets leading to a US and global recession.

The underlying cause of the financial crisis is widely attributed to the risky bets of many Wall Street firms on the financing and selling of financial instruments tied to consumer mortgages.[ii] In addressing the financial crisis, the Treasury Department and the Federal Reserve began unprecedented efforts to inject capital into financial markets (by providing loans and other equity capital to banks in order for the institutions to avoid bankruptcy), and to assess the underlying causes of the financial crisis.[iii] The federal government also began a multi-agency investigation into the conditions, which caused the financial crisis.[iv]

The Treasury Department concluded there were several reasons for the financial crisis.[v] Citing a lack of regulatory oversight and transparency in the selling of collaterized debt obligations and mortgage-backed securities by banks, investment banks, and other financial firms, the federal government began a regulatory overhaul of financial firms.[vi]

The assessment of systemic risks in the financial markets was determined to be a regulatory priority. The Treasury Department began to identify institutions it deemed “too big to fail” and establish procedures for applying a “stress test” to these institutions.[vii]

Two key initiatives are noteworthy. One calls for increased transparency, accountability, and monitoring of firms receiving federal funds.[viii] The second calls for housing support and foreclosure prevention for consumer mortgages.[ix] While both initiatives potentially improve the accountability of financial firms in their use of government funds, the government requirements for risk assessment do not require financial firms to put in place reasonable procedures to assess the effects of mortgage lending on communities of color.

The financial crisis caused by risky bets on Wall Street has had more dramatic effects on communities of color in the form of mortgage foreclosures.[x]
Communities of color were more likely to be the victims of fraudulent and unscrupulous mortgage broker practices.[xi] While Wall Street appears to be headed for new record profits and bonuses for employees, the downstream communities harmed by the financial instruments fueling Wall Street growth continue to receive little attention.[xii]

Federal Regulators must mandate that Wall Street financial firms deemed too big to fail develop a corporate social responsibility agenda for corporate governance. Corporate social responsibility requires firms to consider the consequences of business decisions on society.[xiii]
Financial firms deemed too big to fail by the federal government should be required to develop a corporate governance process in which a corporate social responsibility agenda assesses the potential negative consequences of loan products derived from consumer lending, particularly on low income or communities of color.

Requiring a corporate social responsibility agenda that seeks to understand the downside risk of financial products on communities of color, serves two important goals.
First, financial firms deemed critical to the economic stability of US and global economies and requiring government funding in the event of financial instability should be required to know the effect of their financial products, which are derived from consumer mortgages, on the communities served. Second, financial firms critical to the flow of capital should be required to assess the future economic consequences of the mortgaged based products they sell on the communities they serve.

If a financial firm is too big to fail, it is also too big not to know the consequences of its financial decisions on the communities it needs to drive its financial success.

[i] Comments of Z. Jill Barclift, Associate Professor of Law, Hamline University School of Law. These comments are based on a forthcoming presentation and essay.

[ii] See generally THE TRILLION DOLLAR MELTDOWN (Charles R. Morris 2008)

[iii] See generally (last accessed 10/15/09) Statements by Secretary Henry M. Paulson, Jr. on Financial Markets Update, October , 2008

[iv] See generally (last accessed 10/15/09) Joint Economic Committee: Shelting Neighborhoods from the Subprime Foreclosure Storm

[v] See generally (last accessed 10/15/09)

[vi] Id.

[vii] Id.

[viii] Id.

[ix] Id.

[x] See generally (last accessed 10/15/09) Worl Economic Forum, Partnering to Strengthen Public Governance (January, 2008)

[xi] Id.

[xiii] Id.

Wednesday, October 14, 2009

Citigroup Fined $600,000 for Implementing Tax Avoidance Strategies that Defrauded IRS of Billions in Taxes

Citigroup Inc. was fined $600,000 by the Financial Industry Regulatory Authority (FINRA) formerly known as the National Association of Securities Dealers, a private-sector regulator of U.S. broker dealers with supervisory authority over 4,800 U.S. brokerages, which determined that Citigroup Global Markets assisted their clients to avoid paying billions of dollars of U.S. taxes.

The recent fine against Citigroup is part of a larger U.S. Senate investigation regarding global tightening on tax evasion schemes as numerous governments attempt to close widening budget gaps fueled by economic weakness. At the center of the U.S. Senate investigation and tax recovery effort has been the U.S. Department of Justice’s case against UBS AG, a Swiss banking conglomerate. In October 2008, UBS AG agreed to pay $780 million to settle criminal claims that it helped U.S. citizens evade taxes.

In the case against Citigroup, FINRA determined that Citigroup employed two main trading strategies to help their clients avoid paying U.S. taxes. The first trading strategy Citigroup employed from 2000-2004 to help their clients avoid paying U.S. taxes, was designed primarily to enrich Citigroup. The strategy involved Italian stock trades and loaning the stocks to Citigroup’s Swiss affiliate to avoid paying U.S. withholding taxes.

The second strategy that Citigroup employed from 2002-2005 involved buying U.S. stocks from foreign broker-dealer, selling the U.S. stocks back to the foreign broker-dealers before dividends were paid. After a series of interim steps, including using a derivative contract commonly known as a total return swap, the foreign clients would receive an amount equal to the dividends as a “dividend equivalent” free of withholding taxes. The “dividend equivalent” is not subject to U.S. withholding taxes. In 2006, Citigroup paid approximately $24 million to the Internal Revenue Service for using this strategy.

FINRA’s Executive Vice President and Chief of Enforcement, Susan Merrill, stated that “Citigroup’s inadequate supervision resulted in improper trading… increasingly complex trading strategies must be governed by supervision that is equally sophisticated.” FINRA determined that Citibank lacked written procedures to govern total return derivative swap transactions. FINRA also determined that Citigroup employees deviated from the procedures that Citigroup did implement. Furthermore, Citigroup failed to report certain stock trades to the New York Stock Exchange, as required by securities regulators.

In an era of heightened corporate governance, in part due, to the adoption of Sarbanes-Oxley as result of corporate misconduct by former Wall Street darlings such as Enron, K-Mart, Adelphia Communications et cetera, it is shameful that corporate misconduct of this magnitude continues to proliferate in the markets. I find myself repeatedly asking why major corporations engage in such reprehensible conduct. Citigroup’s implementation of total return dividend swap-links, intentionally designed to deceive the IRS, is not only manipulative and fraudulent, it is also illegal. However, FINRA’s fine of a mere $600,000 seems grossly under representative of the magnitude of Citigroup’s conduct.

FINRA stated that the amount of the $600,000 fine was influenced by Citigroup’s willingness to report the violations to FINRA. Citigroup neither admitted nor denied wrongdoing in agreeing to settle the investigation.

Lydie Nadia Cabrera Pierre-Louis
St. Thomas University School of Law

Tuesday, October 13, 2009

On the Public Availability of Merger Agreement Schedules

With the Bank of America case squarely in the front of corporate news, the custom of not filing merger agreement disclosure schedules as part of SEC exhibit filings has been spotlighted. In that case, as you may recall, the SEC claims that overall disclosures to shareholders in connection with the merger were materially misleading on the issue of Merrill Lynch's lucrative executive bonus program. The complaint in the Bank of America case alleges a violation of Rule 14a-9, the proxy regulation antifraud rule.

Typically, representations and warranties--and sometimes covenants and conditions-- in merger agreements are qualified by reference to a set of disclosure schedules that provide background information on, e.g., exceptions, limitations, clarifications, and other informational enhancements, to the text of the merger agreement. Some of these disclosures represent information that the parties desire to keep confidential--threatened litigation and claims, for example. The relevant filing Rule, Item 601 of Regulation S-K allows for the omission of these types of schedules under certain conditions. Specifically, the description of the relevant exhibit (Exhibit 2) provides that "[s]chedules (or similar attachments) to these exhibits shall not be filed unless such schedules contain information which is material to an investment decision and which is not otherwise disclosed in the agreement or the disclosure document." Most corporate counsel, in my view, have believed that the clear references to disclosures omitted from filing under the rule (especially when combined with a statement disclaiming third-party reliance) would be a signal to shareholders that reliance on the absolute truth of the qualified text of the merger agreement is unwarranted.

However, the non-filing of merger agreement disclosure schedules also was an issue in a recent Ninth Circuit case, Glazer Capital Management, LP v. Magistri, 549 F.3d 736 (9th Cir. 2008) (Adobe Acrobat required for viewing), where the court finds that representations and warranties in a merger agreement qualified by unfiled disclosure schedules referenced in the agreement are actionable under Rule 10b-5 (the general antifraud rule relating to purchases and sales of securities), expressly stating that the fact "that the merger agreement was a private document and included reference to a non-public disclosure schedule would not, as a matter of law, prevent a reasonable investor from relying on its terms."

Although some may view this ruling as harsh, it would seem that the existing rules appropriately balance the issues relevant to both cases. If the corporation can prove that all material information necessary to a voting or other investment decision has been accurately and completely disclosed in the disclosure document (Schedule 14A proxy statement, Form 10-K annual report, etc.), then the corporation should be able to avoid ultimate liability. The problem for the corporation is that it may be unlikely to be able to rid itself of this type of claim on a motion to dismiss (since materiality is a mixed question of law and fact typically not easily determinable on a motion to dismiss). One possibility, however, is for the corporation to argue one of the key defenses to materiality--in this case, likely the truth on the market defense. In fact, former SEC Commissioner (now Professor) Joseph Grundfest made just such an argument in an affidavit filed in the Bank of America case.

I am curious about others' thoughts on this issue, which is important to public company M&A practice. Is it also your view that the current playing field is well balanced between corporate issuers/registrants and investors?

Sunday, October 11, 2009

The Most Massive "Welfare" Program in History?

The above chart shows a disturbing reality: a huge amount of societal wealth is sitting idle at the Fed, and has recently increased to record amounts. In my view, this fact is the result of the most massive welfare program in history--corporate welfare--for financial elites.

The Fed essentially purchased a wide variety of assets and paid for them by increasing bank reserves, leading to the above. refers to these efforts as the Fed's $2.2 trillion fire hose. Some in Congress want to know precisely the terms of the Fed's transactions and which banks benefited--for both balance sheet transactions and off-balance sheet transactions. Outside of the very general analysis it is impossible to know what exactly the Fed has been up to--and those in the mainstream media--like Maria Bartiromo--could not be less interested.

We do know that the Fed has made mass purchases of mortgage backed securities (including "troubled" assets) and Treasury obligations. Since banks hold these securities in huge amounts this not only keeps interest rates down but also pumps up bank capital by inflating asset prices on bank balance sheets. This subsidy is not costless: when the Fed sells the stuff they bought the US taxpayer will be on the hook for losses, as recognizes. If the Fed fails to sell the assets it purchased then banks can lend these reserves and through the operation of fractional reserve banking create a wave of inflation.

Another Fed action that helped create these idle reserves was the decision to pay interest on the reserve balances in October of 2008. In the middle of the greatest financial crisis in history, the Fed essentially decided to pay banks not to lend. One economist calls this one of the greatest errors in Fed history. Another calls it "utterly inexplicable."

But the answer lies in political economy not economics. The payment of interest on reserves allowed the Fed to give banks a safe harbor for parking capital at rates significantly higher than short term Treasury obligations. Again this subsidy is not costless. Aside from its contractionary effect, and its immediate cost of above market interest, either the Fed will have to raise the interest rates paid on these reserves at some point in the future or face the risk of inflation. If it raises the interest rate too high all of its operating income could be absorbed and the US taxpayer would have to bailout the Fed. As economist William Gavin states:

"It is relatively easy to imagine situations in which the interest cost paid on reserves would absorb most or all of the Fed’s income. Such conditions might include an inverted yield curve, reduced income from the GSEs, and/or a rising portfolio of nonperforming assets from bank rescue operations."

A bailout of the Fed is hardly unthinkable. Over the last year the Treasury has issued debt to pump $560 billion into the Fed pursuant to its "Supplementary Financing Program."

It will be years before all of this unwinds and we know the true costs of this stealth Fed bailout. But, it is a huge and unprecedented amount. We have pumped up asset values, limited loss exposures, and pumped up income, to keep the big banks afloat. Long term incentives have been destroyed. This is on top of the $700 billion TARP bailout that Congress (barely) passed.

All of this has been done with limited Congressional approval and limited public disclosure. It has also been broadly bi-partisan. The effort to audit these activities is the least Congress should do.

The central point is this: those concerned about federal spending need to recognize that the relatively trifling amount spent on "welfare" for real people has been dwarfed by welfare for the banks, which will ultimately amount to trillions not billions in expenditures. And, it may well be impossible for the Fed to avoid a torrent of inflation down the road, depending on the cost of keeping these reserves idle.

The bi-partisan decision to bailout the banks will be the key turning point in American economic history.

Saturday, October 10, 2009

Capital Law’s Annual Business, Tax Institute, 10/16/09, Broadens Focus To Benefit Executives, Counsel Navigating Turbulent Economy

FOR IMMEDIATE RELEASE: Contact: Nichole Johnson, Director of media relations and communications, Capital University, (614) 236-6945 Cell: (614) 440-9158.

COLUMBUS, Ohio – Capital University Law School’s Sixth Annual Business and Tax Institute is shifting its focus this year from tax and estate planning to new corporate governance issues emerging out of the financial crisis, and transaction options for distressed companies trying to stay afloat in choppy economic waters. The conference topic is “The Financial Crisis: New Administration Initiatives and How Practitioners Should Advise Clients as a Result.” It will be held Friday, Oct. 16, from 8:30 a.m. to 5 p.m. at the State Teachers Retirement System of Ohio, 275 E. Broad St., in downtown Columbus. Featured speakers and panelists include nationally recognized practicing attorneys, business financial advisors and academics, such as:

  • James Wilson, immediate past chair of the American Bar Association’s Section on Antitrust Law and a partner in the Columbus office of Vorys, Sater, Seymour and Pease LLP;
  • Michael J. O’Sullivan, a corporate partner in the Los Angeles office of Munger, Tolles & Olson LLP and blogger at provided, however, a blog devoted to corporate law issues; and
  • John P. Beavers, managing partner at Bricker & Eckler LLP and founder and director of Bricker & Eckler’s Counsel for Boards and Executives.

“The financial crisis has shaken the foundation of our economy, and in many ways, executives are trying to regain their footing on ground that hasn’t settled yet,” said Regina Burch, associate professor of law at Capital, corporate governance expert and blogger for the Corporate Justice Blog. “Our intention with this institute is to offer practical advice from a legal and business perspective to executives, boards and their counsel as they steer their organizations through a turbulent economic environment.”

The morning sessions will focus on the financial crisis and the governance of private and publicly held for-profit and nonprofit corporations. Afternoon sessions will address financial transactions for distressed companies, including bankruptcy, restructuring and raising capital. The day will conclude with a presentation by James Wilson, who will highlight the new Department of Justice antitrust enforcement policy and its impact on business combinations designed to help financially troubled business organizations. Other conference speakers and panelists include:

  • Anthony Blanchard, vice president, Deloitte & Touche Corporate Finance LLC, in Detroit, Mich.
  • Kevin M. Kinross, associate, Bricker & Eckler LLP, Columbus, Ohio
  • Trish D. Lazich, assistant chief of the Collections Enforcement Section of the Ohio Attorney General’s Office, where she manages the bankruptcy portfolio
  • Jeannine R. Lesperance, of the U.S. Department of Justice, Civil Division, Commercial Litigation Branch, in Washington, D.C.
  • Andrew M. Malek, assistant U.S. attorney for the Southern District of Ohio, and affirmative civil enforcement coordinator for the district
  • Jeffrey A. Marks, principal, Squire, Sanders & Dempsey LLP, in Cincinnati, Ohio
  • Victoria E. Powers, partner, Schottenstein Zox & Dunn Co. LPA, in Columbus, and co-leader of the business restructuring and creditors’ rights practice group and coordinator of the creditors’ rights and corporate trust practice area
  • Michael P. Shuster, partner, Porter Wright Morris & Arthur LLP, in Cleveland, Ohio

Up to 7.0 continuing legal education credits are available. For more detail on the speakers, agenda, costs, registration and more, visit <>.

Friday, October 9, 2009

Runaway Debt?

The above chart shows a simple and straight forward ratio: Gross Debt/GDP. In the last year this ratio has moved from an unprecedented 350% to an even more unprecedented 375% of GDP, as of 3/31/2009. In other words, our nation and society is more leveraged and indebted than ever before. In fact, the recent financial crisis has thus far operated to exacerbate indebtedness rather than facilitate an orderly deleveraging.

Deleveraging is never pleasant as you can see from the chart: the last major deleveraging led to the Great Depression. Deleveraging means consumers and businesses cut back on expenditures, including employees, sell assets to pay off debt, and slash investment, all with the goal of reducing, by all means necessary, debt. Another means of deleveraging is to expand income or GDP, rapidly.

We have no policy for managing our society's debt load through law, or otherwise. In the past we at least required 20% down payments (or private mortgage insurance), and government budgets had a minimal level of integrity and sustainability. For example, Bush I/Clinton worked together in the 1990s to remedy the high deficits created in the wake of the Reagan deficits. Bush II never saw an issue that could not be resolved through tax cuts and he put the nation on a catastrophic fiscal course. The present administration has not had many options for dealing with this train wreck, but its continuation of bank bailouts and more tax cuts have neither stimulated the over leveraged economy (because banks are desperate to shore up balance sheets and are hoarding capital and consumers are desperate to pay off debt) nor remedied our long fiscal nightmare.

Meanwhile, American consumption was expected to drive global growth even in the face of eroding wages and jobs in the US. The only means available to deliver both cheap wages, fattened profits and high CEO bonuses to the transnational firms and American centered consumption was through massive debt. This model of globalization enjoyed broad support from both Democrats and Republicans.

Finally, everyone (Democrat and GOP) wanted to deregulate financial markets worldwide. All of a sudden globalization became the means of spreading toxic levels of American debt throughout the globe. These foreign investors actually drove expanding levels of debt by flooding the US with cheap capital.

So, the cards were stacked in favor of a debt binge parading as financial "innovation." No amount of innovation can spare a nation from the pain of unsustainably high debt levels.

Runaway debt combined with runaway unemployment poses a major threat to our standard of living, yet our leaders and our mainstream media seem oblivious to the problem. Mainstream Law & Economics is similarly bankrupt.

I am working on a paper entitled the "The Law and Macroeconomics of Odious Debt" that specifically seeks to articulate the appropriate legal framework for managing the risks of over-leveraging on a society wide basis. Any help would be most appreciated.

Tuesday, October 6, 2009

No Nachos for Nacchio

The U.S. Supreme Court denied certiorari regarding Joe Nacchio, a former Qwest chief executive, appeal of his insider trading conviction. Qwest Communications International, Inc. is a Denver based telecommunications company. In 2007, a jury convicted Joe Nacchio, on 19 counts of illegal insider trading because Nacchio illegally dumped $52 million worth of Qwest stock based on insider information that Qwest was performing much worse than was being publically stated or forecasted. Judge Edward Nottingham sentenced Nacchio to six years in prison and ordered him to pay $71 million in fines and asset forfeiture.

As a result of Nacchio’s misconduct, thousands of Qwest shareholders blame Nacchio for their retirement losses. "There are people who are going to go to their graves very, very upset with Joe Nacchio," stated Al Lewis, a former business columnist for the Denver Post. However, in 2008, Nacchio’s conviction was reversed by a three-judge panel within the Tenth Circuit for the U.S. Court of Appeals. Almost a year later, the full Tenth Circuit reversed the decision, and teed up the process for an appeal to the Supreme Court.

Nacchio’s legal battle is far from over. In July 2009, an appeals panel that had previously granted Nacchio a new trial, awarded Nacchio a new sentence, ruling that trial Judge Edward Nottingham miscalculated when he ordered Nacchio to serve six years in prison and pay $71 million in fines and forfeitures. The appellate panel suggested that the sentence was excessive because the sentence penalized Nacchio for the natural appreciation of his Qwest shares, not just the benefit Nacchio gained from trading on inside information. The appellate court's ruling will likely result in a shorter prison term-- approximately 3.5 years imprisonment rather than 6 years and smaller financial penalties for Nacchio’s insider-trading conviction.

Nacchio’s legal expenses continue to be paid by Qwest because a corporate arrangement requires Qwest to pay for Nacchio's defense under its corporate bylaws and indemnification agreement. "It was a huge amount of money for [Nacchio] to spend. [On his appeal] he had one of the best known lawyers in the United States, Maureen Mahoney, representing him," Lewis stated. Lewis estimates that Nacchio's legal bills could easily total $75 million.

The Securities & Exchange Commission is also pursuing a civil lawsuit against Nacchio and other former Qwest executives. That case is expected to go to trial in early 2010.

Lydie Nadia Cabrera Pierre-Louis
St. Thomas University School of Law

Monday, October 5, 2009

Runaway Unemployment?

The September jobs report from the Bureau of Labor Statistics rattled markets on Friday, and aged poorly over the weekend in light of more detailed review and analysis. First, the loss of 263,000 jobs exceeded the most pessimistic estimates. Second, the government acknowledges that it overestimated the number of jobs in the past by 824,000. Third, the number of long term unemployed reached alarming levels implying the permanent erosion in workforce skills. Fourth even those employed are working a record low number of hours. Given the levels of debt in our economy, we must be concerned that continued deterioration in labor income will trigger a second wave of defaults leading to huge financial losses with cascading job losses and plunging GDP. In other words, these levels of unemployment could trigger another vicious downward cycle, perhaps more serious than what we have seen so far.

The chart above shows the civilian employment ratio. It is simply the number of employed individuals divided by the nation’s population. It spotlights a fundamental element of our ability to service debt over time. Employed people can pay their debts and unemployed people cannot. The employment ratio is at a multi-decade low with little prospect of improvement. Wage growth could offset job losses but, for years, wages stagnated. Our elected leaders must address the crisis in our labor market or the entire financial system risks massive defaults brought on by runaway unemployment.

We need a jobs program targeted at the most hardcore unemployed. We also need a jobs training and higher education program to mitigate unemployment and to enhance the nation’s human infrastructure. So far the government response to the crisis neglects these realities. In the past, programs like the Civilian Conservation Corps and the GI Bill succeeded in building human capital and strengthening the economy over the long term, while ultimately costing the government little or nothing, and in the case of the GI Bill generating tax revenues that exceeded expenditures.

The irony is that the government laid out trillions to bailout financial elites (much of which sits idle at the Fed) when investing in the economy would have helped everyone (including financial elites) the most. Hopefully, it is not too late for a more balanced government response.




Saturday, October 3, 2009

Bernie Madoff's Family Members Sued For $199 Million

Yesterday, Irving Picard, the court-appointed trustee in the Bernie Madoff bankruptcy case, filed a lawsuit to recover $199 million from four (4) members of Bernie Madoff’s family for investors defrauded in Bernie’s Ponzi scheme. Picard sued Peter Madoff, Bernie’s younger brother; Shana, Bernie’s niece, and Peter’s daughter; and Bernie’s two sons Mark and Andrew Madoff. Peter Madoff was the Chief Compliance Officer at Madoff Securities. Shana was the compliance director. Bernie’s sons Mark and Andrew were co-directors of trading at Madoff Securities. Picard alleges in his Complaint that these four (4) individuals were “completely derelict” in carrying out their duties at Madoff Securities. As a result of their dereliction of duty, they failed to detect and stop Bernie Madoff’s fraudulent Ponzi scheme.

The gist of Picard’s Complaint is that these four (4) members of Bernie Madoff’s family lavished themselves in luxury and financed business ventures from ill-gotten profits stemming from Bernie’s Ponzi scheme. In essence, the Madoff family members used Madoff Securities was a personal piggy bank. Recall, I wrote about a similar lawsuit that Picard filed several weeks ago against Ruth Madoff to recover $44 million. Undoubtedly, the net is beginning to surround and ensnare Bernie Madoff’s family and inner-circle. We will have to see how all of this plays itself out. I’ll keep you posted.

Thursday, October 1, 2009

Aiding and Abetting under Rule 10b-5: Time for a Change?

Should lawyers and others continue to get a free pass on aiding and abetting the commission of securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and the SEC's Rule 10b-5? Two of our esteemed law academy colleagues testified on this issue a few weeks ago before the U.S. Senate Subcommittee on Crime and Drugs of the United States Senate Committee on the Judiciary. The bill at issue was the "The Liability for Aiding and Abetting Securities Violations Act of 2009," Senate Bill 1551, introduced by Senator Arlen Specter. In essence, the bill would permit private actions to be brought against those providing substantial assistance to a securities fraud or other violation of the securities laws. Professor Jack Coffee (Columbia) supports the bill, but believes there should be a cap on liability. He states that:
the time has come for legislative re-examination of the immunity given secondary participants; a balance needs to be struck. As I suggest below, this balance is best struck by restoring private aiding and abetting liability, but with a ceiling on damages.
In his testimony, Professor Coffee contends that pleading requirements for scienter would make it difficult for plaintiffs to bring frivolous litigation against aiders and abettors that survives a motion to dismiss.

Professor Adam Pritchard (Michigan) opposes the bill as a significant threat to free enterprise. He notes the pressure on issuers to settle out securities fraud cases and argues that "[g]iving the plaintiffs’ bar aiding‐and‐abetting authority would offer class action lawyers one more weapon with which to shake down settlements." He also indicates that the bill has the capacity to transform lawyers and other professionals into "quasi‐fraud police."

Who is right? One? Both? Neither?

On the one hand, it does not seem right (at some level) to let fraud facilitators "walk." On the other hand, because the securities class action process and the elements of a Rule 10b-5 claim most often propel securities fraud actions toward settlement (even if the case is weak), plaintiffs have incentives to seek new deep pockets (aiders and abettors drawn from the ranks of lawyers, accountants, and investment bankers, among others) from which to extract settlement payments. Professor Pritchard suggests an alternative to the bill that he has posited elsewhere: force wrongdoers to disgorge any ill-gotten gains.
Accountants, lawyers, and investment bankers who are complicit in the corporation’s fraud should be forced to give up their fees (or some multiple thereof) earned during the fraud period. Canada uses a version of this remedy in its recently adopted securities class action legislation. Under that legislation, the liability cap for experts is $1 million or the revenue that the expert and its affiliates have earned from the issuer and its affiliates during the 12‐month period immediately preceding the day on which the misrepresentation or the failure to make timely disclosure occurred. Those limits are inapplicable if the fraud is done knowingly.
I find this an interesting proposition worth further thought.

I respect the scholarship of Professors Coffee and Pritchard. The testimony of each on this matter does not disappoint; I commend it to your reading.