Missing school? Free online lectures and podcasts

I was forwarded this information last week via a LinkedIn group, and thought someone out there might find it interesting. It is a collection of links that host videos of well-known professors giving lectures.

Proviso: Forward Movement makes no claim about the quality, authenticity, or permissions involved as regards the following links. (Though many of the organizations hosting the video are of fair repute, so am assuming they have addressed all the legal P and Qs).

FWIW, in no order or format apart from that contained in the original document. Enjoy!

http://academicearth.org/

http://ocw.mit.edu/OcwWeb/web/courses/av/index.htm

http://worldlibrary.net/Collections.htm

http://freevideolectures.com/

http://videolectures.net/

http://lecturefox.com/

http://www.ted.com/

http://ocw.nd.edu/
Courses include detailed lecture notes, a calendar of teaching assigned for each class, and a description of major assignments.

http://ocw.tufts.edu/
Offers student-made documentaries about social issues as well as a list of weekly readings.

http://itunes.stanford.edu/
Professors Martin Evans and Marsh McCall lecture on great works by Virgil to Voltaire.

http://itunes.berkeley.edu/
Berkeley's lectures online.

http://webcast.berkeley.edu/
Alternate site for Berkeley lectures.

http://scholarspot.com/

http://www.varsitynotes.com/

http://www.learnerstv.com/

Entrepreneurship podcasts:
StandfordeCorner http://ecorner.stanford.edu/authorMaterialInfo.html?mid=1554
Harvard Business School http://www.hbs.edu/entrepreneurs/


http://oedb.org/library/features/236-open-courseware-collections

http://www.careervoyages.gov/education-videos.cfm

http://www.sba.gov/tools/audiovideo/deliveringsuccess/index.html

http://www.sba.gov/training/index.html

http://www.sba.gov/tools/audiovideo/Podcasts/index.html

http://www.openculture.com/2007/07/freeonlinecourses.html

http://www.videomd.com/featured_videos.aspx

http://www.freesciencelectures.com/

http://streaming.discoveryeducation.com/

http://education.usgs.gov/common/video_animation.htm

http://www.nachi.org/advancedcourses.htm

http://education-portal.com/video_library/index.html

http://www.serve.org/nche/ibt/aw_video.php

http://www.practisinc.com/interactive/patient-education-videos.php

http://scholarspot.com/

http://www.varsitynotes.com/

http://www.learnerstv.com/

http://www.ovguide.com/education.html
Other educational video links.

Hat-tip: JD Velasquez.

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A Case Against the Adoption of a "Selective Waiver" Doctrine, by Vlad Frants

Privileges, such as the Attorney-Client privilege, are designed “to encourage full and frank communication”[1] between persons in certain relationships. For example, it is understood that “a lawyer’s assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure.”[2] Thus, the confidential nature of privileged communications is naturally in conflict with the truth-seeking purpose of a trial in an American court. Courts have responded to this tension by making sure that “[p]rivileges...[are] narrowly construed and expansions narrowly extended.”[3]

Generally speaking, the Attorney-Client privilege exists where a “communication between the client and the attorney has been made in confidence of the relationship and under circumstances from which it may reasonably be assumed that the communication will remain in confidence.”[4] The Attorney-Client privilege also includes certain communications made by corporate employees to the corporation’s counsel.[5] Yet, the Attorney-Client privilege can be waived.[6] For example, “the privilege once established can be waived if the communication is shared with corporate employees who are not ‘directly concerned’ with or did not have ‘primary responsibility’ for the subject matter of the communication.”[7] Also, the Attorney-Client privilege has been held to become waived when a company discloses its internal investigations to the government.[8] The information then becomes available to others who seek discovery of that material for ensuing civil suits.[9] On the other hand, the Eight Circuit has recognized in Diversified Industries v. Meredith[10] the concept of selective waiver, under which a corporation is permitted to selectively waive the privilege to an agency such as the SEC without effecting a broader waiver.[11] Some courts[12] “have applied selective waiver of the Attorney-Client privilege where disclosures were protected by a confidentiality agreement.”[13] However, most circuits have rejected selective waiver of the Attorney-Client privilege.[14] Despite this, a new Federal Rule of Evidence was proposed, which included and would have codified the selective waiver doctrine. Ultimately, the selective waiver provision[15] was not included in the final rule. Since the codification of selective waiver may come up again, it would be interesting to consider the pros and cons of such a codification. I believe that the rule should not have been adopted – and should never be.

Despite trying to be objective in my analysis, I can rely on only a couple of somewhat palpable, interrelated, arguments for why some could argue that the selective waiver doctrine should have been codified in the Federal Rules. First, a rule protecting selective waiver in circumstances where there is disclosure of information to a government agency, arguably furthers the policy of cooperating with the government.[16] This is because corporations would be more comfortable disclosing information to the government without fear of private parties using the information in civil suits. Second, codification of selective disclosure maximizes the effectiveness and efficiency of government investigations.[17] The reason for this is that the costs of government investigations would theoretically decrease.

On the other hand, I believe that there are strong reasons why the selective waiver doctrine should not be codified into a Federal Rule of Evidence.

First, selective waiver would be fundamentally unfair because it would deprive private parties of information that may be essential to private recovery. Why should the government have access to information that would benefit it, but not private parties? There is no justification for this disparity other than that the government acts for the public interest and private parties act for themselves – however, it is unfair to brand this as always being the case.

Second, the purpose of the Attorney-Client privilege is to “foster frank communication between a client and his or her attorney.”[18] Yet, the purpose of the selective disclosure doctrine is based on public policy concerning the public’s need for cooperation between companies and the government.[19] The selective disclosure doctrine does not seem to fulfill the purpose of the Attorney-Client privilege.[20] Inextricably connected to this point is the notion that the Attorney-Client privilege has historically been narrowly construed and strictly constructed,[21] but that the selective waiver doctrine not only goes beyond the purpose of the Attorney-Client privilege but also borders on the creation of an entirely new privilege.

Third, the selective waiver doctrine does not fulfill the purpose of the Attorney-Client privilege for yet another reason.[22] While there are exceptions to the general rule that disclosure to third parties waives the Attorney-Client privilege, the selective waiver doctrine is very different from the other exceptions.[23] Those exceptions include the presence of interpreters or paralegals, to whom the information is disclosed.[24] In those cases, the theory underlying the Attorney-Client privilege is fulfilled because disclosure to those persons is necessary for the client to obtain legal advice.[25] However, disclosure to the government is not necessary for the client to obtain legal advice.[26]


Since the selective waiver doctrine has been rejected by most of the federal courts,[27] there would have to be some very good reasons for justifying such a rule. Moreover, since privileges are usually created by the states and derived from common law,[28] wouldn’t the codification of the selective waiver doctrine be the first federal codification of a specific privilege, and thus require further justification? On balance, I don’t think this burden of justification has been met. Not only do the quantity and merits of the clear-cut cons outweigh the pros, but the codification of the doctrine raises a number of concerning issues, even if the wording of the proposed rule were to change one day.

There is a question as to how a federal codification of the selective waiver doctrine would effect the application of the doctrine in state courts. I’m not sure how effective the selective disclosure doctrine would be if it did not also apply to state courts. If state courts would be compelled to apply the doctrine, wouldn’t this raise federalism questions? On the other hand, if the doctrine would apply in federal courts but not state courts, this may cause forum shopping. Since an entire case could rise or fall based on a single item of disclosure, is it fair to permit parties to forum-shop on this basis? The answer is probably no because this would turn into too much of a trial tactic and the privilege would, in essence, be misused. Even if a future proposed rule adopts the In re M & L Business Machine Co.[29] version of selective waiver and becomes one where the prerequisite for the shield of selective waiver is that a confidentiality agreement should first be obtained from the government, this would be a bad idea. This is because the privilege would rise or fall based on the structure of the agreement itself and not on the practicality of the privilege – the policy of government cooperation, one of the most important arguments for selective waiver, would clearly be undermined. Ultimately, there would be no certainty as to when certain disclosures would or would not be privileged.

Interestingly, even in the event that the proposed rule were adopted as is, and the company would be protected from having to disclose information to private parties when disclosing to the government, nothing in the present form of the proposed rule prevents the government agencies from sharing the information among each other[30]. Knowing this possibility may hinder the Attorney-Client relationships because the company may be afraid to disclose certain conversations regarding, for instance, the company’s questionable antitrust and securities activities to the Department of Justice (DOJ) for fear that the DOJ will pass along the information to the Securities and Exchange Commission (SEC). Then again, as the court pointed out in In Re Sealed Case,[31] “[t]he SEC or any other government agency could expressly agree to any limits on disclosure to other agencies consistent with their responsibilities under law.” Of course, these agencies would first have to agree to do so.

While Judge Boggs made an interesting point in his Sixth Circuit dissent arguing for the selective disclosure doctrine, stating that “[a]s the harms of selective disclosure are not altogether clear, the benefits of the increased information to the government should prevail,”[32] I respectfully disagree, grounding my argument in the notion that the obvious harms, the higher burden of justification, and the serious issues that would arise, weigh against adoption of a selective waiver doctrine in any form.

[1] U.S. v. Schwimmer, 892 F.2d 237, 245 (2nd Cir. 1989)
[2] Id.
[3] U.S. v. Weissman, 195 F. 3d 96, 101 (2nd Cir. 1999).
[4] In re Qwest Comm., 450 F.2d 1179, 1184 (10th Cir. 2006).
[5] See generally Upjohn Co. v. U.S., 449 US 383 (1981)
[6] See generally Hopson v. Mayor, 232 F.R.D. 228 (2005).
[7] Muro v. Target, 243 F.R.D. 301, 308 (2007).
[8] See generally In Re Qwest Communications International, Inc. 450 F.3d 1179 (2006).
[9] Id.
[10] 572 F2D 596, 611 (1977).
[11] In Re Qwest Communications International, Inc. 450 F.3d 1179, 1187 (2006).
[12] See In Re M&L Business Mach. Co., 161 B.R. 689 (D. Colo. 1993).
[13] In Re Qwest Communications International, Inc. 450 F.3d 1179, 1189 (2006).
[14] Id.
[15] The proposed language read as follows:
"In a federal or state proceeding, a disclosure of a communication or information
covered by the Attorney-Client privilege or work product protection when
made to a federal public office or agency in the exercise of its regulatory,
investigative, or enforcement authority does not operate as a waiver of the
privilege or protection in favor of non-governmental persons or entities. The
effect of disclosure to a state or local government agency, with respect to
non-governmental persons or entities, is governed by applicable state law.
Nothing in this rule limits or expands the authority of a government agency to
disclose communications or information to other government agencies or as
otherwise authorized or required by law. F.R.E. 502(c) as originally proposed."
[16] In Re Qwest Communications International, Inc. 450 F.3d 1179, 1192 (2006).
[17] Id.
[18] See In Re Qwest Communications International, Inc. 450 F.3d 1179, 1194 (2006).
[19] Id.
[20] See In Re Qwest Communications International, Inc. 450 F.3d 1179, 1187 (2006).
[21] Id.
[22] See id.
[23] In Re Qwest Communications International, Inc. 450 F.3d 1179, 1193 (2006).
[24] See id at 1193-94.
[25] See id at 1193-94.
[26] See id at 1193-94.
[27] In Re Qwest Communications International, Inc. 450 F.3d 1179, 1189 (2006).
[28] See FRCP 501.
[29] See infra note 14 and accompanying text.
[30] See 676 F.2d 793,824, (D.C. Cir. 1982)
[31] 676 F.2d 793,824, (D.C. Cir. 1982)
[32] See In Re Qwest Communications International, Inc. 450 F.3d 1179, 1187 (2006)(quoting In re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293 F.3d 289, 311 (6th Cir.2002)).
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SEC Shareholder Director Nomination Proposal: Rule 14a-11

I’ve actually had this post in outline form on my desktop for weeks now …Thank god for Thanksgiving and down-time!

The Securities and Exchange Commission (“SEC”) deferred its decision to expand shareholder (“s/h”) board nomination rights until 2010. Chairwoman Shapiro wanted to review the hundreds of comments that were submitted regarding the proposal. Recall the comment period elicited joint letters from both sides of the aisle, BigLaw defense and plaintiff securities firms.

The proposal is available here, and I wanted to share some of what I read (not ironically, what has generated the most discussion). Broadly speaking, the proposal would allow shareholders greater access to a company’s board. Specifically, the SEC proposes a new rule, Exchange Act Rule 14a-11, that would require a company to include in its proxy materials shareholder nominees for director. Any state law, articles of incorporation, or corporate by-laws that disallow shareholders to nominate directors would supersede the proposed rule. The rule is not intended to apply to shareholders seeking either control of the company or possession of “more than a limited number” of director seats. Refer infra. discussion for clarification of what “more than a limited number ” means.

The SEC theme is fortifying existing shareholder rights. Proposed rule 14a-11, for example, is to remedy what the SEC identifies as an obstacle to a s/h’s right to nominate and elect the board of directors. That being, shareholder nominees float the expense to present their nomination to the shareholders at large for purposes of voting. Board nominees, on the other hand, are simply listed in the company’s proxy materials, and therefore do not have to finance the expense.

Ownership Floors

In an effort to address contra arguments (cost and disruption to the company), the SEC has proposed an eligibility requirement to leverage 14a-11. There is a minimum ownership threshold that must be met by the nominating shareholder or the shareholder group (“shareholder(s)"). The breakdown:

∙ 1% - For large accelerated filers, and registered investment companies with net assets of $700 million or more (company type and size, as defined in Exchange Act Rule 12b2).
∙ 3% - For accelerated filers, and registered investment companies with assets between $75 million and $700 million.
∙ 5% - For non-accelerated filers, and registered investment companies with assets less than $75 million.

These percentages are beneficial ownership as of the time of s/h notice of the vote, and as a percentage of the company’s securities entitled to be voted on at the time of the vote. Further, shareholder(s) must have owned the shares for a minimum of one year preceding the notice, and intend to continue to do so up until the vote in fact occurs.

Disclosures to SEC

Shareholder(s) must also provide notice to the SEC of their intention to include a nominee in the company’s proxy materials; Schedule 14N. This same disclosure would also be made to the company, and is manifold. It contains information such as the percentage of securities held by the nominating shareholder(s), the length of the ownership and the intent to continue to hold the securities until the vote, as well as “certification” that the shareholder(s) do not intend to change control of the company or obtain “more than a limited number” of seats.

Nominating shareholder(s) would also attest that the nominee satisfies standards of director independence as required by a national securities exchange or association, or for a registered investment company, that the nominee was not an “interested person” per § 2(a)(19) of the Investment Company Act.

Further, nominating shareholder(s) would attest that there is no agreement between the nominating group and the company as regards the nominee (Ie., once elected, the director would block certain issues from moving forward). Unsuccessful negotiations with the nominating committee of the company to have the candidate included on the company's proxy card as a management nominee, or negotiations regarding disclosure of the shareholder nominee, do not count.

“More than a limited number”

This limited number is either one nominee, or a quarter of the total possible director positions on a board; whichever is greater. If shareholder(s) successfully nominate and elect 25% of a board’s directors, and those directors' terms overlap with the next nomination and election process, the company is not required to include any further shareholder nominees in the impending proxy materials (so as to avoid greater than 25% of the board being composed of shareholder nominees). Further – as regards which shareholders’ nominees will get priority – first in line is first in time. 14a-11(d)(3).

Closing

As a threshold matter, inclusion of shareholder(s) nominee in the company’s proxy materials would not prohibit other solicitation materials that currently exist and are proper (SEC Ie., a website).

Since an SEC decision on the matter has been deferred until 2010, if approved, Rule 14a-11 would not be applicable during the 2010 proxy season.

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Thanksuing/Thanksgiving: A time to Appreciate, Reflect Upon and Ask Tough Questions About Our Adversarial System, by Vlad Frants

At trial, a prosecutor gets away with asking a witness, “the defendant choked you, didn’t he?,” whereas the witness merely stated during her preliminary hearing testimony that she was “lightly choked.”

While preparing his witness to take the stand, a defense attorney “clarifies” what he hears: “Correct me if I’m wrong, but you meant to say that you did not see the other car coming, right?”

During an investigation where a young boy insists that he was never molested by his teacher, overzealous detectives warn that if he doesn’t “disclose [what happened],” then the boy will grow up “gay.” [This example is from the “Complex Persecution: A Long Island Family’s Nightmare Struggle With Porn, Pedophilia, and Public Hysteria” article by Debbi Nathan (published May 20, 2003).]

***

Certainly, the mechanics of a trial, such as the cross-examination process, and unequivocally unethical behavior, such as bribing a judge, are the clear-cut cases of “this is part of the adversarial system” and “this goes beyond what is permissible in the adversarial system,” respectively. However, it is less clear where the three above-mentioned examples would fit. Are these the sort of actions that belong in an adversarial system? Do they go beyond what we should expect from an adversarial system? And if instead they fit into that gray, “in-between” area, then does the legal community today draw that proverbial line too liberally? I argue that, in the pursuit of justice today, attorneys and other players in the criminal justice system (such as law enforcement) get away with actions that go beyond what should be permissible, even in an adversarial system. Most importantly, I posit that when it comes to actions that are best characterized as fitting in that “gray area,” where there isn’t a clear-cut case of “this is what the adversarial system should permit” or “this is not something that the adversarial system should permit,” the legal community permits attorneys (and law enforcement personnel) to get away with too much unethical behavior, and justifies this by saying that this is supposed to happen in an adversarial system. I disagree.

In the opening pages of his book, Steven Lubet explains that “[t]he objective of a trial is to do justice…[and] the ultimate purpose of the adversary system is to seek the truth, and thereby to distinguish right from wrong.” Steven Lubet, Modern Trial Advocacy, p 1 (2004). Looking at the first example above, where the prosecutor asks the witness whether the defendant “choked” her, while knowing quite well that the witness admitted that she was “lightly choked,” the attorney is not seeking the truth and is thus misusing the adversary system. As George Orwell noted, “language can…corrupt thought.” [George Orwell, “Politics and the English Language,” 1946]. And certainly, hearing that someone was “choked” versus “lightly choked” elicits completely different images in one’s mind and thus guiding one’s thoughts. Were the hands wrapped tightly around the other person’s neck? Or were the hands loosely resting on the person’s neck? Certainly, I wouldn’t want either one to happen to me – but each is a different reality. One scenario is the truth and the other is not. At best, the prosecutor is “leaving false clues [as opposed to outright lying] or simply remaining silent [by leaving out the word “lightly”]…,” which, according to Elliot Cohen, is even a characteristic mark of a morally bad person [See Ellion Cohen, “Pure Legal Advocates and Moral Agents: Two Concepts of a Lawyer in an Adversary System.” Pg3].

While it is impossible to argue that the prosecutor was linguistically correct in leaving out the word “lightly,” what in fact keeps this situation in the “gray area” (as opposed to the “goes beyond the scope of what is expected in an adversarial proceeding” category) is the fact that in an adversarial system the defense is expected to jump on this verbal exchange between witness and prosecutor during cross-examination – “…the hallmark of the Anglo-American system of adversary justice.” [Steven Lubet, Modern Trial Advocacy, p 70 (2004).] The availability of cross-examination makes the exchange between prosecutor and witness somewhat appropriate, irrespective of whether the defense actually sees to it that the witness clarifies that she had used the words, “lightly choked” in her preliminary statement. For me, this is insufficient. I think that it is inappropriate to rely upon other functions of the adversarial system (i.e. cross-examination) to mitigate the harm done in direct examination by a somewhat unethical, counter-truth seeking, exchange between prosecutor and witness.

When considering the second example above, about the attorney preparing his client to take the stand, the expression “it’s not what you say, it’s how you say it” comes to mind. And, regrettably so. I find it remarkable that an attorney can get away with indirectly prompting the client to say one thing or another, if he does so tactically. For example, had the attorney in the second example above said to the client “tomorrow you have to say…,” then this would be inappropriate. However, if the attorney is careful in what he says, he may indirectly guide the client without violating any ethical or professional code. Quoting former Supreme Court Justice Byron White who wrote, “Our interest in not convicting the innocent permits counsel…to put the State’s case in the worst possible light…In this respect…we countenance or require conduct which in many instances has little, if any, relation to the search for truth,” Frederic Dannen wrote that “[c]ritics tend to forget that in our adversarial system it is defense counsel’s prescribed role to be disingenuous if it will help win an acquittal for his client.” Frederic Danne, “Annals of Law: Defending the Mafia.” So this seems to suggest that the reason why “tactfully guiding” a client to say one thing or another during testimony remains in that “gray area,” and should not be considered to go beyond the scope of what is permissible in the adversarial system, is because it gives attorneys the opportunity to acquit innocent clients. But, this is not what an attorney is supposed to do – and certainly not something that should be embraced by the adversarial system, especially because everyone is presumed innocent until proven guilty in a court of law. “Through the use of logical theories and artful techniques, the advocate will present the most compelling arguments for her client,” not by fabricating the story. [Steven Lubet, Modern Trial Advocacy, p 1 (2004)] There is absolutely no justification for an attorney to be able to “tactfully guide” a client to tell aspects of the story, if the story did not, in fact, occur that way.

The third example above, where the detective attempts to coerce the boy into telling him the story he wants to hear, is an example of something that taints the trial later on. If the objective of a trial is to do justice, and the ultimate purpose of the adversary system is to seek the truth, then how can either of these be accomplished if the trial itself is based on falsities? Some would justify the behavior of the detective by making an argument which is completely opposite to Frederic Dannen’s argument. Whereas Dannen would argue that a defense attorney should do anything in his power to free the innocent, some would argue that a prosecutor or law enforcement personnel, as in this instance, should do anything in their power to penalize the guilty – even if it means using unethical means to extract the kind of incriminating evidence that they are looking for. This, and because of the deference the legal and broader communities tend to give our law enforcement personnel, keeps a lot of their actions in the “gray area” and not beyond the scope of what is permissible in an adversarial system.

For each of the examples above, there are arguments that justify keeping many otherwise potentially unethical actions carried out by members of the legal and law enforcement community in the “gray area,” as opposed to the “outside the scope of actions permissible in an adversarial system.” However, I wonder whether such arguments really do or should justify those actions, which are, in my opinion, unethical and problematic. Despite these arguments, I wonder whether the legal community has stopped to think about why we are still permitting these activities and questioning if the justifications that have permitted these actions really are sufficient. It seems that, absent the most egregious, clear-cut cases of impropriety, an attorney’s actions are justified as simply "well that's just how the adversarial system works." This is no longer a valid justification. The legal community needs to stop and think about what its members want from an adversarial system. As Elliot Cohen argues, “[f]or it is our full conception of the role of a professional which sets the parameters on the kind of personality compatible with that role and which serves to shape the personalities of its participants accordingly...”[Ellion Cohen, “Pure Legal Advocates and Moral Agents: Two Concepts of a Lawyer in an Adversary System.” Pg33.] Without giving these “gray area” actions more thought, simply maintaining a habit of justifying the unethical behavior we see as “natural consequences of an adversarial system” is no different than upholding an antequated tradition of stoning to death the unlucky villager who draws the wrong slip of paper from a little black box simply because that’s the way things have always been. [See: The Lottery by Shirley Jackson].

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UPDATE THREE of THREE: BofA and SEC briefs submitted to Rakoff

Late last month, Judge Rakoff of the S.D.N.Y. requested additional briefs from the SEC and BofA, detailing outside counsel’s involvement in structuring the Merrill merger. I have tried to follow the issue on this blawg (Ie., here). AmLaw Litigation Daily reported the briefs came in this week.

The BofA brief stuck to what is now a familiar chorus: BofA did nothing wrong because the proxy statement issued to shareholders was not handled negligently and did not contain any misleading statements or omissions. In support of this, BofA maintains the proxy statement contained both language that alerted shareholders of impending incentive pay, and that qualified the proxy statement terms regarding compensation. BofA’s brief is thorough to list, inter alia: the language qualifying the proxy statement by an other “disclosure schedule” (not publicly disclosed), language allowing exception to proxy statement terms via BofA consent, language incorporating various financial disclosures and public references to unabated Merrill Lynch compensation (such as financial statements or BofA management discussion on earnings calls), as well as a number of contemporaneous media reports that disclosed to the investing public year-end Merrill Lynch compensation to be paid. Interestingly, the brief closes with two short but common-sense defenses. First, in light of the Wall St. compensation culture, it would be illogical for Merrill Lynch to not pay year-end compensation. And second, the proxy statement was a tool to solicit shareholder approval for a merger that was based on “strategic desirability of [the] business combination” of two entities. To the extent that compensation was relevant, it was only as a means of retaining the “human capital” that constituted Merrill’s value.

The SEC brief found a new bone, however …

Discussion about the SEC brief and the privilege issue after the jump.


The SEC brief maintained that shareholders should be able rely on direct representations in a proxy statement so as to cast an informed vote, and not have the burden of stringing together “material information from a variety of external sources.” Further, the SEC found unpersuasive BofA’s reliance on “standard transactional practice” (as regards the use of the now infamous “disclosure schedule”). The SEC relied on practice area publications produced by the various outside counsel on behalf of their firms, in response to 2005 SEC guidance counseling against using nonpublic schedules in merger agreements. The SEC maintains counsel used these publications to advise their own clients not to use such nonpublic schedules. Outside counsel responded to AmLaw Litigation Daily, however, suggesting the publications are in fact a guide how clients can circumvent the 2005 SEC guidance. Separately, the SEC maintains that the proxy statements contain misstatements, and that the incorporated financial statements and references are not clear that incentive pay would be paid. Further, the SEC labels the contemporaneous media reports of incentive pay as “speculative” and sporadic. The government does make an interesting and entertaining quip, however: that BofA maintains a reasonable investor would have connected all the dots and would have known incentive pay was forthcoming; ironic, then, that this reasonable investor cannot be trusted with that information directly, so that a “disclosure schedule” detailing the incentive pay was necessary in the first place.

And what about the issue of Privilege? The case sparked a blawgging furor in August over the suggestion attorney-client privilege was waived. The SEC killed the matter, however, signaling that Second Circuit precedent holds asserting reliance of counsel constitutes forfeiture of privilege only during judicial proceedings and not during investigative processes (what does federal precedent suggest regarding Andrew Cuomo’s most recent state law escapade?). Other circuit courts are on the same page.

Bottomline: both parties encouraged the Court to approve the $33 million settlement as a fair and reasonable resolution. The next move is Rakoff’s.

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Backdating is still kicking around (Broadcom and Reyes): what is it, exactly?

AmLaw ran a post yesterday discussing the recent Broadcom settlement in the derivative suit alleging stock option backdating (reported as historically one of the largest settlement amounts). And late last month, reports were rampant about the unending litigation involved with the Brocade Communications backdating matter (It’s over! *Psyche* Those cases collectively create their own “Never Ending Story”). Only briefly: there, a federal appeals court overturned the criminal conviction of CEO Reyes. I have done research on the options backdating scandals that hit in 2006, and the petering litigation that has followed (though more frequently, settlements). These news stories catch my eye because of that context, although before such, I only had a passing familiarity with what stock option backdating was. Assuming some of our readers may be in a similar position, I wanted to offer a brief skeleton of what backdating entails.

Corporate compensation frequently includes equity-based stock option grants. Stock option grants are typically a component of executive and managerial compensation, but are also given to employees throughout the corporate structure as a means of incentive and creating a vested interest in the corporation's pursuits. When the grant is given, it creates within the recipient the right to purchase a specific number of stocks at a specific exercise price on a specific date. Many stock options are granted “at-the-money.” This describes the exercise price being equal to the current fair market price of the stock on the day of the grant. “In-the-money” options, on the other hand, describe the exercise price being lower than the fair market price of the stock on the day of the grant. Backdating is the act of changing the grant date to an earlier date so that the exercise price is lower than the fair market stock price on the day of the proper grant. Backdating can occur either at the time the grant is written, or retroactively after the grant is written.

If I have adequately explained this, the affect is apparent: recipients of backdated options stand to gain more money that was originally granted; that is, between the lower backdated price and the higher grant date price.

Backdating in-and-of-itself is not illegal. Backdating is legal when done with board authorization, in full disclosure, and in compliance with applicable accounting and tax provisions. And there’s the hiccup … or the dozen different hiccups. For example, as regards taxes: at-the-money stock options are considered performance-based. Performance-based awards do not count towards a corporation’s one million dollar executive compensation deduction cap under IRS Code § 162(m). In-the-money options, on the other hand, are not considered performance-based as specifically regards the difference between the low exercise price and the higher fair market price of the stock on the day of the grant. That difference in price, then, counts towards the one million dollar deduction under § 162(m). The rub: corporations may have taken full deductions on amounts that should have been limited.

After the jump: GAAP and SOX hiccups discussed.

Another frequent example of where backdating may go wrong is in regards to financial statements represented as “GAAP compliant.” To be so compliant, a corporation must record in-the-money stock options as a compensation expense. The expensed amount is, again, the difference between the lower price of the stock on the day the option is exercised and the higher fair market price of the stock on the day it was properly granted. If this expense was not properly recorded during the financial period it was incurred, a corporation may need to restate its financial statements. Uber problematic: options are accounted for over the course of their vesting period, which typically entails a period of several years. This translates into multiple restatements to accommodate that same several year period.

Also the subject of possible fraud allegations: SOX compliance and the Compensation Discussion & Analysis (“CD&A”). The CD&A requires the corporation to publicly articulate in detail executive compensation packages; objectives to meet, elements used to incentivize performance. It will include information, such as the exercise date that stock option grants are given. Backdating a grant to an earlier exercise date would obviously alter this information. Keep in mind the CD&A is filed with the SEC, and therefore subject to both the ’33 and ’34 Acts. It is also shared publicly via the corporation's proxy statement.

FWIW – happy starter primer. Sls.


Photo credit: Irving Underhill.

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UPDATE: BofA offers a defense in its most recent brief regarding Merrill bonuses

I have blawgged before (here and here) of the continued conflict over the BofA acquisition of Merrill, and the fallout over what was known and disclosed prior to the merger regarding the Merrill bonuses. Earlier this month, Judge Rakoff in the S.D.N.Y. refused to approve an SEC brokered settlement on the matter, and required counsel for both BofA and the SEC to produce briefs detailing the lawyers involvement in how the merger occurred and how the bonuses were determined and disclosed. AmLawLitigationDaily reported yesterday that both sides produced their briefs. While the SEC’s brief includes some of the details Rakoff specifically requested, the brief is necessarily limited by BofA’s refusal to waive attorney-client privilege during the SEC investigation. BofA’s brief, while although privy to the totality of the details Rakoff solicited, instead took the opportunity before the Judge to make a plea that BofA has no liability in the matter of Merrill bonuses.

SEC Brief Highlight: BofA in fact greenlighted some bonuses, and asked that its consent be sought for additional payments. This agreement was not disclosed in BofA’s proxy statement last fall, however, but was contained in a “disclosure” schedule that was not released to BofA shareholders prior to the merger vote. (Emphasis in original). This “disclosure” schedule was prepared by outside counsel. Further, outside counsel is credited with the preparation of the proxy statement. The proxy statement in fact contained a provision that indicated, contradictorily, that Merrill in fact could not and would not pay any bonuses without BofA’s consent.

BofA Brief Highlight: The proxy statement was in fact not false, and the bonuses were part of the “total mix” of information publicly available to shareholders via a series of financial statements and media reporting. Further, merger agreements commonly “include confidential disclosure schedules that qualify their terms,” and qualifying language in the proxy statements frequently warn shareholders not to rely on disclosed terms as “factual representations regarding the parties.”

The SEC and BofA have two weeks to respond to the other’s brief, at the conclusion of which the Court will have the opportunity to comment.

After the jump, alleged contradictory language in the “disclosure” schedule and proxy statement, as presented by the SEC.


The "disclosure" schedule reads:

5.2(b)(iii), 5.2(c)(i), and 5.2(c)(ii) – Variable Incentive Compensation Program (“VICP”) in respect of 2008 (including without limitation any guaranteed VICP awards for 2008 or any other pro rata or other 2008 VICP awards payable, paid or provided to terminating or former employees) may be awarded at levels that (i) do not exceed $5.8 billion in aggregate value (inclusive of cash bonuses and the grant date value of long-term incentive awards) … and (ii) do not result in 2008 VICP-related expense exceeding $4.5 billion … Sixty percent of the overall 2008 VICP shall be awarded as a current cash bonus and forty percent of the overall 2008 VICP shall be awarded as a long-term incentive award either in the form of equity or long-term cash awards. The form (i.e., equity v. long-term cash) and terms and conditions of the long-term incentive awards shall be determined by [Merrill] in consultation with [Bank of America] … The allocation of the 2008 VICP among eligible employees shall be determined by [Merrill] in consultation with [Bank of America].

"Disclosure" Schedule to Agreement and Plan of Merger, dated 09/15/2008, Government Exhibit A, at 14.

The Proxy Statement contains language such as:

5.2 Company Forbearances. During the period from the date of this Agreement to the Effective Time [the closing of the merger], except as set forth in this Section 5.2 of the Company Disclosure Schedule or except as expressly contemplated or permitted by this Agreement, [Merrill Lynch] shall not, and shall not permit any of its Subsidiaries to, without the prior written consent of [Bank of America]:

...

(c) except as required under applicable law or the terms of any [Merrill Lynch] Benefit Plan existing as of the date hereof, (i) increase in any manner the compensation or benefits of any of the current or former directors, officers or employees of [Merrill Lynch] or its Subsidiaries (collectively, “Employees”), (ii) pay any amounts to Employees not required by any current plan or agreement (other than base salary in the ordinary course of business), …

Bank of America Corp., Joint Definitive Proxy Statement (Schedule 14A) (“Proxy Statement”), filed 11/03/2008, Defendant Exhibit B, Appendix A, at A-31 – A-32.

The SEC concedes, however, that Merrill’s agreement to not pay bonuses without BofA’s consent may be excepted under the following language:

Merrill Lynch further agreed that, with certain exceptions or except with Bank of America’s prior written consent (which consent will not be unreasonably withheld or delayed with respect to certain of the actions described below), Merrill Lynch will not, and will not permit any of its subsidiaries to, among other things, undertake the following extraordinary actions … except as required under applicable law or the terms of any Merrill Lynch benefit plan, (i) increase the compensation or benefits of any current or former directors, officers, or employees; (ii) pay any current or former directors, officers or employees any amounts not required by existing plans or agreements …

Proxy Statement at 83 – 84.

BofA maintains and concurs that the Proxy Statement and Merger Agreement make these exceptions clear, as well as qualifying the language to clearly communicate that it does not represent “any other factual information regarding Merrill Lynch.” (Emphasis in original).


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What is the value of a pet? Damages for emotional distress of owners and animal rights law.

What is the value of this very handsome dog, my Rusty Dog, my precious pooch? Historically, pets are considered personal property and therefore are valued at their replacement cost. A case currently pending in a Virginia State trial court will decide if a pet can be valued for its “unique value [ ] as a companion animal.”

The fight will be uphill. The Virginia Supreme Court, as recently as 2006, maintained that pets are personal property, and owners are entitled to the value of that property or the value of the injury inflicted upon that property. Emotional or mental anguish for the destruction or injury to that property is not compensated for. In Kondaurov v. Kerdasha, plaintiff sought and was awarded damages at trial for the emotional distress she suffered when witnessing the injuries inflicted to her dog during a car accident. The claim was negligence. On appeal, the Supreme Court reversed the damages award, reasoning that although there is an emotional bond between a pet owner and their pet – likened to that of a parent to its child in the opinion –pets have been historically treated by law as merely property. Further, the Court reasoned that not only has Virginia case law never awarded damages for emotional distress for injuries incurred to personal property, but that had the Virginia Legislature intended a different result, statutory provisions regarding pets and their attendant value would have been written more broadly.

Plaintiff counsel in the currently pending case has anticipated this, and intends to analogize the pet to the jury as a family heirloom. (Though good luck Lanny – there’s case law, albeit old, that says sentimental value over personal property cannot be recovered, either). Minimum damages sought are $15,000; claims include assault and battery, unlawful killing of a dog, and intentional infliction of emotional distress.

While most jurisdictions concur in this historical platitude, some courts do award damages for emotional distress caused by the intentional injury or killing of animals.


In La Porte v. Associated Independents, Inc., the Supreme Court of Florida reinstated a trial judgment awarding plaintiff damages for the “malicious destruction” of her dog. There, a garbage collector hurled a garbage can at a miniature daschund that was tethered away from the collector. Although the act killed the dog, the collector laughed at both the owner and the dog while walking away. Plaintiff’s claim sounded in tort, seeking recovery for her emotional distress. The Court reasoned the affection between a dog and its owner is “a very real thing,” and that the “malicious destruction” of a dog provides an element upon which the owner should be able to recover damages for. This ruling has since been distinguished by Kennedy v. Byas. There, the Court of Appeal of Florida for the First District refused damages for veterinary negligence (ruling La Porte precedent requires maliciousness).

Similar case law exists in Idaho (plaintiffs could recover for intentional infliction of emotional distress when defendant negligently and recklessly shot and killed the family pet donkey), Kentucky (defendant conduct was so outrageous, the object subject to that conduct– family pet horses – was not a detrimental factor to an owner claim for intentional infliction of emotional distress), and Louisiana (mental anguish award increased where defendant conduct’s caused the abortion of a child’s anticipated pet colt).

Related p.s. : Both Michael Vick and the Eagles stink.

Hat-tip: Allison Klein at WaPo.

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SEC and Cuomo handling the Merill Lynch bonuses; Cuomo using Martin Act in future?

SEC
Busy and slightly convoluted week for the SEC. AmLawLitigDaily reported Tuesday that Bank of America (“BofA”) had paid the SEC $ 33 million to settle a complaint moments before it was filed in the Southern District Court of New York. The settlement, of course, neither admits or denies the charges, and the SEC has publicly indicated it is continuing its investigation into related matters. (Separately, but beating the same horse, today the House Committee on Oversight and Government Reform requested BofA produce all documents related to the Merrill Lynch ("ML") acquisition). The complaint alleged BofA mislead its shareholders prior to the ML acquisition about ML bonuses. Specifically, the complaint alleges:

Bank of America represented in the merger agreement that Merrill had agreed not to pay any bonuses to its executives before the merger closed, except as set forth in a schedule. Unbeknownst to shareholders, the schedule was already in place weeks before the proxy statement was filed with the SEC and disseminated to shareholders. Under the schedule, Bank of America had agreed that Merrill could pay up to $5.8 billion, or nearly 12 percent of the $50 billion merger consideration, in discretionary bonuses to its executives. The merger agreement was included as an appendix and summarized in the joint proxy statement that was distributed to all 283,000 shareholders of both companies. But Bank of America's agreement to allow Merrill to pay these discretionary bonuses was in a separate document that was omitted from the proxy statement and whose contents were never disclosed before the shareholders' vote on the merger. (n. 0).

And so thinking it was a done deal, we all waited for court approval of the settlement … which didn’t happen. Wednesday, the same Court declined to approve the settlement over concerns the $ 33 million would come out of the $ 20 billion bailout BofA received last year. A hearing is scheduled Monday to discuss the matter. There has been media discussion of how the settlement and continuing investigation have – once again – burdened BofA shareholders. The Monday hearing is anticipated to truly bring to light how the BofA / ML deal was done.

Cuomo
New York Attorney General (“AG”) is also well-aware of the matter. Earlier this year, AG Cuomo successfully compelled former Merrill CEO John Thain to divulge the names of those who received the $ 3.6 billion in bonuses. (n.1). The complaint relied on authority under the Martin Act. The Martin Act is one of New York state’s blue sky provisions, and gives the AG broad powers to investigate and litigate financial fraud. (n.2). The purpose of the act is to prevent any form of deception related to securities. (n.3). The Act gives the AG discretion as to what matters to investigate, and provides power to subpoena witnesses and produce evidence. (n.4).


In moving forward on the matter of Merrill bonuses, the AG’s office may be looking to cases such as Loengard. (n. 5). In Loengard, plaintiff minority shareholders claimed that defendants – a parent and wholly-owned subsidiary involved in a short form merger – acted fraudulently by not providing the plaintiffs with notice of the merger, and by deflating the value of the plaintiffs’ shares. After lengthy litigation, the District Court found that plaintiffs failed to state a cause of action under the Martin Act for failure to show fraudulent conduct. The Court reasoned that fraudulent conduct under the Act was understood as a “ ‘tendency’ to deceive or mislead.” (n. 6). The Court did not find the appraisal of plaintiff’s shares fraudulent, or that the defendants had any duty under the law to provide the plaintiffs with notice of the merger.

In light of the AG's much-discussed report on bonus compensation released last week, it is unlikely Cuomo's current silence on the Merrill matter signifies any abdication on his part. The Martin Act has been effective for him to date, and may produce ongoing results for him moving forward in the matter.

(n. 0). Securities and Exchange Commission Press Release, 2009-177, August 3, 2009.
(n.1). People of the State of New York v. John Thain, 2009 NY Slip Op 29114 (table), 2009 N.Y. Misc. LEXIS 591 (2009) (court denied the third party’s right to intervene).
(n. 2). New York General Business Law §§ 352-c (2009). See also §§ 339-a, 352-353.
(n. 3). People v. Lexington Sixty-First Associates, 381 N.Y.S.2d 836, 840 (N.Y. 1976).
(n. 4). Thain, 2009 N.Y. Misc. LEXIS 591 at **1-2 (citing §§ 352(102)).
(n. 5) Loengard v. Santa Fe Industries, Inc., 573 F. Supp. 1355 (S.D.N.Y. 1983), later proceeding, 639 F. Supp. 673 (S.D.N.Y. 1986).
(n. 6) Id. At 675.

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Consumer Financial Protection Agency (“CFPA”): the re-regulation has begun

Olga wrote me last week, bringing my attention to a discussion of whether the U.S. is re-regulating itself out of competition for global business and capital. I kept her note in my inbox, and over the course of the week a number of other articles and blawgers caught my attention on the same topic; Richard Posner among them. My motivation for discussing re-regulation here is not so much the broader perspective of – are the regulators in the best position to tell consumers and businesses how and what they should be doing, and where will that structure lead us in ten years – as much as it is what this re-regulation practically entails to those businesses and consumers immediately subject to it. And I think plenty of folks will be subject to it: in total, as of last week, there are 32 government czars. That’s a lot of administrative law (as a side note for another post: is there an issue of executive vs. legislative power here?).

The Obama Administration has proposed the Consumer Financial Protection Agency (“CFPA”) Act of 2009 (the “Act”), intending a number of things. First, it seeks to bring under federal supervision non-regulated financial bodies that act as banks. This includes mortgage brokers and consumer-credit companies. Second, it will “consolidate[e] responsibility for consumer protection under one agency.” Third, FCPA “market-wide jurisdiction” will focus solely on how banking products and practices affect consumers. And Fourth, the FCPA will have “consolidated authority” to write, supervise, and enforce rules. For example, financial products and services that would come under this jurisdiction include but are not limited to: deposit-taking services, various forms of credit extension and loan servicing rights, as well as real property services (Ie., settlement services, title insurance services, and matters of leasing). The FCPA will have a board of five members serving terms of five years, including: the National Bank Supervisor and four additional members proposed by the President with consent of the Senate. The agency will also have a consumer advisory board (similar to the role of the Investor Advisory Board to the SEC).

The Act does have some teeth, however. Similar to the SEC’s ever-useful §10b and Rule 10b-5 violation of the Exchange Act, the FCPA would be empowered with a similar enforcement provision over similar-such fraud. This includes, among other things, fraud as regards public disclosures of consumer financial products and services, as well as sales practices. One of the most interesting provisions of the Act, however, is the CFPA responsibility to create “standard consumer product[s] or service[s].” Essentially, the CFPA will create bare-bone versions of financial products and service, and these bare-bone versions must be offered for sale alongside the other, privately-created financial products and services. Just a guess, but this “standard” product discussion is going to get pretty lively in the next several months.


Also, as part of the second intent of the FCPA - as described above, consolidating consumer protection – the Act proposes removing consumer-related functions and responsibilities from existing administrative agencies. As the Act stands now, this would affect: the Federal Reserve Board (“Fed”), the Office of the Comptroller of the Currency (“OCC”), the Office of Thrift Supervision (“OTS”), the Federal Deposit Insurance Corporation (“FDIC”), the Federal Trade Commission (“FTC”), and the National Credit Union Administration (“NCUA”). This has raised some eyebrows as the Act was introduced earlier this summer, and is also likely to create drama throughout the next several months.

The House has absorbed much of the Act in the form of bill H.R. 3126. However, the House bill does not contain reference to either the creation of a National Bank Supervisor, or removing consumer-related enforcement as delegated by the Community Reinvestment Act (“CRA”) (as regards depository institutions engaging in fair lending, overseen by the OCC, the Fed, the FDIC, and the OTS). Discussion of the bill is pending the Congressional summer adjournment (Washington reconvenes after Labor Day). Additionally, there are Senate and House bills for a Financial Product Safety Commission (S. 566 and H.R. 1705, respectively). Both bills are yet in Committee, so am unsure at the time of this post if their provisions will be absorbed by the FCPA, or forfeited altogether.

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U.K. Say-On-Pay and Shareholder Empowerment

There has been some significant movement in executive pay this week: the House voted Friday to pass the say-on-pay bill that was produced by its Financial Services Committee. In light of the successful vote, I wanted to briefly follow-up with discussion of say-on-pay, as legislated in the U.K.

The Directors’ Remuneration Report Regulations came into affect in 2002, requiring among other things, that shareholders be afforded a non-binding vote on executive compensation. Only U.K. corporations listed in “major” stock exchanges are required to make public an executive compensation report. The report, then, is subject to vote at the annual shareholder meeting. Compensation data disclosed includes salary, equity compensation, and severance payments.

The results of the U.K. legislation have been scrutinized by critics as mixed. It has frequently been reported as effective in instances such as Glaxo Smith Kline in 2003. There, shareholders voted by simple majority to reject a substantial severance package for an executive who had widely been regarded as unsuccessful in recent years. However, the trend in U.K. executive salary shows continued increases over the seven year period following enactment.

Several thoughts come to mind in light of this criticism. Among them, say-on-pay is frequently advocated as a shareholder empowerment tool; permitting shareholders a more potent voice in interacting with the corporation’s board on matters of the corporation’s resources and an executive’s performance. To strictly treat it as a means of ensuring low executive pay disregards the potential for improvement in shareholder interaction and cooperation. So statistics that merely tell me that U.K. executive pay increased over a period years confuses me. Is that an accurate measurement of the success of the legislation? Has anyone asked if the shareholders felt more empowered – both over the issue of executive compensation and as a matter of ownership within the corporate structure? Was corporate governance improved as result of the enhanced interaction? Too, presumably these statistical increases have taken into account inflationary factors, as well as the culture of the years preceding our current economic crisis (for if I recall correctly, everyone was making a lot of money at the time, and no one had a problem with it – shareholders or executives).

A recent Time’s article discussed Aflac’s supporting the idea of shareholder empowerment. Not as a means to limit executive pay, per se, but as a means to specifically improve shareholder relations. The counter argument, and frequent defense, is that shareholders already are empowered with tools to counter any problems they may have with the compensation packages awarded. That is, they can vote-off any director from the board that they disagree with, including decisions concerning executive compensation. Too, data reveals that despite the current drama engendered by the say-on-pay movement, among the nearly two dozen American corporations that have voluntarily empowered say-on-pay votes, none have experienced a successful shareholder rejection of an executive compensation package.

Out of interest, it should be noted that American say-on-pay legislation is not as strict as it could be. Similar legislation adopted in the Netherlands (2004), Sweden (2006), Norway (2007), Spain (2008), and France (2009) all require a binding shareholder vote on compensation packages.

(Photo courtesy of Petre Kratochvil).

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SOX § 304’s Clawback: Executive Fraud Not Required

Last week, the SEC filed a complaint in the District Court of Arizona to compel former CEO of CSK Auto Corporation, Maynard Jenkins, to disgorge over $ 4 million in bonuses and equity compensation. Since SOX's inception in 2002, § 304 has been used only a handful of times. This complaint is notable in that it marks the first time § 304 has been used to clawback executive compensation from a defendant who has no other securities fraud allegations pending against him. The move on the SEC's part is significant and warrants a background discussion.

Section 304 is subject to a number of significant limitations. The most substantial of which is the statute's broad language. For instance, the clawback function of § 304 disgorges executive compensation in the instance of "misconduct." Misconduct, however, is not defined by statute. Case law up to this point has provided a fairly narrow definition of what "misconduct" is. In SEC v. McGuire, former CEO and Chairman of UnitedHealth Group, William McGuire, settled with the SEC for $ 468 million to resolve allegations of personal involvement in a lengthy stock-option backdating scheme. In SEC v. Brooks, former CEO and Chairman of DHB Industries, David Brooks, was alleged to have overstated inventory values, falsified journal entries, and failed to charge obsolete inventory - all of which portrayed a false gross profit margin to the public. Brooks was also alleged to have misused corporate monies and to have engaged in insider trading. Apart from the factual allegations, both McGuire and Brooks involved a § 304 action to clawback executive compensation against an executive who had securities fraud allegations leveled against him personally. This is substantially different from the SEC's complaint last week against Jenkins.

There, in fact, are no personal allegations of securities fraud against Jenkins. The SEC has been chasing CSK's financial misconduct for several months. In March of this year, the SEC charged a number of officers with securities fraud. And again in May, the SEC instituted settled cease-and-desist proceedings against CSK for making public false financial statements. The SEC complaint last week against Jenkins compels disgorgement of his executive compensation for the periods of CSK's alleged financial fraud. A lay-instinct may be to indicate that Jenkins in fact signed CSK financial statements, and therefore despite not having allegations of securities fraud leveled against him, he is yet responsible to the extent of his SOX Certifications. It is widely held as consensus by the courts, however, that SOX Certifications alone do not constitute scienter. (n.1). The move on the SEC's part to try and clawback Jenkin's executive compensation despite and withal this, is fairly bold. I am sure I am not alone in wondering if this will be a secluded event.

Before closing, I want to briefly suggest to you other significant § 304 limitations.

• It is insufficient for the "misconduct" to have merely occurred, or to even have been known of; a financial restatement must be publicly released (or, so says the case law).
• It is only the executive compensation of a corporation's properly named CEO and CFO that is subject to the clawback provision.
• Any bonus and equity compensation received one year following the "misconduct" is subject to clawback; salary excluded. Any profit earned from the sale of issuer securities sold one year following the "misconduct" is also subject to clawback.
• Other vague statutory language, not yet resolved by the courts, includes: "required [to prepare]" (when must an issuer restate its financials: upon auditor suggestion? SEC opinion letter?); "material noncompliance" (as regards "misconduct"); "received" and "profits" (as regards when executive compensation is in fact received by the executive, and do you use the sale price or the acquisition price to determine stock sale profits?).
• No private right of action.
• No retroactive award (prior to SOX's 2002 enactment).
• Disgorged proceeds are reimbursed to the corporate issuer, and not to any collection of shareholders, or other plaintiffs.

(n.1). In re Intelligroup Secs. Litig., 468 F. Supp. 2d 670, 707, complaint dismissed, 527 F. Supp. 2d 262 (D.N.J. 2007).

Hat tip: former Guest Blawger, Allen Major.

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Litigating the Credit Rating Agencies

AmLawDaily is among the media outlets that reported CalPERS filed a suit alleging negligent misrepresentation against Moody’s, Standard & Poors (via The McGraw Hill Companies), and Fitch. The suit – the first by a pension fund against a credit rating agency - also alleges that each rating agency played a role in the structuring of the investment vehicles. The litigation was filed in California state court, alleging violations of both the California Civil Code and California common law. The short of it: CalPERS (which manages $ 173 billion in assets) invested in structured finance vehicles that defendant rating agencies denoted as AAA; the subprime crisis revealed the vehicles were in fact not AAA, and CalPERS is seeking recompense of its lost investment.

There appears to be a consensus that the rating agencies will successfully plead their ratings are an expression of their First Amendment rights, and the CalPERS suit will be dismissed. Really? I am both a young attorney and new to the matter, so was surprised when I discovered that the rating agencies are not only subsidized by the federal government, but also receive compensation from the firms whose instruments they rate. Frank Pasquale at Co-Op has a great post on the topic. I am really intrigued by the issue, and so investigated what litigation in New York is among that pending against these actors.

In In re Moody’s Corp. Sec. Litig., 599 F. Supp. 2d 493, reconsideration denied, 612 F. Supp. 2d 397 (S.D.N.Y. 2009), plaintiff investors filed a class action against the rating agency and several of its officers and directors, alleging a variety of misrepresentations in violation of the Exchange Act § 10(b) and Rule 10b-5. Among the misrepresentations Moody’s is alleged to have made: as regards the independence of both itself as a rating agency and the ratings it released, in light of interested issuers of securities; as regards the meaning of Moody’s ratings themselves; as regards Moody’s structured finance revenue; and as regards its rating methodologies. Although I will not address such in this post, plaintiffs also alleged control person liability against individual defendants, under Exchange Act § 20(A). On defendant motion, the Court dismissed all allegations against defendant COO and Managing Director of Moody’s U.S. Asset Finance Group, and allegations regarding the meaning of Moody’s ratings and Moody’s structured finance revenue (meaning and derivation). The remaining claims proceeded to trial, and plaintiffs were otherwise left with leave to amend.

Although only an opinion on a motion to dismiss, it’s interesting to review what happened. The Court found plaintiffs provided sufficient evidence that Moody’s statements about its independence were indeed false. The Court relied on a number of WSJ articles that described events such as: Moody’s changing a rating so as to save a client issuer; and promotion of analysts who favored higher ratings and asked fewer questions. In finding so, the Court rejected defendant’s puffery argument; that language was “vague” and “non-specific.” The Court considered precedent which had ruled puffery as inactionable; language there took the form of declarations of intent and discussion of hope. Moody’s, on the other hand, was found to have treated its independence as a “cornerstone” of its very livelihood, and the Court found several public statements made by Moody’s to be neither “vague” or “non-specific.” The case is yet pending in the Southern District Court of New York, 07 CV. 8375 (SWK).

The topic is hot, not to mention interesting. As a new attorney to the issue, there are loads of topics to research and discuss, so I will certainly revisit the topic as the blawg moves forward (no pun on that last bit … ). Thanks – Sls.

(Image courtesy of Bank of the Ryukyus, Limited).

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Jack Welch: Legal Constructivist or Bully?

I am not a legal theorist (Olga?!), and not particularly enthusiastic about the comments this post might illicit, but I felt compelled to write. Last week Jack Welch remarked at a SHRM event that female professionals had the burden of making a choice: to focus on acquiring a leadership position within their company and field, or, to focus on having and raising children.

I didn’t pay much attention to the news item at the time of its release – then, it wasn't blawgable. In the interim period, the online community has been both critical and supportive of Welch (ie, ABA, Ms. JD, WSJ). The reason the news story originally sailed passed my attention is ironically the reason I write now, because I feel Welch merely remarked on the roadmap every female professional realizes exists.

I will not discuss whether this roadmap is “right,” or “fair,” or a choice a man is under the same obligation to make. But from a legal constructivist position, Welch’s comments make sense. Legal constructivism studies how law embodies norms. It makes sense, that a woman competing in any profession built by men, and for decades professionally populated by men, would have to compete by the rules those men created. And whether purposefully or subconsciously, those men would create rules that reinforced the manner in which they performed, the means by which their performance was judged, and by values their male community supported. So where a male professional had sacrificed his personal interests for the sake of his company’s interests (or alternatively, did not have to make the sacrifice because a partner supported him), it is logical that a promotion and company leadership structure would embody the same rationale, priority, and reward.


As a closing matter, Welch’s comments also make intuitive sense. If I join an athletic team, and leave work early each evening to practice, travel periodically for games, and have my mental focus divided among competing concerns, no one – not even myself – would expect a professional leadership position at work. And this is not to denigrate raising children to the level of playing baseball, but the issues of distraction and divided focus from company concerns remain the same. We grew up as kids knowing we couldn’t have it all, right? That our choices and actions had consequences? (And this is a personal and truthful reflection): why, then, does it come as such a shock when Jack Welch says it out loud?

(Photo courtesy of Re:Focus).

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Rules of Revolution

The thesis is as follows: from the standpoint of international law, national sovereignty must be viewed as a flexible concept when self-determination by a people of a nation is in question in times of outbreaks of internal violence directly tied to the very question of people’s self-determination – in other words – in times of revolution. That is, the international community has a right to breach the otherwise sovereign borders of a state (peacekeeping forces, etc) in order to minimize human violence, and to prevent violent oppression of the revolting people by the government’s armed forces.

The reasoning is as follows: government derives its legitimacy from a choice made by the people to have that government. At times, political circumstances turn in such a way that a substantial number of people are dissatisfied with their government, AND are unable to change that government through peaceful, lawful means (e.g.: election, even one decided by a Supreme Court, which is still an institution of law). During such times, people turn to self-help and try to change their form of government through revolution. Unfortunately, too frequently the government has control over the armed forces and is able to forcefully suppress change and political dissent. When the government has to use force to secure people’s compliance with it, the government divests itself of its fundamental legitimacy. A nation without a government is still a sovereign nation, and the international community has two choices at that point: do nothing and let the revolution and bloodshed take its natural course, or intervene (again, e.g.: peacekeeping forces) and mediate the set-up of a replacement government while also providing the people with protection against violence possibly perpetrated on the people by their old regime.

Today, there are many NGOs that work in foreign countries and assist them in setting up their legal and political systems. The international community ought to recognize the tremendous importance of this type of work, and, in times when a country breaks out into violence, enable armed peacekeeping envoys to penetrate an evolving nation’s sovereignty to ensure the protection of the first and foremost human right: the right to life – even if one is a revolutionary otherwise willing to sacrifice it. From a moral standpoint, we should not stand by idly and watch other people sacrificing their lives in the name of freedom, and while the peacekeeping/envoy option may not be a great one (hey, this is my first crack at this!), the United Nations should consider other formal approaches to intervening in the affairs of sister states whose people seek a more perfect expression of freedom.

This thought-process was triggered by the current crisis in Iran, so let’s consider how this might play out. We have unrest by a significant number of the people, a law-less election, violent clamping down of the protesters by the government controlling the armed forces, loss of life, and, a key factor – lack of legal recourse and inability of the people to resolve the electoral dispute by application of law. The UN is currently being petitioned to send “envoys” to Iran to mediate the crisis; however, there is seldom any discussion of use of UN military force to stand up to the government’s en masse use of the military against its own citizenry.

There is a big part of me that thinks that the current crisis in Iran would satisfy the threshold criteria, as set forth above, for international use of force aimed at stabilizing the situation – a coalition of envoys, that is, who will oversee a re-election, and perhaps oversee a referendum on certain parts of the Iranian Constitution, such as the part granting unchecked power to one Supreme Leader. Yet, there is also a big part of me that feels such an approach too intrusive under the circumstances, and possibly unwelcome and counterproductive. In fact, I could imagine an argument that the Supreme Leader’s call of the Iranian election IS application of legal process – because the Supreme Leader is empowered by the Iranian Constitution to have the power to make that call, which means that the law prevailed and the protesters ought to go home. The problem, of course, is that the protesters are not going home, and those who are – are quite possibly doing so out of fear of death rather than a truly voluntary choice to consent to the government’s ruling.

So, at the end of the day, I am not ultimately willing to make this call. However, I do think that the United Nations ought to consider very strongly various formalized collective responses to brewing revolutions, including use of military peacekeeping forces, for the purpose of preserving and protecting human life. The UN’s approach right now is ad hoc and there is little thought (that I’m aware of) given to formalizing a set of rules and criteria that would trigger a right to intervene in the affairs of sovereign nations the governments of which use violence to suppress the people’s dissent, which governments, therefore, become illegitimate. We have legal rules for war – and the creation of those rules was motivated by a self-evident need to protect human life and other rights in times of great crisis; we should have rules for revolution – for the very same reasons.

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