ExeComp in the News: SEC Goes For the Kill, and then there's Attorney General Cuomo, AIG, and London Bankers

Bank of America. The core of the SEC charges to date (trial beginning March 1, 2010) focuses on the alleged improper BofA disclosure of the Merrill bonsues to its shareholders. The SEC has asked Judge Rakoff of the S.D.N.Y. to add an additional allegation – failure to properly disclose the Merrill 4Q 2008 losses! Rakoff has said the additional allegation can not be added to the current litigation, but the SEC can always file a new complaint. How many lawyers' kids can go through grad school on BofA's tab: check it out here, here, or here.

City of London bankers are threatening to leave town. (Really? You're going to have your spouse leave his job, pull your kids out of school, buy and sell property, and get vet paperwork done on the dog ... Really?) Though admittedly, this is a lot to handle at once: in addition to Darling's intent to levy a one-time 50% tax on bonuses equal to or greater than $ 40,700, the FSA announced recently that compensation for banking employees earning $1.6 million per year will have their compensation deferred - as much as 60% and for as long as three years! Check it out here or here.

In response to the potential 50% tax, financial firms have indicated they will just pay their employees more money (incidentally, at the cost of the shareholders). In this way, the tax will be spread out over the global resources of the organization. Okay. Or, you could just pay the one-time tax on bonuses. One-time. On a bonus.

Remember Andrew Cuomo? Yeah – he didn't think so either, so he's leveraged the Martin Act again and made a demand this week on eight companies that received government financing to disclose their 2009 bonus pool information. When is that election again? Hope it comes and goes before folks realize earlier Cuomo threats leveraging fraudulent conveyance allegations against AIG – which culminated in a very public AIG "we'll give almost all of it back" – has in fact only produced a fractional return of the bonuses. What's a candidate to do? Check it out here.

Speaking of AIG – a new GC is being named: Thomas Russo (previously with Lehman). Here's hoping he rolls with the Compensation Czar's style more easily than his predecessor. Or, maybe AIG could just pay the $183 billion in federal financing back.

Is there an Antidote for Russia's Corruption Problem? by Vlad Frants

Recently, a BusinessWeek article depicted corruption as "Russia's economic stumbling block." Sure, if corruption were decreased then people would be less weary of investing in Russia and a major economic stumbling block would be removed. But how easy can it be to markedly decrease corruption in a place where for so many years judicial enforcement was almost nonexistent, substantive legal remedies available to underpaid and inexperienced judges were ill-defined and Russians were working under tremendous cultural constraints to not follow the law?

Anti-corruption laws don't sound bad and Russia has already made important strides in the right direction by overhauling a problematic tax system, introducing bright-line limitations on local authorities in order to reduce arbitrary bureaucratic actions and creating the Council for Combating Corruption. But perhaps the focus shouldn't be only on decreasing corruption by side line participants. Perhaps there should be a solution from the inside-out.

What if there existed a corporate governance model for Russia that itself led to decreased corruption by molding the right cultural mindset? Bright-line rules, rather than standards, to define proper and improper behavior. Strong legal remedies to compensate for the low probability that the sanctions will be applied. Greater protection of outside shareholders than is common in developed economies. Enforcement, as much as possible, through actions by direct participants in the corporate enterprise (shareholders, directors, managers), rather than indirect participants (judges and regulators).

These are elements of the "self-enforcing" model of corporate law which was introduced by professors Bernard Black and Reinier Kraakman in 1995 for Russia. After creating the model and seeing that it was unable to withstand the socio-economic difficulties and setbacks that Russia faced in the years preceding Russian President Vladimir Putin's tenure, the professors abandoned the model.

In a law review article entitled "Russian Corporate Law: is "Self-Enforcement" Still the Way to Go?, 13 UCLA J. INT'L L. & FOR. AFF. 435 (2008), I reviewed some of the positive changes that President Putin implemented in Russia and argued that we should reconsider a self-enforcing model for Russia.

Perhaps assimiliating the elements of the professors' "self-enforcing" model, coupled with aggressive anti-corruption campaigns, would be the best antidote for Russia's corruption problem.

Whoopi Goldberg on drugs again? “Rape-rape.”

I have zero interest in the practice of criminal law and so originally had no intention of discussing the Roman Polanski matter here. But then The View and Whoopi Goldberg popped-up on the radar. Goldberg’s participation in the program’s Polanski discussion yesterday included:

“I know it wasn’t rape-rape … All I’m trying to get you to understand, is when we’re talking about what someone did, and what they were charged with, we have to say what it actually was not what we think it was … Initially he was charged with rape, and then he plead guilty to having sex with a minor, okay … We’re a different kind of society. We see things differently. The world sees thirteen year olds and fourteen year olds in the rest of Europe … not everybody agrees with the way we see things.”

A video and transcript of the show is available here. The transcript of the victim's grand jury testimony is available here. Summarized briefly, the incident involved: a 44 year-old man, a 13 year-old girl, lots of “no(s),” alcohol, drugs, and sex including oral, vaginal, and anal.

I think the characterization of “rape-rape” is tremendously irresponsible and dangerously flippant. I do not think Goldberg was referencing various degrees of rape (ie., rape with a weapon might be considered first degree rape in some jurisdictions). Her comments suggests to me a rape that is actionable and rape that is not. In light of some of the frightening statistics of our modern society – one in four college women report surviving a rape or attempted rape - I am frustrated and disappointed by such a cavalier reference. Wth? WTH???!!

Let’s be real on two points. First: Polanski was charged, inter alia, with rape, but ultimately plead-out to engaging in unlawful sexual intercourse with a minor. He was under psychiatric evaluation at a California state prison for 42 days, but was granted a 90 day stay to complete a work project. It was after his evaluation but during this stay period that Polanski fled the jurisdiction. Second (and from someone who has lived in Europe a number of different times and in a number of different locations): Europeans do have a healthier perspective on teenage sex, but Europeans do not condone the drugging and forcible rape of a teenager.

Also allow me to point out that I can appreciate people’s hesitance at accelerating the Polanski matter: it has been over three decades since the crime, the California budget is strained as it is, and significant political chips will be spent to successfully extradite the fugitive from Switzerland. This is what I also appreciate: there was a law, it was broken, a plea was agreed to that included a sentencing hearing, and anticipating a sentence he did not have the courage to face, Polanski fled the jurisdiction.

Just so that I can keep pace with my more liberal and apparently enlightened West Coast peers: smoking is bad, meat is bad, fur is bad, but non-consensual sex with an intoxicated child is okay?

Navel Gazing and UPDATE: Executive Compensation and Financial Markets

So I’ll admit my own distraction for the last week, but was surprised that when I tuned-in again, the issues of executive compensation and market regulation had been subject to significant movement. Seriously: this is why people are afraid to take vacations.

The Consumer Financial Protection Agency (“CFPA”) being proposed by the Obama Administration (discussed earlier here) has taken some serious heat >> members of the President’s own party are offering competing proposals that in fact contain no mention of CFPA at all. Well, sort of … in place of creating a new federal regulatory structure for financial products marketed to consumers, Representative Walt Minnick (D – Idaho) has proposed having existing state and federal regulators work with one another under a Consumer Financial Protection Council (“CFPC”). Rumor also has it that once supportive House Financial Services Committee Chairman Barney Frank (D – Mass.) has indicated that the final bill will not contain the “plain vanilla mandate;” recall, under the CFPA, the government would create standard financial products that would be required to be offered in tandem with specialty products banks and firms offered to consumers. The House Committee meets today at 10am to continue hearings on the matter; a webcast is available from the House site here.

The SEC is creating a new division of Risk, Strategy and Financial Innovation. The new division will advise the commission on how new developments, products, and trends may affect the financial market and systemic risk. The division actually pulls together functions across existing Commission divisions, including the Office of Economic Analysis and the Office of Risk Assessment.

Microsoft’s Board of Directors approved a shareholder say-on-pay proposal, giving its shareholders an advisory vote on executive compensation. The first vote will happen at this year’s shareholder meeting on November 19th, and then occur again every three years after.

The Federal Reserve itself is moving to amend compensation practices, and is seeking to expand its regulatory reach regarding the compensation of nearly all bank employees. Caps are not being sought, but evidently the Fed is toying with different methods of how to curtail the amount of risk-taking employees throughout the bank take on behalf of consumers.

Glad the Fed thinks it can fix something, because every time you hear a bell ring, another American bank fails.

And our favourite main-man – Kenneth Feinberg the Pay Czar – has announced that within the next several weeks he will be disclosing some of the compensation revealed to him and approved by him. Rumour is Feinberg is looking to set some manner of precedent.

And precedent seems to be all we will be getting out of the recent G-20 meeting on the issue of executive compensation. Each of the world leaders in attendance affirmed their intent to reform executive compensation and capital requirements at banks, and then they each exchanged promise rings and caught the next flight home.

FWIW – a few of the headlines I found in my inbox over the course of last week. My continued obsession with Bank of America (“BofA”) of course continues, and has also been hot lately. BofA warrants its own post, though, so see you at lunch!

Photo credit: Anne Geddes, as portrayed by Pauline Kaill on Playle's Online Auction.

But what will become of sushi night?!

Sure, sure, so many people say they’re sushi snobs and that if they vouch for this restaurant, its because their sushi is so very fresh. While I can’t say that I am a sushi snob, I am a sushi aficionado and grew up at the sushi bar – well, except for all the times that snobby owners thought little kids couldn’t enjoy real sushi so they sat our family at a table. Whether it’s the scrapes leftover to make a spicy tuna roll, a nice piece of tuna, or a delectable meaty slice of toro, tuna is clearly the sushi staple.

Sadly, commercial overfishing has led to the endangerment of giant blue fin tunas. Earlier this summer celebrities attempted to boycott famed Nobu restaurants for serving the endangered fish. [Daily Mail] Small Japanese towns that had wanted stricter regulation on fishing are now worried that their town’s appeal and revenue are in jeopardy. Unfortunately, as is the case with any commercial overfishing example (including the fish used to make McDonald's filet-o-fish sandwiches!) regulating the fishing in international waters is a difficult task, to say the least. [Serious Eats] As Masayuki Komatsu, an expert on the fishing industry at Tokyo’s National Graduate Institute for Policy Studies, stated to the NYTimes, “there are too many entrenched interests whose objective is maximizing profit, not sustainable use.” This seems to illustrate oh-too-common reason our ecosystems are in trouble today. The EU earlier this week failed to decide to protect the endangered species. [Huffington Post] Whether it is politics, wealthy legislators enjoying their own slices of blue fin tuna, or the difficulties in regulating the international waters even if the crowd pleasing fish were placed on a protective list, overfishing is a problem here to stay.

Alas, as for the tuna eaters, so long as sushi prices don’t sky rocket, I’m afraid we, myself included, likely will continue to eat our beloved tuna – over soy sauced. At least we'll have our sake bombs? Gombei!

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.

View full post and comment string ...

Gonna change my way of thinking.

One commentator (thanks for the tip, Stef!) recently suggested that the Iranian Constitution’s vesting of ultimate authority in the Supreme Leader is analogous to the Divine Right of Kings. One respondent (number 3) to that commentator has cautioned that “the Iranian Constitution… has rather deep intrusions of democratic principles[; it] repeatedly references democratic ideals in interesting and somewhat surprising ways,” citing, for example, the importance attributed by the Constitution to the public will, as it is expressed by public elections. This basic tenet of democracy -- self-determination by popular electoral will -- is indeed decidedly sophisticated from the viewpoint of institutional political maturity. However, I would argue that the very existence of a Supreme Leader whose final judgment is unquestionable because it is explicitly tied to the pronouncements of a higher-than-human authority reduces the “deep intrusions of democracy” in the Iranian Constitution to an aspirational ideal at best, and at worst - to mere lip service.

The recent electoral crisis in Iran is an illustration: despite extensive and strenuous protest by the very people who are supposedly empowered to self-determine their political fate, so far it is the word of the Supreme Leader that is prevailing. Some have pointed out that the recent unrest in Iran is likely to spell a serious change for the Iranian regime. Indeed, determination by the authority of the people, by its very nature, is incompatible with determination by the authority of a being other than the people and it is precisely this basic incompatibility that is behind the intuition concerning the impending regime change in Iran.

However, it is unclear exactly what kinds of (presumably democratic) institutions will replace Iran ’s current irreconcilable marriage between democratic choice and divine power, or, perhaps more importantly, how that change may be peacefully implemented. It is ironic enough that the people’s revolution of 1979 replaced an actual king with a leader possessing a divine right of kings; it would be more ironic and possibly quite tragic if another (armed) revolution were necessary to purge the remnants of divinity (that currently controls the armed forces) from the political framework to make room for rule of truly democratic (read: non-divine, people-controlled, in a word - secular) law, even if that law makes a respectful nod to religion (as it would have to in Iran). Allahu Akbar because the people's votes count.

Ultimately, what this discussion aims to stimulate and preface is a rethinking of certain aspects of international law, especially those aspects pertaining to nations’ rights to interfere in the affairs of other nations (see also previous post re: need for a flexible definition of national sovereignty during times of internal national violence.) Certain philosophical considerations do indeed justify, and in fact demand international attention to (and I would argue, at times, intense international involvement in) major transformative political events within any particular country, to facilitate the peaceful and lawful nature of these transformations, minimizing violence and loss of human life that too frequently accompanies them. International law can and should be used to challenge the necessity for coincidence of major political transformations with civilian bloodshed.

The Big Picture

Only as high as I reach can I grow, only as far as I seek can I go, only as deep as I look can I see, only as much as I dream can I be. – Karen Ravn.

On that note, I’m starting with the BIG picture.

The law is a process which, like any other process, is in constant motion. Driving the process of law are actors (read: lawyers) who are constantly engaged in defining the relevant legal rules. At its best, the law transforms the naturally chaotic and selfish human beings into socially conscientious benefactors, because lawyers promote those rules governing human behavior which, to borrow the language of game theory, lead to a maximum-sum game: if everyone follows those particular rules, everyone will maximize their own, and everyone else’s benefits.

The cutting edge of economics today is preoccupied with applying game theory principles to public policy matters. One day, perhaps, our economic modeling ability and technology will grow capable of calculating the number reflecting the outcome-sum of any game played by 6 billion human beings. That day, we will have mathematical proof of which rules governing human behavior are, in fact, better for humanity than all other rules. But until that day comes, it is up to the lawyers to tap into our collective intuition and social consciousness and aspire to create and advocate the kinds of rules which, if followed, lead to a universal and perpetual maximum-sum game. No matter what we as lawyers do, the maximum-sum game paradigm must always remain in our minds’ not-so-distant background. This is as true of the work that we do as it is of the lives that we lead.

With this as background, the specific legal question for this post is as follows: in terms of international law, must (or should) Western nations let the sovereign people of Iran sacrifice their lives in the name of freedom and self-determination of its sovereign future generations, or, is it “good” for the sovereignty principle to be, as a matter of international law, inherently flexible and subject to international interference, considering that once self-determination is obtained by the Iranian people, it is likely that, like any other free people, they will demand nothing short of absolute respect for their sovereignty? (I claim no more to have the right answer to this question than I claim to have just stated it clearly, which, clearly, I have not.) Nevertheless, my view is that, as a matter of international law, national sovereignty must yield when self-determination by a people of a nation is in question, at least in times of outbreaks of internal violence directly tied to the very question of people’s self-determination. I plan to address some of the reasons supporting this view in my next post, which, I swear, will be, like, totally way more clear.