More on Prof. Coffee and the Paulson Committee
In an article in the November 16, 2006, New York Law Journal, Prof. John Coffee writes that notwithstanding what he labels some "dubious reporting" by the New York Times, he has not recommended to the Paulson Committee that "any private cause of action under Rule 10b-5 could and should be eliminated by SEC rule-making." He writes that his proposal (which is set forth in detail in this October 2006 law review article) actually is far more modest:
But the boldest and most fundamental of the reforms that I would recommend asks the SEC to adopt an exemptive rule under § 36 of the Securities Exchange Act of 1934 that would shield a non-trading public corporation from liability for monetary damages under Rule 10b-5. This would not eliminate a private cause of action under Rule 10b-5, but it would force the plaintiff's bar to sue and settle with corporate officers and agents--i.e., auditors, underwriters, and law firms--instead of treating the corporate entity as the deep pocket that paid everything. Such litigation is entirely feasible, as shown by the fact that in the Enron and WorldCom cases, which are the two largest settlements in securities class action history, the bankrupt corporate entity was not sued, yet record recoveries were obtained.
He also notes that § 36 could be used to "recast securities litigation" in another way, by providing auditors with a partial exemption in the form of a ceiling against catastrophic liability.
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November 15, 2006 |
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Breaking Down the Royal Ahold Attorneys' Fee Award
Judge Blake in the USDC for the District of Maryland has issued this opinion awarding attorneys' fees in the massive $1.1 billion Royal Ahold settlement. Some quick but notable points:
1. Class counsel (Entwistle and Cappucci) was permitted under its retainer agreement with lead plaintiff COPERA to seek up to 20% of the settlement amount, but instead sought just 15% ($163.3 million, or a multiplier of 3.21 times the lodestar of $50.8 million).
2. The Court awarded Class Counsel 12% ($130.6 million), lopping off nearly $33 million from the requested amount. The Court stated:
I agree with plaintiffs that the range of comparable settlements should include some below $1 billion as well as those few that substantially exceed $1 billion.9 Strictly on a percentage comparison approach, a 12% fee award appears to me a reasonable percentage of the class recovery.Application of the Barber factors, some of which already have been addressed, also supports an award of this magnitude. On the one hand, settlement was achieved well before trial, presumably aided by significant concessions about the fraud at U.S. Food Service and the existence of “side letters” related to the joint venture consolidation. While some of the legal issues were familiar, others were more difficult and, at least as to subject-matter jurisdiction, novel in this Circuit. While the case was not “undesirable,” lead counsel was required to and did devote exceptional resources to the prosecution, facing some risk of non-recovery as the fee was entirely contingent under the retainer agreement with COPERA, and Royal Ahold’s financial position was unclear. The global aspect of the case raised additional practical and legal complexities, as did the parallel criminal proceedings in another district. The settlement obtained is among the largest cash settlements ever in a securities class action case and represents an estimated 40% recovery of possible provable damages. The notice process appears to have been very successful not only in reaching but also in eliciting claims from a substantial percentage of those eligible for recovery.
The court concluded by noting (listen up Lies, Damn Lies and WSJ Law Blog!) that
Finally, plaintiffs’ counsel were vigorous and extremely competent in their litigation against equally well-qualified defense firms.
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November 14, 2006 |
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SEC Everywhere, Part II
Three years ago I looked at the flurry of SEC enforcement activity at that time and suggested a new tagline for the SEC: "SEC Everywhere". Four days later, as if on cue, SEC Chairman William Donaldson was asked at the Securities Industry Association conference why the SEC enforcement staff did not detect abuses in the mutual fund industry before they were uncovered by New York Attorney General Eliot Spitzer. Donaldson reportedly said, "We have had a full plate. We can't be everywhere." (See my follow-up post: "SEC Not Everywhere)".
So we've been in this "SEC Not Everywhere" holding pattern for three years. BNA Securities Law Daily reports that yesterday, however, ironically at the same Securities Industry Association conference, SEC Enforcement Director Linda C. Thomsen said that
she wants the enforcement division to cover all areas and issues--not just those in the headlines. Speaking at a seminar in New York, Thomsen said, "We want to make sure we are everywhere."
Accordingly, SLW is officially changing the status back to "SEC Everywhere". But you might want to check back in four days.
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November 10, 2006 |
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More on the Fastow Deposition: No Ninjas
As discussed in advance here, Alexei Barrionuevo of the New York Times has this excellent article about the deposition of Andrew Fastow in the Enron case, which ended November 2 after eight and a half days of apparent drama, drudgery and even some comedy. According to the article, Fastow did not produce any smoking guns, but exhibited an impressive consistency over the nine days of his questioning.
The article also recounts an interesting event on the first day of the deposition:
Tensions were high that first morning, according to several people who witnessed the deposition. About 30 lawyers packed into the main conference room, sitting on either side of Mr. Fastow. Almost 40 more watched on video feeds in two overflow rooms.
Suddenly, four shadowy figures with ropes appeared, hanging outside the windows of the main room, which had the blinds drawn. A marshal scrambled to the windows. One lawyer for a major bank said the figures resembled ninjas. It turned out they were window washers.
“A lot of uncomfortable smiles broke out,” Mr. Heaton said....
Finally, the article suggests that my pre-deposition estimate that the Fastow depo would end up being a $3.2 million event was too high:
The deposition drew lawyers representing 10 major banks and top Enron executives who have not been charged with crimes. It was also streamed live over the Internet so law firms in New York, London and elsewhere could listen in.
With the typical lawyer in the case billing about $450 an hour, the legal fees just to follow the testimony could cost at least $2.1 million, and the overall price tag of the litigation is expected to reach hundreds of millions of dollars.
Doing the math on the NYT estimate, the article is assuming 7 hours days for each of the 70 lawyers, at $450/hour, for 9.5 days. I assumed 10 hour days, which is the key difference between the estimates. Not that it really matters but the article notes that the depo went from 9 am-6 pm most days, with only occasional breaks. That's 9 hours right there, and when you add in the travel time ... I'm thinking that my 10 hour/day estimate is probably closer to what was billed in this case.
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November 9, 2006 |
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Cablevision Form 10-Q Scoops Everyone on Larry Brown Settlement
Who says SEC filings are boring?
Yesterday, the details of former New York Knick coach Larry Brown's settlement with the team over the termination of his contract were first announced not on ESPN or even a blog like Deadspin.com, but rather in the Cablevision Form 10-Q (Cablevision owns the Knicks). According to the 10-Q filed November 8,
On June 22, 2006, the New York Knicks, a division of Madison Square Garden, L.P., notified the then-head coach of the Knicks, Larry Brown, that his employment had been terminated with cause pursuant to his employment agreement with the Knicks. Mr. Brown disputed the Knicks’ right to terminate his employment with cause and the matter was referred to the Commissioner of the National Basketball Association (“NBA”), who had the authority under the agreement to resolve all disputes. On October 30, 2006, the parties reached a settlement of this matter under which the Knicks agreed to pay Mr. Brown $18,500 of the disputed amount in connection with his employment agreement, which amount has been accrued for in the accompanying financial statements as of September 30, 2006.
According to this article on ESPN.com, the settlement was indeed first disclosed in the SEC filing and is actually for $18.5 million (the filing apparently states all dollar figures, even in the text, in millions).
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November 7, 2006 |
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The Twinkie Offense
In his February 2006 speech to the US Chamber Institute for Legal Reform, SEC Commissioner Atkins veered way off of his topic of litigation reform to deliver a message to corporations: stop treating the Commission like a rubber stamp by prematurely disclosing your settlement offers to, or "settlements in principle" with, the SEC staff!
He stated:
It has become a common occurrence lately that I see public companies disclosing an agreement, or settlement, "in principle" with the SEC. I can't tell you how frustrated this makes me. To understand my frustration, you must understand the context in which these situations arise.Often in the SEC enforcement process, public companies, or sometimes their regulated subsidiaries such as broker-dealers, decide to pursue a settlement with the Commission. In the settlement process, the settling party deals directly with our enforcement staff, but the staff does not have the authority to bind the Commission to the terms of a settlement. Simply put, the settling party is offering to the enforcement staff to settle the matter based on certain violations of the securities laws, with certain remedies such as bars, penalties, or disgorgement, and in return the enforcement staff is agreeing to recommend to the Commissioners that they approve the settlement as offered.
At this stage nothing is final, and because of that lack of finality I find it hard to believe that the agreement by the staff to recommend settlement to the Commission is, by itself, necessarily an event that must be reported to shareholders. Although we Commissioners have deep respect for the work of enforcement staff, I can assure you that the next step in the process is not a rubber stamp approval by the Commission.
In fact, this Commission has shown that it does not own a rubber stamp! Proposed settlements have been, and will continue to be, disapproved or modified by the Commission when they do not meet the policy objectives of investor protection, as well as other factors. Those of you who follow closely the workings of the SEC or who practice before us know very well what I am talking about.
And yet companies routinely continue to do this, the most recent example being the press release by Twinkie-maker Interstate Bakeries. Interstate announces in its press release that
it has submitted an offer of settlement to the staff of the Division of Enforcement of the U.S. Securities and Exchange Commission (SEC) in connection with a previously disclosed SEC investigation. On January 28, 2005, IBC announced that the SEC had issued a formal order of private investigation concerning matters related to a previously announced investigation by IBC's audit committee into the manner for setting its workers' compensation reserves and other reserves.The proposed settlement is subject to approval by the Commission. IBC has been informed that the staff of the Division of Enforcement has determined to recommend the settlement to the Commission. However, IBC cannot give assurance that the Commission will approve the proposed settlement.
It is unclear to me why companies continue to do this in the face of the Commission's clear, albeit informal, guidance on this. Anyone have any thoughts on this?
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November 3, 2006 |
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Make Up Your Mind
Fast Times at Ridgemont High (1982)
Jefferson's Brother: My brother's gonna kill us! He's gonna kill us! He's gonna kill you and he's gonna kill me, he's gonna kill us!
Jeff Spicoli: Hey man, just be glad I had fast reflexes!
Jefferson's Brother: My brother's gonna $#!+!
Jeff Spicoli: Make up your mind, dude, is he gonna $#!+ or is he gonna kill us?
Jefferson's Brother: First he's gonna $#!+, then he's gonna kill us!
Jeff Spicoli: Relax, alright? My old man is a television repairman, he's got this ultimate set of tools. I can fix it.
According to several articles such as this one from Bloomberg, the SEC brought 574 enforcement actions in fiscal 2006 (which ended September 30), 9% fewer than the 630 cases it brought in 2005. According to the article:
The drop was largely a result of reduced staff, SEC Chairman Christopher Cox said in the statement. The agency restricted hiring in 2006 because it had to close a $48.7-million budget gap triggered partly by cost overruns in building a new headquarters in Washington.
As elaborated on in this Washington Post article,
Cox attributed the decline to temporarily reduced staff levels. The SEC as a whole lost 155 employees last year -- including 43 in the enforcement unit -- compared with fiscal 2005. A total of 3,696 people worked at the agency in 2006, with 1,189 in the enforcement division. The agency is reviewing its staffing levels and plans to restore some of the unfilled positions, officials said.
The message here from the SEC seems to be that its enforcement program suffered somewhat because it was "grappling with staffing cuts" (as the Post put it), but that they are actively trying to restore these positions and this situation will hopefully be resolved soon. That is a plausible response but it strikes me as quite different from the message the SEC sent out in August 2004 when it was similarly reported that the number of SEC enforcement actions in fiscal 2004 would be declining for the first time in many years. At that time, then-Chairman William H. Donaldson took the "half-full" approach, and declared that the decline was, in fact, "encouraging" in that it could indicate that the SEC's efforts are having a deterrent effect. He was reportedly "quick to add that it was too early for the SEC to declare victory in the war on corporate corruption." Chairman Cox could have seized on the continued decline in enforcement actions (down from as many as 679 in 2003) as additional encouraging news, but he seems to have taken the opposite approach: that fewer cases equates to a bad situation that may require a response (i.e., hire more people).
So my question: Is the fact that there are fewer enforcement actions year-over-year a good thing or a bad thing? Or neither?
And to the SEC, guest blogger Jeff Spicoli says, "Make up your mind, dude!"
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