Category: Corporate Law


Whistleblowers and Stereotyped Cultural Norms

I’m a little slow to weigh in on this issue, but I just received the latest edition of the ABA Journal. This month, they have a story, “Culture Clash,” by John Gibeaut describing how Sarbanes-Oxley’s whistleblower provisions are causing trouble for foreign cross-listed companies. Ideoblog and Conglomerate have already provided some commentary about the article, which begins as follows:

Americans like to elevate whistleblowers to near folk-hero status, from Daniel Ellsberg, who leaked the Pentagon Papers to Sherron Watkins, who exposed the Enron Corp. financial scandal that in 2002 moved Congress to pass the fraud-busting Sarbanes-Oxley Act. Indeed, Watkins shared Time magazine’s Person of the Year honors in 2002 with World Com Inc. whistleblower Cynthia Cooper and FBI agent Collen Rowley, who accused the bureau of mishandling information on suspected hijacking plotter Zacarias Moussaoui before the Sept. 11 terrorist attacks.

Say whistleblower in Germany, however, and the term most likely conjures up memories of the Gestapo, Adolf Hitler’s secret police. In France, the term evokes images of the Vichy regime’s collaboration with the Nazis and of neighbors ratting out one another.

I think that the beginning of the article relies on some flawed cultural stereotypes of both Europeans and Americans. Be that as it may, I would question the author’s proposition that American whistleblowers enjoy some sort of elevated status. About a year and a half ago, I wrote an article about (American) whistleblowers and the Sarbanes-Oxley Act. In the article, I argue that whistleblowers are not being given enough protection. Not under state employment law, and not under Sarbanes-Oxley either. Studies – cited in my article – show in graphic detail that American whistleblowers end up unemployed, broke, divorced, and depressed.


Skilling And Lay Off To The Pokey

It appears that a Houston jury was not particularly sympathetic to these gentlemen, convicting them of most charges. Of course, business criminals get time to get their lives together before heading to prison. They’ll be sentenced in September and remain free until then.


On the Milberg Indictment

MW.gifI’ve been mulling over the Milberg indictment. Since I waited a weekend to post, I have the advantage of having read lots of other folks’ views. Quick summaries follow:

  • Michael Dorf: Kickback payments slaved the named plaintiffs to MW, bloating agency costs.
  • Steve Bainbridge:Kickbacks encourage “nuisance claims.” We may need criminal sanctions to crank the Hand formula to optimal levels, but only against individual lawyers.
  • Walter Olson:”[MW was] taking no chances on the watchdogs staying pacified: It threw regular chunks of raw liver into their cages.”
  • Larry Ribstein: Who cares? Lawyers are fungible.
  • Ed Morrissey: Bad for Democrats and ambulance chasers.
  • Christine Hurt: It’s high noon, and MW can’t blink.
  • And let’s not forget MW itself: It was just a referral! And the theory is overreaching! And our interests remained aligned!

Wow. Lots of words. So here is what I think.

First, I still don’t particularly understand the economics of outrage here. I’ve seen two arguments about why kickbacks are bad (apart from their being unlawful, which we’ll put aside briefly). First, I’ve heard the argument that they “capture” the lead plaintiff, making that person less able to monitor the lawyer’s work. As Dorf points out, however, plaintiffs in securities class actions are sort of like shareholders stockholders: they have deputized oversight and management to lawyers, in return for fiduciary duties. Some folks seem to have in mind a more active role for lead plaintiffs – something like a controlling stockholder(?) – but given the relatively low bonuses awarded in settlements for lead plaintiffs, why would anyone want to play that role? That is, you can’t have distributed, small-stakes, high-impact, governance by private actions and have plaintiff management at the same time. The capture argument is another way of saying that these types of claims are not in the public interest. But we don’t criminalize inefficient lawyering. Not usually.

The second argument I’ve seen is related to the first – it is Bainbridge’s – and it suggests that kickbacks encourage securities actions that are (on the merits) weaker. Yup, that sounds right. But that isn’t an argument against kickbacks, it is an argument that judges aren’t doing enough to raise hurdles to weak actions at early stages, as the PSLRA was designed to accomplish. To the contrary, I have found that judges are quite hostile to securities claims.

The argument that I haven’t seen on the blogs, but which is larded through the indictment, suggests that MW was, in effect, selling out the rest of the class to benefit the folks at the head of the line. And in a way, this is (for me) the strongest argument against the practice. If MW really did countenance paying referrals-as-kickbacks to named class members out of their portion of the settlement, then we know that dollars were being taken out of the mouths of the rest of the class pretty directly. On the other hand, one might argue that MW had to pay off the named plaintiffs to bring the cases in the first place – that it is a an expense like overhead.

Two additional aspects of the case trouble me. Obviously, indicting the entire firm feels excessive. I don’t agree with Larry R. that reputational effects won’t follow MW’s innocent lawyers. I know lots of counsel at MW – I litigated against them – and I thought they were incredibly hard working, tough, honest, passionate adversaries. One of my worst days as a lawyer came across a deposition table from an experienced Milberg partner: he taught me a great lesson on how to get one’s opponent to hang himself on the record. And I’d be shocked if more than a handful of lawyers at the firm had any knowledge of the activities charged. If the USAO is really indicting out of pique for failure to roll over as most corporations would do in response to a patently unreasonable discovery demand, well, many folks who think of themselves as white knights are going to be tarnished unfairly.

Second, I have some problems with the continued federalization of state practice ethical rules. Although the indictment doesn’t come out and say this, some of the illegality is premised on state fiduciary duty and referral laws. (Some, granted, is based on Rule 23.) Shouldn’t this type of prosecution be the job of Elliot Spitzer and his imitators? Which raises a question: why didn’t Spitzer get here first?


A Reckoning In Houston

Tomorrow the Enron jury will hear closing arguments in the Lay/Skilling trial. Given both defendants’ reported weaknesses as witnesses, the futures market estimate of conviction on at least several charges for Lay (76% ) and Skilling (73%) is predictable. (Although, the line has shifted significantly from February.) And even if a verdict arrives this week, the defense team(s) are already no doubt working on an appellate strategy. One tack: Judge Lake appears to have accepted the government’s intent instruction.

This raises an issue which I’ve been thinking a bit about recently. Given research showing that juries often ignore instuctions, especially in complicated cases, and instead focus on a narrative and attributions of blameworthiness, why does the government so often appear to overreach and thus preserve great defense issues for appeal? Does the federal prosecution manual discount the research? Or, more cynically, is the phenomena a problem of incentives? In the ordinary case, the marginal gain from the prosecution instruction is reaped by the line attorney, but the marginal cost of the instruction is usually discounted by time and by the likelihood that the government attorney defending the appeal is a different unit, or a different office altogether.


Big (Business) Love Is a Bust

biglove.jpgLarry Ribstein, Ann Althouse, and Christine Hurt all have recently commented on HBO’s new series “Big Love.” To one degree or another, each has focused especially on the business-law themes in the show, which they see variously as a source of weakness (Althouse), social commentary (Ribstein), or tremendous fun (Hurt).

For what it is worth, I’m mostly with A.A. here. The show’s evil character, Roman Grant, and its main hero, Bill Henrickson, are engaged in a long-running conflict which nominally regards the scope of profit-sharing clause in a loan agreement. Does the clause cover only the first store Bill built, or later stores as well? I like these issues well enough when I teach them, but as conflict fodder on a nighttime-soap, this is weak gruel. Compare the contract problems in B.L. to the simmering fight between Swearengen and Bullock and Wolcott (and others) on Deadwood about the proper role of law in constraining business, sex, and violence: the better show stands out by a mile. Plus, the writing on Deadwood is better – product, no doubt, of series creator David Milch’s golden pen. I’d give an example, but they are all profane. Notwithstanding Filler’s example, this is a family-friendly blog. Oh, ok, one link.

However, in the last B.L. episode, there was a hint that the conflict between the protagonists will soon move from accounting tricks to religion, as a character suggested that Bill was forced to leave his home at an early age because of Roman’s worry that he was a true prophet. In my view, this would be a good dramatic move. Contract interpretation, even including a neat parole evidence issue or two, simply isn’t sexy enough to compete with T.V.’s other offerings.


Empirical Studies at ALEA

Bill Henderson (at the ELS Blog) has a very useful round-up of empirical papers presented at the recent ALEA conference. Blog-traveller Kate Litvak comes in for special praise:

Kate Litvak [presented] “The Effect of the Sarbanes-Oxley Act on Non-US Companies Listed in the U.S.,” which was an extremely well-done event study that used a natural experiment approach to capture the market reaction to SOX (it was generally negative). In the last couple of years, Kate, who does not have a PhD, has spent a lot of time learning sophisticated econometric techniques. It really showed. Very impressive (and easy to follow) presentation.

To be frank, I’ve been quite skeptical of studies showing a negative relationship between SOX and equity prices, on several grounds: (1) my practice experience managing the creation of event studies that dealt with changing legal regimes suggested that results are rarely as robust as one might hope; (2)) the passage and eventual implementation of SOX were so attenuated that event studies would seem hard to perform; and (3) the debate is quite politicized, with folks already disposed to dislike federalization of corporate law leading the charge on the empirical front as well. But, having read Kate’s paper, I’m inclined to rethink my position. It is well-worth a read.


Lay-ing it into the Wall Street Journal

Ken Lay, testifying yesterday and especially today at the Enron trial, has been attacking the WSJ pretty harshly. The Journal forms one part of Lay’s new axis-of-evil (as reported at the stupendous and invaluable Houston Chron trial blog):

“Enron’s failure was caused by a run on the bank,” Lay said, adding, “It all begins with the deceit of Andy Fastow and probably not more than one or two other people.”

Fastow, the former chief executive of Enron has admitted to running a sham at Enron where he profited personally to the tune of millions of dollars.

Short sellers, Lay continued, also contributed. He then blamed the Wall Street Journal for articles that were critical of Enron in 2001, the year Enron filed for bankruptcy.

Here’s the thing. Obviously, this is a prepared trial strategy. Fastow, short-sellers, and the media killed Enron, not Jeff or me. Repeat. But I wonder whether the emotional valence that jurors normally might get from attacks on “the media” are as present when the media in question is the WSJ, a highly respected publication that to me smells like money and Republicans. I can understand attacking the Times – even saying the word connotes liberal elitism in some quarters. But is the Journal the same? Maybe to jurors from Texas it is. And, notably, I’m not nearly as well-positioned on this particular issue as the defenses’ jury consultant, who might have blessed this strategy after subjecting it to focus-grouping.

Still, as I just told a reporter, this feels risky. Can’t the prosecution, on cross, now lead Lay through the reporting and ask what was wrong with what was said? To the extent that the reporting was mostly accurate, and the market reacted to it, doesn’t that mean that this wasn’t an irrational market run, but instead a reaction by the market to a perceived failure of those internal control mechanisms which Enron had been known for?

[Update: The article resulting in part from the conversation with the reporter I mentioned above is now up on the Business Week Online’s website here.]


On Exxon, Corporate Salaries, and Gouging

exxon.jpgThe blogosphere was abuzz toward the end of last week about Lee Raymond’s reported $398,000,000 retirement package. The obscene package contrasts sharply with Raymond’s congressional testimony, at the height of the post-Katrina gas gouging crisis, that “”We’re all in this together, everywhere in the world.”


When you make $190,915 7 days a week, 365 days a year you aren’t in it with us. You don’t pump your own gas. In fact, I doubt you even see the guy who pumps your gas. Why would you? Let’s say your driver stopped to pump your gas on the way to your jet. It takes 3 minutes. That’s $400 of time, wasted. You could have jawboned oil prices up to $50/barrel in that time! Or doodled out a plan for world domination!

Sheesh. It’s numbers like this that have to give folks who believe in shareholder democracy some pause. This information was available last year, at the latest, but Exxon’s stock has been on a flier of late. Nor will forseeble changes in corporate governance prevent this type of compensation plan, whatever happens in Disney.

Needless to say, I think that the scope of this compensation package provides further evidence for the need of a windfall tax on Big Oil, not least because it would amount to the Kaldor-Hicks transfer that nominally supports arguments for permitting price gouging after catastrophes. Other taxes are equally attractive, because there is no incentive based reason that I buy that justifies a $398,000,000 pension plan.

Now, I’ll admit that Raymond was CEO of Exxon from 1993-2005, and had led the company from strength to strength. But Exxon wasn’t downtrodden when he assumed control, and reaping profit from an oil company couldn’t have been incredibly hard in an era of global instability, increasing demand for oil worldwide sparked by growth in China, the continued immunity of OPEC to antitrust liability, and, shucks, a war in the Mideast or two. I don’t know what in my book would qualify you for a retrospective paycheck like the one Raymond will collect. But steering the ship to its berth when the moon was full and the waters calm sure isn’t it.

[p.s. If you want to read a great case talking about oil company profit-taking during oil shocks, check out Eastern Air Lines v. Gulf Oil, 415 F. Supp. 429 (S.D. Fla. 1975), which I taught my class last week. Fun case. Great facts.]

[Update: Bill Sjostrom corrects my reliance on mainstream media reports and suggests that the real value of the pension is slightly under $100,000,000. Fair enough Bill. The other $200,000,000 looks to be largely composed of previously issued options and restricted grants of stock, i.e., potentially incenting compensation. But the windfall argument remains.]


Jeff Skilling’s Day

skilling.jpgThe Houston Chron’s Trial Watch was all over Jeff Skilling’s testimony today. Of course, the direct went well: the actors in this particular scene have rehearsed their parts for years. As JS himself explained, “I went into absolute crash mode to prepare for this trial.”

A few small tidbits from the Chron help set the scene. The players:

Petrocelli [lawyer for JS, or, “cologne guy“], who is often given to theatrics when he was cross-examining a government witness, stayed largely at the podium and often used soft tones when questioning his client. Skilling, who in real life is often given to tirades and sarcasm, was very calm and careful with his answers, sometimes looking over at the jurors when speaking.

The narrative:

[Petrocelli] then asked whether executives had any reason to portray “a rosy picture” of Enron to the public?

“No,” Skilling replied.

The relationship between Enron and SOX!:

“It’s funny that Sarbanes Oxley, that’s one of the protections to make sure there isn’t another Enron, we had it before,” he said.

Of course, it is hard to know what to make of a day like this. Jurors may have made up their minds already based on the prosecution’s strong case. We’ll have to see – but until the verdict comes in, the defense team is obviously looking to put on a show, Scrushy-style.


Nothing Ordinary About Sexual Orientation Discrimination

ford-logo.jpgOn Monday, the Securities and Exchange Commission ruled that Ford Motor Company must allow a shareholder vote on a resolution altering the company’s anti-discrimination policy. The resolution eliminates sexual orientation from the policy, implicitly suggesting that discrimination against gay people is OK. This is yet another volley in the ongoing culture wars playing out at Ford. A few months back, social conservatives pressed the company to withdraw ads from magazines targeted at gay people. The company decided to pull ads from gay-oriented publicatioins, explaining that the decision was purely financial. The American Family Association withdrew its threat to boycott the company. Then, after meeting with members of the gay community, the company backed off and re-committed to advertise in these publications. Now, a shareholder named Robert Hurley of Alton, Illinois, is taking a new approach: turning Ford “gay-unfriendly” from the inside.

Ford sought to have the resolution excluded from a vote under SEC Rule 14a-8(i)(7), which provides that a company need not submit an issue to shareholders if it involves “ordinary business operations.” The question, then, is whether anti-discrimination policies are part of ordinary business operations. Let me say, first, that I have not dealt with SEC matters since I was a young associate in New York. But I would have guessed that an anti-discrimination employment provision would be part of ordinary business operations. Some might contend that mundane employment policies cease to be “ordinary” when they touch on hot-button social issues – and sexual orientation anti-discrimination policies, arguably, fit this category. But from my cursory research of SEC no-action letters, it appears that the SEC often allows companies to kill shareholder votes on employment polciies and does so even when the issues involve socially controversial matters.

On one hand, I tend to agree with those who believe in shareholder democracy. I am suspicious when a company seeks to shelter its policies from shareholder scrutiny and input. But I would be troubled if the SEC’s new decision reflects a changed attitude about sexual orientation discrimination, rather than corporate governance. That is, is the SEC now forcing companies to put all manner of employment policy resolutions to a vote? Or did it only choose to do so when sexual orientation was at issue? I simply don’t have the expertise to know.

Whatever the motives of the SEC, I’m not sure that the result is bad. Many progressives have come to believe that civil rights won through debate and democratic choice are more stable than those obtained through the decisions of small groups of elites. When change happens by majority choice, the remaining objectors can’t play the “anti-majoritarian” card. There is no denying that, sometimes, elites – Presidents, judges, or corporate boards – spur positive change through anti-democratic actions. But on the issue of gay rights, I think that the public has already become pretty well engaged.

As for Ford, I say let Mr. Hurley have his vote. There are good business and social reasons for Ford to take a stand against discrimination. I agree with KipEsquire: those who seek to discriminate and diminish will be forced to the margins. And if they lose by acclamation, rather than declaration, perhaps they will find other things to be grumpy about.

UPDATE: I have not been able to find a free copy of this SEC letter, which was released on March 6, 2006. It is available on Westlaw at 2006 WL 739897.

FURTHER UPDATE: Thanks to Marty Lederman, a PDF copy of the letter is now available gratis.