Category: Corporate Law


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.


Judging Securities Law

Steve Bainbridge has a new post up on the Supreme Court’s securities law “jurisprudence.” He seeks to rebut the arguments contained in Mark Loewenstein’s draft article (on SSRN here) to the effect that the Supreme Court’s “much-heralded ‘new federalism’ philosophy of the Supreme Court is not a factor in securities law cases or in business cases generally.” I’ve just downloaded the paper (but haven’t yet read it), so my reactions here are just to Bainbridge’s argument.

Basically, Bainbridge says that the Supreme Court should not be expected to demonstrate a coherent federalist philosophy in its securities cases. Indeed, expecting any coherent philosophy would be a surprise: (a) such cases come before the court rarely because the court believes them to be boring and therefore not cert-worthy; and therefore (b) the court doesn’t get the repeat-player experience or know how that would polish their work . (This summary flows from Steve’s article, co-authored with Mitu Gulati, on the bounded rationality of securities decision making. I have recently criticized this view, arguing that securities law, at least in the lower federal courts, does “push” a coherent model of “good” shareholder behavior.)

However, I do agree that the Supreme Court is institutionally pretty weakly positioned to govern federal securities law. This institutional weakness arises, however, not just out of a lack of interest by the justices. Supreme Court clerks and Supreme Court practitioners both are traditionally conlaw folks, not experts in behavioral finance, comparative financial regulation and accounting, state blue sky laws, or any of the other hot issues likely to be litigated before the court in the next decade. Even “easy” issues, like materiality, can thus be made into a mess. See Basic v. Levinson (sheesh).

But criticisms of the Court’s work in securities cases may give its work in constitutional, criminal, tax and federal statutory cases too much credit. It is my experience, listening to colleagues who live with (i.e., teach) these cases on a daily basis, that the problems of incoherence, inattention to future consequences, lack of expertise in the foundational material, and triumph of rhetoric over craft that corporate scholars see in the Court’s work are quite common. Indeed, the federalism rhetoric that Bainbridge discusses is itself an example of a missing coherence, at least according to folks like Randy Barnett. So, what makes securities law exceptional? Is it just that the cases have more at stake in dollar terms, and are not, on first glance, as politically charged?


The Enron Trial Stinks

chocolat.jpgI really can’t believe I beat Christine Hurt to this nugget.

According to the indispensable Enron Trial Blog, Friday’s proceedings were interrupted by a five minute break called by Judge Lake. Although the audience were told there were scheduling problems, in fact:

[T}hat five minutes was so Skilling’s lawyer Daniel Petrocelli could scrub off his cologne. Apparently a juror in the front row found it overwhelming during his cross-examination of witness Mark Koenig this morning. She said she was gagging from the scent. She felt strongly enough to ask the court for an attorney fragrance correction.

The cologne allegedly was Chocolat. And Matt Bodie thought this would be an uninteresting trial!


Litigation Lessons at the Enron Trial

bates.jpgToday’s testimony in Houston involved an emotional breakdown and some lessons about discovery. Surprisingly, one had nothing to do with the other. On the discovery matter, Judge Lake told the jury that:

“Years ago they gave you a stamp, like a checker uses to stamp a can of peas with,” Judge Lake told the jurors. “I guess the original stamp was named for a Mr. Bates.”

“Now you know more than you ever wanted to know about this,” the judge said as he ended his instructional aside.

Commentators over at the Enron Trial Blog suggested that the Judge was wrong:, “Bates stamps” were really named for the Bates Manufacturing Company (pictured to the right). But the Company was founded by a Norman Benjamin Bates, so I think Judge Lake deserves a break. Thus, the many appellate lawyers watching the trial looking for errors will have to keep looking. Sitting Juror #11, on the other hand, well that’s a different story.


Is Apple Exploiting Consumer Irrationality?

John Nocera’s Sunday column ($$) attacks Apple for its business practices. Two in particular raise Nocera’s ire: (1) hiding Apple’s customer support number; and (2) building iPods that have relatively short usable lifespans. Nocera notes that Apple will repair iPods that die within the good’s one-year warranty, but suggests (through a source) that the device’s natural life is “just a hair longer than the warranty.”

Nocera claims that customers expect their devices to last a “good long time,” and we are “just not conditioned to believe that a $300 or $400 device is disposable.” But he admits having bought six iPods in the last five years, three of which were replacements, suggesting that at least one customer has been conditioned as to the device’s disposability. My own experience (3 iPods purchase; 2 replacements; 1 repair under warranty) are similar. I imagine that there are millions of Americans who are gradually learning that when you stuff increasing numbers of gizmos into increasingly smaller gadgets, friction makes for trouble in the motherboard.

But Nocera might be right in his implied argument that consumers are behaving irrationally by ignoring evidence like this, which would explain Apple’s growing market strength. The optimism bias is among the most robust of the cognitive tics exposed by experimental behavioral law and economics literature. We consistently underestimate the likelihood of bad things happening to us. So, although Apple’s one-year warranty suggests a steep product failure curve at month 13, we discount that risk in our purchase decision. This optimism is no doubt enhanced by Apple’s careful packaging, which makes it look like they’ve taken a swiss-like level of care in their manufacturing process, and iPod’s high-price, which suggests quality. That is, iPod’s effective life is a classic example of an experience good. Consumers are unable to determine the life of an iPod by looking at Apple advertisements (cf. price, design) and therefore they turn to Apple’s brand value to determine how long the iPod will last.

This analysis suggests that so long as Apple retains its brand – expensive, low-defect, attention to detail – it will continue to convince consumers to buy products with lower-than-expected lives. Competitors would be well advised to directly attack this brand. Why haven’t they succeeded?

Nocera thinks that one explanation is that folks are locked into iTunes, having spent time and money building a proprietary library through the software. This sounds like the beginning of a tying claim to me (although they better file quick, while patent-tying is still a strong antitrust theory.) But is a strange argument, because as I see it, iTunes has triumphed by virtue of its superior product characteristics, over an alternative format (WMP) that was supported by a titular monopolist! (I imagine that folks have thought about bringing an an implied UCC warranty claim for failure to serve a particular purpose – i.e., long term use – but that claim would be a stretch, at least on first glance.)

I obviously have mixed feelings about Nocera’s column. On the one hand, I concede that consumers are vulnerable to being misled about the life of the iPod. On the other hand, I love my iPod, even though I know it is not long for the world, and will buy another when it dies.

[UPDATE: Josh Wright responds here. Shorter version: the market will clear.]


Why Enron Still Matters


Matt Bodie has a provocative post up on Prawfs titled “The Enron Trial: Reasons Not to Watch“. Explaining that he doesn’t find the trial all that interesting, Matt argues that Enron is an overexposed story, Skilling and Lay aren’t the real “bad guys”, and the jury is likely to decide the case on factors other than the underlying factual guilt. The first objection is fair (my colleague Jonathan Lipson has pointed out that ““[t]he Enron case has already spawned a cottage industry among legal academics.” ). However, Matt and I part ways on his second and third objections.

Matt argues that :

Like many criminal conspiracies, the worst offenders have pled, leaving trials for those who have the best case for innocence. Lay and Skilling may or may not have really known what was going on. Sure, even not knowing is bad, given their positions of authority. And creating a culture of noncompliance is also wrong.

I’d guess that the reason Skilling and Lay have not pled and Fastow has is demographics. Fastow is a young(ish) man, who can serve significant time and still emerge with earning power. Lay and Skilling don’t have the years left to do the time that the government (apparently) would find appropriate. But more importantly, take a look at the indictment. I think it is right to be hesitant about conflating all crime with evil, but I don’t know why Lay and Skilling should be described as merely knowingly lazy at the helm. The government is charging, rather, that they personally profited from a conspiracy that they designed. The purpose of that conspiracy was to defraud thousands of investors. (Yes, I recognize that this is all contested and contestable, and you can make this a story about criminalizing agency costs. Moreover, as Larry Ribstein has observed, “the moral force of the criminal law should be reserved for the cases that deserve it.” But I think that the case is going to turn on the perceived truthfulness of the defendants on the stand, which by all accounts is a core jury competency.) Fastow, by contrast, self-dealt to the company’s detriment: a crime whose impact on the securities markets was more indirect, although ultimately catastrophic. In any event, if Skilling and Lay are guilty of the knowledge and purpose charged by the indictment, they are evil. Maybe less evil than, say, murderers, but that is a distinction I leave for other folks to make.

As for the jury point, I agree that this trial may not be resolved based on an application of cold logic to clear facts – but I don’t think that the morality play we’re seeing in Houston is noticeably different in that dimension from any other criminal trial. Criminal adjudications create norms for relevant potential offender communities – – here corporate CEOs – – and it is that process of norm creation that drives my interest in the story.

Plus, just check out the stories the attorneys told today. On one side, we’ve got the prosecution, spinning the jury a familiar tale about greedy, lying executives. In my view, they’ve got the worse of the case on the facts, which is why I’m with Gordon and Christine in betting on a partial or full acquittal. On the other side, the defense has to rehabilitate not just their clients but a corporate law system that may diverge from ordinary intuitions about responsibility:

‘Ken Lay has, does and will continue to accept responsibility for the bankruptcy of Enron. He was the man in control … But failure is not a crime. Bankruptcy is not a crime. If it were we’d have to turn Oklahoma back into a penal colony because there would be so many people we’d have to lock up,” Lay’s lawyer Mike Ramsey told the jury this afternoon.

I understand Matt’s Enron-overload. But I guess I’m not there yet. I can’t wait for tomorrow!


Liveblogging the Enron Trial

Via Christine Hurt, I found the Houston Chronicle’s weblog of the Lay/Skilling trial. The first day, for a certain type of person (read: corporate law nerd) was a must-read. My favorite part was the human touch from Judge Lake at the end:

The judge extensively warned the jurors not to talk to friends and family about the case and warned that media reports are not evidence.

He said they will be supplied muffins for breakfast; he noted that the banana nut go fast and the medicinal-tasting cranberry never get eaten.

First thought: so supply and demand are out of whack? Sounds like the opportunity for a little creative trading to me! Second thought: tomorrow, the prosection and defense jointly fund a trip to starbucks for sixteen blueberry muffins. Not the non-fat version, the ones that make the next five trips to the gym dead weight loss.