Category: Corporate Law


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.


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.