Insurance Claims and Bad Faith Law Blog

Fiduciary Duties for Fannie, Freddie Failures?

     The fired CEOs of Fannie Mae and Freddie Mac will not be receiving the full amounts of their  multi-million dollar separation payments, it is reported by Zachary A. Goldfarb, "No 'Golden Parachutes' for Fannie, Freddie's Ex-Chiefs" (Washington Post Online, Monday, September 15, 2008).  Both Fannie Mae and Freddie Mac recently agreed to revising (upward) their respective CEOs' separation provisions, also known as golden parachutes because they lower only one person for a golden landing while doing absolutely no good for anyone else.  However, not recently enough.

    Since the Federal Taxpayer Takeover of both Fannie Mae and Freddie Mac by agents of the current Federal Government, it has been reported that the Federal agents are talking about not paying the full amount of these golden parachute provisions, now funded by you and by me, dear Federal Taxpayer.  Id.

    Later newspaper articles report that the fired CEOs will only lose about 1/2 of their separation bonuses, the remaining millions of dollars to be paid by you and by me, the Federal Taxpayers.  Zachary Goldfarb, "Fannie, Freddie's Former CEOs to Lose $12.6 Million in Severance Pay" (Washington Post Online, Tuesday, September 16, 2008). 

    The agenda really begins with how much the fired CEOs, on whose watch Fannie and Freddie failed, are going to pay back.  To talk about not paying these people the "full" or "part" of the amount of their separation bonuses is insulting if not downright farcical.

    It remains to be seen whether the current agents of the Federal Taxpayers have the capacity either to deny these people anything, or to recoup the gains these people received while failing so miserably that the same Federal Taxpayers are suddenly saddled with responsbillity for the failures of these people.  See Binyamin Appelbaum, Carol D. Leonnig and David S. Hilzenrath, "How Washington Failed to Rein in Fannie, Freddie/As Profits Grew, Firms Used Their Power to Mask Peril" (Washington Post Online, Sunday, September 14, 2008).

    More on this story is posted on Insurance Claims and Issues Web Log, available at www.insuranceclaimsissues.typepad.com and also on the web site of the American Bar Association and linked here.

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Federal Taxpayer Takeover Looms of Fiduciary Fatalities Fannie and Freddie.

    Unknown, unnamed "officials" are critical of executives in charge of Freddie Mac and Fannie Mae.  It is reported on the weekend this post is written, that Federal Taxpayers will soon be paying for a Federal takeover of the two "mortgage giants".  Stephen Labaton and Andrew Ross Sorkin, "U.S. Rescue Seen at Hand for Two Mortgage Giants" p. A1, col. 5 (New York Times Nat'l Ed., Saturday, September 2, 2008).

    Reportedly, as part of the Federal Taxpayer Takeover the executives and the boards of both Freddie Mac and Fannie Mae will leave.  It appears that they will be leaving with no noticeable effect on their own financial portfolios.

    Investors, however, will not be so lucky.  Shareholders of the quasi-governmental corporations "would be virtually wiped out".  Id.

    Although the linked newspaper report does not link the anonymous officials' "criticism" with the executives' compensation, it does repeat previous reports of "huge compensation packages" for certain executives of Fannie Mae and Freddie Mac who were reportedly in charge of the companies' operations which have led to the Federal Taxpayer Takeover.  In particular, the CEO of Freddie Mac allegedly was paid over $38,000,000.00 since 2003, id., which is some $7.6 Million per year on average for each of the past 5 years.

    Rather than words of criticism in private, perhaps some examination could be made of the question of recovering some of the executive compensation for the shareholders -- or not say anything at all if nothing public is to be done.

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Auction-Rate Bond Sellers, Fiduciary Duties, And the States.

 Auction-Rate Bond Marketers Are Buying The Bonds Back Rather Than Pay Potentially Much Greater Penalties in Proceedings Pursued by State Regulators.   

    One-time sellers of Auction-Rate Bonds are buying them back rather than face paying penalties.  The reason these former salespeople are acting this way is that previously they arguably acted like people who had fiduciary duties but may have breached them, at least according to allegations filed against them by many State regulatory agencies across the United States.

    Regulators of the sellers have launched investigations across the nation.  These local governmental investigations are resulting in settlements by which the sellers reduce their potential penalties exposure in return for protecting the people and local goverments to which they rather aggressively sold these securities.  Allegedly, the once-upon-a-time sellers kept selling Auction-Rate Bonds even after the market dried up for them -- in a niche market.  That means that, allegedly, the sellers knew the conditions of that unique market and most buyers did not.  Interview With Massachusetts Secretary of State William F. Galvin, "Still Sorting Out The Auction-Rate Mess/Galvin's Office Addresses Conflicts" (Boston Globe Online, Sunday, August 31, 2008).

    That would mean, it appears from these allegations, that the marketers occupied a superior position compared to the potential buyers, and that the marketers were acting on behalf of the buyers but instead preferred their own (sellers') interests to those of the people and entities for whom they were supposed to be acting.

    To offer a helpful definition here, adding to past posts about Auction-Rate Bonds and other types of Bonds which drew Bond Insurance Policies, Auction-Rate Bonds "are investment notes or securities or bonds -- financial commitments" which were treated like cash because they could be bought and sold with ease in their heyday.  This "high degree of liquidity" came from "a process of periodic rebidding."  Id.  The rates of Auction-Rate Bonds and Securities were regularly reset at auction, in basic and simple terms.

    Conflicts of interest are at the heart of investigations into the sale and purchase of other securities, such as Mortgages, and the sale and purchase of commodities, such as oil, wheat and cotton.  "There's not adequate supervision," says Secretary Galvin.  "We're all committed to a free market economy.  But a free market only works when it's truly free and it's not rigged."  Id.

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Expert Witnesses Testifying on Reasonable Conduct, Other Financial/Law Issues.

    Do you pay your Expert Witnesses $1,000 an hour?  Summaries in the newspapers of recent studies reflect that Expert Witnesses often charge that much.  Here is a handy link here.  This report uses many of the studies as resources.

    It is interesting that in 1 out of 3 lawsuits, Expert Witnesses testify at Trial in Federal Court about the "reasonableness of a party's actions" and other "business/law/financial" issues, as reported by studies of Federal Civil Trials and surveys of Federal Trial Judges across the nation.  More such issues are likely to be presented as the financial crisis deepens.

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Judge Holds Federal Process Server's Oath Good For Damages, Contempt.

     The current Federal Securities and Exchange Commission awarded a contract to a Process Server corporation to serve an administrative subpoena for a Witness' deposition.  A State Judge in Massachusetts found that the Process Server's Return of Service was false.  A Return of Service is an Affidavit under oath or affirmation that the Process Server served the Witness.

     Officials of the SEC believed the Return of Service to be in Good Faith and valid at the time.  The Witness, of course, did not appear for the SEC deposition.  A body that has the power to issue subpoenas seemingly has the power to pursue contempt proceedings against a Witness that does not appear.  In this case, "SEC officials" instead reportedly "criticized" the Witness to a newspaper reporter for his failure to appear.

     The Witness filed suit against the Process Server for damage to reputation.  The lawyer who defended the Process Server admitted that the Witness "offered to resolve the matter" if only the Process Server would admit to the SEC that it never served the SEC subpoena.  The Process Server did not agree to do that, for whatever reason, which is not entirely clear from a newspaper report about the matter, below.

     The Witness then proved to the Massachusetts State Court Judge hearing his case that the Process Server had not in fact served the SEC subpoena.  The Witness also proved damages to his reputation as a result of these events.  He was awarded $3,300,000.00 for his damages, with interest, and attorney's fees.

     Further, the Process Server's "principal owner and business manager" reportedly failed to appear at the hearing.  The Judge found them in contempt.

     Affirmations and oaths "in Good Faith" are serious business.  When they are found to be made NOT in Good Faith, woe unto them that the finding is about--plus in this case it appears, $3.3 Million and contempt of court charges too.  See Jonathan Saltzman, "Judge:  Firm Lied About Subpoena Delivery" (The Boston Globe Online, Saturday, June 28, 2008).

     No word on whether the current SEC asked for the Taxpayer money back from the Process Server that the SEC paid for the one unserved subpoena that is now known, nor whether it is examining other matters in which it awarded contracts to this same Process Server, nor on whether the same SEC officials "criticized" the Process Server in any way.

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If You Reap Rewards, Then You Bear Responsibilities, Too ... Right?

    Under their current payment system, it appears that corporate executives receive large payments regardless of their companies' financial performance.  The idea that achieving balance in the payments received by corporate executives is a desirable goal, is shared by increasing numbers of people, among them, the president of a New York investment firm quoted in Gretchen Morgenson, "Fair Game/Approve This Deal, or Else" p. 1, col. 3 "SundayBusiness" Section (New York Times Nat'l Ed., Sunday, June 15, 2008), available online at www.nytimes.com.  The idea is that corporate executives need to share in the risk, as well as in the reward.  Since they have the opportunity to receive large payments, so the idea goes, they should receive large payments if their corporations perform well financially, but they should pay back some or all of the payments they have received, if their companies do not perform well.

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Federal Regulatory Rules Out for Comment.

     The Office of Thrift Supervision issued proposed rules curbing some "deceptive and unfair practices" on some credit card fees and practices.  See for example Kathy M. Kristof, "Proposed Rules Seek to Bar Some Rate Hikes by Credit Card Firms" (Los Angeles Times Online, Friday, May 2, 2008).  Reportedly, the same rule changes will also be proposed by the Federal Reserve Board and by something called the National Credit Union Administration.

     One of the proposed rules would bar some retroactive interest rate hikes.  One person testified before Congress that she had never made a late payment and had never gone over her limit -- sound familiar to anyone? -- yet her credit card company charged her 24.99% interest because, she testified, the credit card company thought that her credit card balance was  "too high".

     Another proposed rule would impose limits on when a credit card company that mails out its statements late, and then charges a late fee to the consumer because the payment is late  -- how about this sounding familiar to anyone?   Under a newly proposed rule, credit card companies would have not less than 21 days to mail or deliver their statements to their credit card holders before the due date.

     It is reported that there will be a public comment period of 75 days.  It is "anticipated" that the proposed rules will be adopted before 2009.

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Planners With Fiduciary Duties: A Definition Given.

     A fiduciary has recently been described as someone who has to work in their client's best interests.  "That means they have to put your interests ahead of theirs at all times by providing advice on investments that will serve you -- not them -- best."  Alina Tugend, "Pick a Planner Who Can Spell 'Fiduciary'" p. B5, col. 1 (New York Times Nat'l Ed., Saturday, April 26, 2008).

     That is one of the better definitions of "fiduciary" in any situation, not just in the stock market or in the business of recommending investments.

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What Role do Conflicting Contractual Duties Play in Establishing Fiduciary Relationships?

 Employers hire Healthcare Cost Managers, companies which reportedly contract to help employers manage their Health Insurance programs "and get medicines at the best available prices."   Milt Freudenheim, "The Middleman's Markup/Benefits Managers Earn Profits With Exclusive Rights on Specialty Drugs" p.B1, col. 2 (New York Times Nat'l Ed., Sat., April 19, 2008).

    Some of these Drug Benefit Managers also contract with some Drug Manufacturers.  Under those separate contracts, the Healthcare Cost Managers assume the duties of exclusively distributing so-called 'specialty' drugs made by the Manufacturers.  Specialty drugs are not called that just because they are novel, but because they have no generic subsitutes.  An example given in the report is an exclusive contract to distribute an anti-seizure drug prescribed for an epileptic child.
   
    If these separate contracts present conflicting duties for the same corporation, which attempts to assume the role of an employer's Manager of Drug Benefits and, at the same time, to assume the duties of Exclusive Distributor for a Drug Company, which if either of these types of contracts establishes a Fiduciary Relation?

    Absent a Fiduciary Relationship, can there be Fiduciary Duties?

    Finally, what if any benefit is conferred upon the contracting employers who think they are paying good money for someone to manage their drug benefits?

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Attorneys at Issue in Bad Faith Cases.

     The past two years have seen two new cases that have shaken Florida Insurance Law.  Neither case has been cited by other Courts -- yet.  This is the time to tell you about them.

     In Barry v. GEICO General Insurance Co., 938 So. 2d 613, 615-17 (Fla. 4th DCA 2006)(subscription required), an Attorney-Expert Witness testified to opinions that GEICO did not act in Bad Faith when it failed to settle the claim in that case, that the injured claimant "made it clear that she was not intending to settle", and that the actions of the Plaintiff and her Counsel "were inconsistent with a willingness to settle."  Here is the official Opinion released by the Florida Appellate Court.  The quoted summary of the Attorney-Expert's testimony appears on page 3 of the attached; see also pp. 5-7:  Download Barry_v. GEICO General Insurance Co. (Fla. 4th DCA Case No. 4D05.206 Opinion Filed Oct. 4, 2006).pdf.

     The U.S. District Court for the Middle District of Florida has expanded Barry's holding.  The District Court denied Plaintiffs' motions "to exclude evidence, argument, and references regarding the motives or conduct" of the claimants' attorney and the attorney's paralegal.  The Federal Court held in yet another Florida Bad Faith failure-to-settle case "that evidence and argument regarding the motives or conduct" of the claimants' attorney and the attorney's paralegal "is relevant and should not be prohibited."  Mendez v. Unitrin Direct Property & Casualty Insurance Co., 2007 WL 2696795 *3-*4 (M.D. Fla. Opinion Filed Sept. 12, 2007)(subscription required).  Here is the Middle District's official Opinion.  Its quoted holding will be found on pages 5-6 of the attached:  Download Mendez_v. Unitrin Direct Property & Casualty Insurance Co. (M.D. Fla. Case No. 8.06.CV.563, Opinion Filed Sept. 12, 2007).pdf.  The Mendez case has an interesting further history.  The case went to Trial which resulted in a Judgment for the Plaintiffs.  Thereafter, the Court's Online Docket shows that the case was settled.  The Federal lawsuit was then dismissed without prejudice in February, 2008.

     As I wrote at the beginning, Barry and Mendez have not been cited by other Courts as yet.  The only case known to include a cite to Barry is Mendez.  No known Court has cited to Mendez -- yet.

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