Claims and Bad Faith Law Blog

Risking Claims of Breach of Duty: Know the Facts.

    Whether any given set of facts will ultimately be found by a Jury or held by a Judge to be a breach of Fiduciary or other Duties, it appears that certain facts carry the potential to draw a claim of liability.  See Eric Dash and Julie Creswell, "Citigroup Pays For a Rush to Risk/Bank Saw no Red Flags Even as it Made Bolder Bets" p. 1, col. 2 (New York Times Nat'l Ed., Sunday, November 23, 2008).

    Drawing from the comprehensive linked newspaper article, here are some of the factual themes or sets of facts that, in particular regarding risk managment, have attracted claims of breach of Fiduciary or other duties.  These then present potentially useful tools of recognition of potential claims situations.  In that sense, these tools are potentiallly useful for Policyholders, Officers, Directors, Insurance Companies, and Counsel representing any of them:

        Potential conflicts of interest on the part of the risk managers;

        Apparent lack of independence of the risk managers from the marketers or traders;

        Instructions from superiors of both risk managers and sales persons to increase marketing of financial instruments that may become profitable in the short term but never become well known except in the long term, such as collateralized debt obligations or C.D.O.'s;

        Lack of clear lines of reporting, such that risk managers report to a person who is in charge of the people marketing or trading the same products that the risk managers are supposed to keep an eye on.

A related post can be found on www.insuranceclaimsissues.typepad.com.

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County Sues Lehman Directors, Officers: Claims Fiduciary Breaches Caused Losses.

    San Mateo County, California has brought claims of Breach of Fiduciary Duties against Directors and Officers of bankrupt Lehman Brothers Holding Inc.  The Directors and Officers do not appear to be bankrupt, not in the least.  "The suit by San Mateo County's investment pool was filed in California state court in San Francisco against Lehman executives including [CEO Richard] Fuld, directors of the company, and auditor Ernst & Young, alleging fraud, breach of fiduciary duty, negligent misrepresentation and violation of securities laws."  William Selway, "Lehman Execs Sued by California County Over Debt Loss (Update 1)" (Bloomberg.com, Thursday, November 13, 2008).

    The factual basis for the claims of proximate causation of the County's losses reportedly is that, allegedly, the Lehman Directors and Officers and the auditor concealed Lehman's "mortgage-related losses" that led to Lehman filing for bankruptcy and vastly reduced the value of its Bonds including Bonds in which San Mateo County invested.  William Selway, supra; Bloomberg News report edited for publication as "San Mateo County Sues Lehman Execs Over Investment Losses" (Los Angeles Times Online, Friday, November 14, 2008).

    Immediately before filing for bankruptcy, Lehman reported that it had $613 Billion of debt.  The current Treasury Department and/or Federal Reserve declined to extend financial assistance to Lehman before Lehman filed for bankruptcy in September, 2008, asserting that it had no other choice as a result.  The current Treasury Department and Federal Reserve's next decision was to ask for, and receive, a bailout of $700 Billion from the Federal Taxpayer by way of Congress.

    San Mateo County's claimed losses are more than monetary.  Reportedly, the Community College District lost $25 Million in investments and the Public School System lost $37 Million which may result both in reduced opportunities for students and in fired instructors.

    Readers of posts in this space will recall that late last year, the State of Florida dealt with a sudden run on its small government investment fund due to defaulting 'securities' and falling Credit Ratings of the contracting 'guarantors'.

    Please Read The Disclaimer.  

 

Standing to Sue Over 382? No Problem.

    Are fiduciary duties limited to private parties?  Is there "Bad Faith" by Government?  Sometimes the answers to these questions come in the forms of remedies, regardless of their names.

    There are many recent newspaper reports about the secret manipulation of the U.S. Tax Code to benefit banks.  While Congress and the nation were justifiably focused on the impending (now deepening) financial crisis in September, the current Treasury Department quietly tried to issue new regulatons that would change the Tax Code.  The action would, if successful, thereby provide frendly banks with $100 Billion in new Federal Tax breaks.  The quick and surreptitious regulations would change Section 382 of the Tax Code.

    At bottom, the regulations make it easier for banks to acquire other banks.  They especially makes it easier for more solvent banks to acquire less solvent banks. That is why many call the change "the Wells Fargo ruling".  The regulations were issued one day after Wachovia agreed to be taken over by Citigroup.  After the new regulations were issued, that deal fell apart and Wachovia agreed instead to be taken over by a major beneficiary of the new regs:  Wells Fargo.

    The majority view is clear:   The Treasury Deparment did not have the authority to issue the regulations.  Only Congress could make that change, in the clear majority view.  Unfortunately, Congress seems unwiling to act and the same Treasury officials who brought us the Wells Fargo ruling say that only they or Congress can change it.    See, e.g., Amit R. Paley, "A Quiet Windfall For U.S. Banks" (Washington Post.com, Monday, November 10, 2008); Evan Halper, "Bush's Tax Breaks for Banks Could Cost California $2 Billon" (Los Angeles Times Online, Tuesday, November 11, 2008). 

    Standing to sue is not necessarily so limited.  States, counties, municipalities and other local government bodies that would have received a part of the Federal Taxes that have now been taken away from them by the Wells Fargo ruling have pretty clearly been damaged as a result.  In this instance, it may be that enforcement of the United States Tax Code must lie in their hands rather than in the hands of those at the Treasury Department who, ironically, had a duty to enforce and obey the law.

Please Read The Disclaimer.

Bonus, or Bad Faith?

    Wall Street pay in the form of "bonuses" added to salary are reportedly going to decline this year as a consequence of the worldwide financial debacle.  Ben White, "Wall St. Pay is Expected to Plummet" p. B1, col. 6 (New York Times Nat'l Ed., Business Day Section, Thursday, November 6, 2008).

    Some people see things as they are, and say "why?"  In this instance, some people see bonuses paid to people who failed miserably and say "why?"  "Why" does failure, particularly financial failure, merit any reward at all?

    One person reportedly asking this question is the Attorney General of the State of New York.  He says that is his "initial" reaction.  Id.  Why?  It should be the final word.

    Other people dream things that never were, and ask "Why not?"

Please Read The Disclaimer.  A related post appear on Insurance Claims And Issues at www.insuranceclaimsissues.typepad.com.

Contractual, Systemic Safeguards on Big Pay For No Performance.

But Do Not Discount Common Law and Equitable Remedies.

    Contractual, systemic safeguards on big pay for no performance by corporate executives is a true "hot-button issue".  It will not go away.  Various safeguards under general discussion include absolute caps on pay, and so-called "clawback provisions" under which corporate executives contractually agree that they can be "forced to give some of the money back" if they make large amounts of money even as their companies do not.  The situation is discussed by Andrew Ross Sorkin, "Dealbook/Rein In Chief's Pay?  It's Doable"  p. B1, col. 1 (New York Times Nat'l Ed., Business Day Section, Tuesday, Election Day, November 4, 2008).

Please Read The Disclaimer.

Predictable Systemic Failure, Mad Loan System Triggers Lawsuits Against Executives.

    Systems in place at one lender, at least, were schemed in favor of making loans.  Shareholder protections were seemingly forgotten, ignored or just plain overridden in favor of making any loans that would increase the loan numbers.  Any loans.  To anyone.

    Loan officers were allegedly told that they were "bad people" if they did not approve even suspect loans.  Either their superiors made their lives difficult if the loan officers did not process potentially fraudulent loans, or the loan officers would receive perks -- such as free vacations -- if they instead approved many, many loans which necessarily included large numbers of loans that could not reasonably be repaid starting from the moment the loans were made.

    The result?  Shareholders are suing the executives who allegedly put this system in place which overrode shareholders' interests -- and which predictably resulted in failure of the lender that the shareholders held shares in.  Some of the allegations and testimony in one of many pending lawsuits is examined by Gretchen Morgenson, "Fair Game/Was There a Loan It Didn't Like?" p. 1, col. 1 (New York Times Nat'l Ed., SundayBusiness Section, November 2, 2008).

    Research on the day of this post on Pacer, the Federal Courts Electronic Court File, reveals that there are many such cases and it is unclear which of these is the one addressed in the linked newspaper report.

    There is a post on this issue to be found also, at www.insuranceclaimsissues.typepad.com.

Please Read The Disclailmer.