Claims and Bad Faith Law Blog

Do Fiduciary Duties Deter Applicants for Bank Boss?

    Reportedly, there is a fear that deters people from applying for the position of Bank Boss, in addition to "activist shareholders, the public scorn and the irate legislators" that currently come with the territory.   At least one commentator adds the opinion that "facing legal issues" from poor performance while these people are in the Bank Boss position may deter them from applying for the position in the first place.  See Michael J. de la Merced, "Bank Chiefs Sit in Jobs Turned Sour" p. B1, col. 6 (New York Times Nat'l Ed., Business Day Section, Friday, February 27, 2009).

    If persons are so afraid of being held accountable for how they fulfill their Fiduciary Duties, it may not be a bad thing if they do not apply for Fiduciary positions.

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Risk Management a Recognized Responsibility of Financial Fiduciaries.

    Questions for the Fiduciaries who sit on corporate Boards of Directors increasingly include their qualifications in the first place.  In particular, it is reported that greater importance is being given to a given person's ability to manage risk, and exposure to and experience if any in Risk Management.  These and similar subjects are now increasingly considered to be areas for inquiry as to whether that person is or was the right fit to serve on the corporation's Board.  See generally  Zachary A. Goldfarb, "SEC to Examine Boards' Role in Financial Crisis" (Washington Post Online, Friday, February 20, 2009).

    There is a post at www.insuranceclaimsissues.typepad.com which explores other aspects of this new development.

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Fiduciary Duties and American Recovery and Reinvestment Act of 2009.

    Fiduciary Duties are potentially greatly affected by the new Act.  If the President signs it as it makes its way to his desk from the U.S. Congress, one of the many new provisions has enormous implications for Fiduciary Duties.

    Reportedly, some of the new provisions will require the U.S. Treasury Department to promulgate new Federal Regulations to govern payment plans at financial institutions which have applied in the past, or which apply in the future for Federal Taxpayer Loans.  Edmund L. Andrews and Eric Dash, "Stimulus Plan Puts New Limits on Executive Pay" p. A1, col. 5 (New York Times Nat'l Ed., Saturday, February 14, 2009).

    Despite the headline of this linked article, the new Federal Laws do not impose any caps on pay nor do they require the Treasury Department to write any.  Rather, the new Federal Laws impose an obligation on Treasury to draft totally new Federal Regulations applicable only to specifically identified executives and other employees:

At financial institutions which have applied, or which apply in the future, for Federal Taxpayer Funds;

Who can still receive bonuses*, but only after the Federal Taxpayers are paid back in full;

And reportedly "[t]he rules also severely limit retention and incentive pay."

Id.  Reportedly also, some so-called compensation experts predict in the linked newspaper article, that officers and executives at such financial institutions will pay the Federal Taxpayers back right away, or seek other positions.  Id.

    Is it in the interests of anyone for Fiduciaries to do anything else?

 

*The New York Times reports that in basic terms, the Act will require that any new Federal Regulations limit the payment of cash bonuses to certain executives until the Federal Loans are repaid in full.  Edmund L. Andrews and Eric Dash, "Stimulus Plan Puts New Limiits on Executive Pay" p. A1, col. 5 (New York Times Nat'l Ed., Saturday, February 14, 2009).  Other newspapers report that cash bonuses are out entirely, and that the restriction applies to bonus awards which the new Act now limits entirely to payment in shares of stock.  E.g., Daniel Dombey and Edward Luce, "US Stimulus Clears Congress" (Financial Times.com, Friday, February 13, 2009);  Tomoeh Murakami Tse, "Congress Trumps Obma by Cuffing Bonuses for CEOs" (Washington Post.com, Saturday, February 14, 2009).  All these newspapers report that the amount of bonus is limited under the new Act to one-third of the banker's total annual compensation.

Another post on this topic, presenting a view from another angle this President's Day, is at www.insuranceclaimsissues.typepad.com.

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Bonus Payments Before Bailout Payments: A Fiduciary Tale With Questions.

    This is how to get an early bonus at Merrill Lynch in the old days.  Well, two months ago anyway.  In October, 2008 the New York State Attorney General started asking Merrill Lynch about ML's plans for paying bonuses for the year.  In November, 2008 the ML Board responded and basically said bonuses would be paid based on two factors:  Employee performance and retention.  Without advance warning or publicity, Merrill Lynch paid out bonsues in December, 2008.

    "Merrill Lynch secretly moved up the planned date to allocate bonuses and then richly rewarded their failed executives.  Merrill Lynch had never before awarded bonuses at such an early date and this timetable allowed Merrill to dole out huge bonuses ahead of their awful fourth quarter earnings announcement and before the planned takeover of Merrill by Bank of America."  February 10, 2009 Letter from New York State Attorney General Andrew M. Cuomo to the Hon. Barney Frank, Chair, U.S. House of Representatives Committee on Financial Services:  Download NYAG L to MC Frank021009.  Also, before Bank of America received an additional investment of Federal Taxpayer Funds of $20 Billion, plus guarantees of $188 Billion, in addition to $25 Billion of Federal Taxpayer Funds which BOA received previously.  Id.

    Even if it was in the interests of the Merrill Lynch shareholders and investors for 2008 bonuses to be paid to ML employees despite the Collapse of Merrill, and that is an awfully big "if," was it in their best interests to pay the bonuses on a date that would provide the best possible protection from scrutiny of whether those bonuses should be paid?  Is this why the  payment date was moved up to the earliest payday in the corporation's history?  Or is this a situation of Fiduciary Self-Preference?  Good questions, these.  There are more.

    In the face of Merrill's losses of $15 Billion in 4Q 2008, and $27 Billion in losses for the year, the New York State A.G. reported to Congress that Merrill Lynch paid at least the following bonuses totaling $3.6 Billion:

$121 Million to 4 people.

$62 Million to 4 others.

$66 Million to 6 others.

$250 Million to 14 other persons, each of whom belong to a group that received at least $10 Million apiece.

And on it went.  All in all, 696 people at Merrill Lynch became millionaires if they were not millionaires already; they received payments of $1 Million or more aggregating to a total of $3,600,000,000.00 in Merrill payouts to some 1.8% of its 39,000 officers and employees.

There is more.  Those interested can read the New York A.G.'s February 10, 2009 letter, supra.

While the Attorney General is completing an investigation into whether New York State laws were violated and, if so, which ones and by whom, there are more questions that arise from these additional facts and figures that Merrill kept secret until the money was gone.  Among the additional questions:

Is the payment of these bonuses as a whole, or individually, mandated by the Fiduciary Duties imposed on those who paid the bonuses and who authorized their payment?

Are these payments, or any one or more of them, consistent with the interests of the shareholders and investors of Merrill Lynch, or for that matter, of Bank of America?

Consistent with the interests of Federal Taxpayers?

Or consistent instead with Fiduciary Self-Preferences?

Good questions.  There are more questions yet to come, undoubtedly.

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Federal Fiduciary Immunity For Foreclosure Modifications: Another View.

    This continues a post here of January 14, 2009.

    Servicing agreements are contracts.  For the view that contracts should not be lightly modified by Congress (to put it mildly), as proposed by the TARP or Troubled Assets Relief Program amendments in the face of the Credit Collapse, see "Mending the TARP" by "The Deal Professor," Steven M. Davidoff, on DealBook web log, found on New York Times Online, January 12, 2009:

Significantly, the bill also abrogates the mortgage-backed security service agreements between servicers and investors in M.B.S.’s. Many of these agreements had required that in the case of a loan modification, the servicer was required to repurchase the loan. Instead, the bill voids these privately negotiated contractual provisions and allows these servicers to freely modify these loans if (i) the property is owner-occupied; (ii) default has occurred or is reasonably foreseeable and (iii) the servicer reasonably believes in good faith that the recovery on the principal obligation of the remodification will exceed the anticipated recovery on a foreclosure on a net present value basis.

[Emphasis added.]

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Decisions in Response to New Bailout Conditions May Be Fiduciary.

   New conditions have been proposed by the Obama Administration on banks which have already received Federal bailout funds and which apply again in the future for additional Federal Taxpayer Funds.  One such proposed condition would be for those Banks to agree to a nonbinding vote of Shareholders on whether certain Bank Officers would receive stock awards as a part of their compensation.

    According to a Wall Street compensation consulting firm, some 60% of executive compensation is already paid in the form of stock shares.  The Financial Services Roundtable, a bank and financial corporate lobbyist, has gone on record against the proposal nonetheless.  The Roundtable says that the new conditions "could have negative long-term effects."  These proposed conditions, according to the Roundtable, could discourage public corporations in need of further money, from asking for it from the Federal Taxpayer.  Financial Services Roundtable Press Release, "Executive Compensation for TARP Recipients is Measured" (February 4, 2009).

    If it were in the interests of the shareholders to apply for Federal bailout funds, but the corporate Officers decided not to apply for those funds because the Officers did not want to accept the condition of a non-binding shareholder vote on the Officers' stock awards, would the Officers then not be preferring their own interests, to those of the shareholders?  A Fiduciary however is required to put the interests of the party for whom she or he is acting, above self-interest.  Interesting issues.

    For more on the non-binding shareholder vote on stock awards, and on other conditions on the further release of Federal Taxpayer Funds to those who apply for them, see Stephen Labaton and Vikas Bajaj, "Executive Pay Limits Seek to Alter Corporate Culture" p. A1, col. 5 (New York Times Nat'l Ed., Thursday, Feb. 5, 2009).

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Boards, Bonuses, and Bailouts: Fiduciary and Insurance Claims Have Begun.

    Ms. Nell Minow is Chair of the Corporate Library.  The Corporate Library, by its own admisssion, is "[t]he leading independent source for corporate governance and executive compensation information and analysis."  Those words are displayed at the top of the Corporate Library web site, here.

    Ms. Minow, "an expert on boards of directors, noted [recently] that boards approve all bonuses.  All too often, she said, they were not rigorous enough in their review or smart enough to understand their company."  Frank Ahrens, "Admiration Turns to Anger as Wall St. Bosses Feather Nests" (Washington Post.com, Saturday, January 31, 2009).

    Phew.  Directors of publicly traded corporations would do well to immediately find out the extent of their Director's and Officer's Insurance Coverage and of any other Insurance Coverage under any other Insurance Policy that might be available to them, for their actions and conduct while serving as Board members.  It sure looks like the Insurance Claims are coming, if they have not already arrived.

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