Claims and Bad Faith Law Blog

Fiduciary Duties, "Swaps" and the World.

    Municipal Bond investigations in Italy have resulted in the commencement of criminal proceedings against 4 nominal Banks.  The 4 institutions have worldwide operations.  The Italian authorities have seized $350,000,000.00 of the institutions' assets to guarantee their ability to pay any resulting fines and forfeitures.  The group of 4 are JP Morgan Chase, Deutsche Bank, UBS and Depfa.  Claudio Gatti, "Italy Seizes Millions in Assets From Four Banks" p. B1, col. 2 (New York Times Nat'l Ed., "Business Day" Section, Tuesday, April 28, 2009).  The Insurance industry operations of corporations owned by Deutsche Bank are for one well-documented.

    One of the many interesting features of the positions taken by the Italian authorities in the criminal proceedings is that the group of 4 breached Fiduciary Duties.  They allegedly sold Municipal Bonds under false pretenses, in sum and in substance, to the Italian City of Milan.  The Italian authorities contend that this was a violation of Fiduciary Duties owed to "a nonprofessional customer like Milan".  The Fiduciary Duties are required by the Financial Securities Authority in Britain (similar to the U.S. Securities and Exchange Commission), according to the Italian prosecutors who base their position on an opinion authored by the former Chair of the F.S.A. apparently.  See id.

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AIG, the Feds, the Trust and the Trustees: Who?

"This was the best idea they could come up with at 4 in the morning on how to avoid the conflicts of government ownership."  Karen Shaw Petrou, President, Federal Financial Analytics, a "consulting firm" located in Washington, D.C.

"It wasn't about ideology and it wasn't about philosophy.  It was about crisis management."  Thomas C. Baxter, Jr., Esquire, General Counsel for the Federal Reserve Bank of New York.

"If this is going to be the model going forward, taxpayers and other investors have a right to understand how this trust arrangement is going to operate."  Richard C. Ferlauto, Esquire, representing unknown, unnamed labor unions who have called for the "ouster" of the AIG Board Member who chaired AIG's Bonus Plan Committee.

Ms. Petrou, Mr. Baxter, and Mr. Ferlauto are all quoted by Edmund L. Andrews, "3 Trustees of A.I.G. Are Quiet, Perhaps to a Fault" p. B1, col. 2 (New York Times Nat'l Ed., "Business Day" Section, Monday, April 20, 2009).   

    The "AIG Credit Facility Trust Agreement" was actually not signed by AIG.  Or by the United States Treasury.  Rather, it was signed as of January 16, 2009 by the Federal Reserve Bank of New York ("FRBNY") and by the Trustees.  While it was signed during the previous administration, it is reportedly considered a model agreement by the current administration.  Timothy F. Geithner, the current Treasury Secretary and former President of the Federal Reserve Board of New York, reportedly would like to use it whenever the Federal Taxpayers take a controlling interest in failing banks or other ailing businesses, in exchange for bailout money.  Here is an "execution copy":  Download .FRBNY and Jill Considine, Chester Feldberg and Douglas Foshee.0109.

    The Trust Agreement provides for three Trustees.  Id., § 3.02(a), page 11.

    It authorizes the Trustees to hire a Trust Attorney and other employees.  Id., § 2.03(c), page 5.  However, the only employee they have hired, apparently, is the Trust Attorney.  See the linked newspaper reports, below.  It is worth noting that the Trust Agreement contains an attempt to make "advice of counsel" an absolute defense for the Trustees.  A parallel post on the "Insurance Claims and Issues" web log explores this and similar provisions at www.insuranceclaimsissues.typepad.com.

    The Trustees are to be paid $100,000.00 a year.  Id., §§ 3.04(a) on page 13, and 3.04(c) on page 15.  Not much is known about the work of the Trustees, as Trustees.  According to newspaper reports, the Trustees meet in person once a month and have telephone conference calls once a week.

    No limit is provided on the compensation to be paid to the Trust Attorney.  Both the Trustees and the Attorney are to be paid from the Trust, id., the body of which appears to be the stock given by AIG to the Federal Taxpayers in exchange for Federal Bailout Money.  See id., § 1.02, page 2.

    With AIG's annual shareholders' meeting scheduled for this coming May, and with Federal Taxpayers holding nearly 80 percent of AIG's shares, the identities and backgrounds of the Trustees and of the Trust Attorney are becoming a little easier to find (but not much).  All three were reportedly "recruited" by FRBNY.  This information about the Trustees comes from Edmund L. Andrews, "3 Trustees of A.I.G. Are Quiet, Perhaps to a Fault" p. B1, col. 2 (New York Times Nat'l Ed., "Business Day" Section, Monday, April 20, 2009); and from Hugh Son, "AIG Trustees Emerge From 'Shadow' as Directors Resign (Update 2)" (Bloomberg.com, Tuesday, April 7, 2009).  The three Trustees, in alphabetical order, are:

Jill M. Considine:  From 1985 to 1991, Ms. Considine was the New York State Superintendent of Banks.  Ms. Considine is also a former Chief Executive Officer of the Depository Trust and Clearing Corporation.  She was on the Board of the FRBNY for six (6) years.  While there, she headed up the Audit and Operational Risk Committee.  At the time that she was "recruited" by the FRBNY to serve as one of the three Trustees, she was (and is) the Chair of the Butterfield Fulcrum Group based in Bermuda.  That business sells administrative assistance to hedge funds.

Chester B. Feldberg:  Mr. Feldberg was at the FRBNY for nine (9) years, until 2000.  While at the FRBNY, he was Executive Vice President, Risk Supervision Group.  He is a past Chair of Barclays Americas.

Douglas L. Foshee:  Mr. Foshee was Chief Operating Officer at Halliburton until 2003.  Then Mr. Foshee became the Chief Executive Officer of a natural gas producer and pipeline operator, the El Paso Corporation.

The Trust Attorney they hired is:

Kevin F. Barnard, Esquire.   See www.arnoldporter.com for information about Mr. Barnard.   Mr. Barnard, like Trustee Considine, comes with a background at the New York State Banking Department where he was Deputy Superintendent and General Counsel.  He was also once an attorney in the Treasury Department.  From 2004 to 2008, he was elected to the Management Committee at White and Case, and in 2008 he left that firm for Arnold & Porter, where he was at the time of his selection as Trust Attorney earlier in 2009, and where he is now.  Parenthetically, Mr. Barnard is one of the presenters scheduled to shed information on "Treasury's Financial Stability Plan and Framework for Financial Regulatory Reform:  An Overview and Update on Key Programs," to be held at Arnold and Porter in New York City on Thursday, April 23, 2009 beginning at 8:00 A.M.  It will be informative to learn what insights he will share, if any.

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Still With The Bonuses? What Effect on Fiduciary Duties?

"You just kind of have to do some analysis of why that change was made.  Is the actual change a good one?" 

Mr. Michael McCauley, identified as the Corporate Governance Officer of the Florida State Board of Administration, quoted by Jonathan D. Glater, "Companies Reset Goals For Bonuses" p. B1, col. 6 (New York Times Nat'l Ed., "Business Day" Section, Saturday, April 18, 2009). 

    

    Bonuses are still the favored way to compensate people who work at corporations, particularly on Wall Street.  See Jonathan D. Glater, "Companies Reset Goals For Bonuses" p.B1, col. 6 (New York Times Nat'l Ed., "Business Day" Section, Saturday, April 18, 2009).  The linked newspaper report advises that since most corporations are not increasing revenues, bonuses are no longer dependent on revenue growth.  Bonuses are still being paid, however, although pay for performance of what, exactly, seems at least open to question.  See id.

    Compensation committee members should have their own questions, clearly, including whether the suggested bases for bonuses at their corporations supports their own Fiduciary Duties to shareholders.

    And whether these same compensation committee members would, or would not, have a good claim to Insurance Coverage if and when their conduct in awarding bonuses is challenged in the future.

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"We Were Only Following Orders, er, Lawyer Memos": Fiduciary Duties?

    Newspapers report in greater detail than was previously available, that C.I.A. operatives inflicted torture in reliance on legal cover provided by Memorandums from government lawyers.  See, e.g., Mark Mazzetti and Scott Shane, "Memos Spell Out Brutal C.I.A. Mode of Interrogation" p. A1, col. 5 (New York Times Nat'l Ed., Friday, April 17, 2009).

    There are so many reactions and questions.  One of the questions:  Did the lawyers owe fiduciary and other duties in this situation, and if so, to whom were the duties owed and were those duties breached, not in this regard by the torturers but by the lawyers who enabled them?

Other reactions and questions are addressed in the "Insurance Claims And Issues" Web Log at www.insuranceclaimsissues.typepad.com.

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Reimbursement - Recoupment Remedies Renamed in Newspapers, Substance Remains in Court.

    Reporters seemingly need to rename things.  The remedies of Reimbursement and Recoupment remain unchanged in substance in Court, however.  See Joanna Chung, "Madoff Trustee Files First 'Claw Back' Suit" (Financial Times.com, Thursday, April 9, 2009).  

    The Bankruptcy Trustee in the Madoff business Bankruptcy has asked the Court to apply two settled rules of Reimbursement and Recoupment there.  One rule is the "preference rule," by which anyone coming into possession of funds subject to the Bankruptcy Proceeding, in this instance reportedly within 90 days before Mr. Madoff's arrest, may have no defense to turning those proceeds over to the Court.  The other rule is the "fraudulent conveyance rule," by which the proceeds received from fraudulent transfers made by Mr. Madoff's business, simply stated, must be returned to the Court registry.  See id.  The Trustee is reportedly not alleging at this time that recipients of proceeds engaged in any wrongdoing themselves.  Id.

    It should be noted that there are now two Bankruptcy proceedings.  Recently the same Bankruptcy Judge ordered that Mr. Madoff personally be subjected involuntarily to Bankruptcy in order to give all creditors a shot at reimbursement and recoupment.

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AIG, Feds Ordered "Counterparties" Paid Face Value, Not Market Value.

    The counterparties or policyholders of AIG's credit insurance policies (Credit Default Swaps) were paid at face value after AIG received Federal Taxpayer Monies in its bailout package.  The market value however was half that amount, it is reported.

    AIG is being asked why it did not negotiate.  If any Federal officials had a role in paying, rather than negotiating, perhaps they will also be asked why, or why not.  The difference to Goldman Sachs, for example, was $14 Billion at face value and $6 Billion less at market value.  That is in addition to the separate Federal Taxpayer Monies that have been paid to Goldman to bail it out.  See Cyrus Sanati, "Inspector to Audit A.I.G.'s Counterparty Payouts" in Dealbook Blog at The New York Times Online, Tuesday, April 7, 2009.

    In addition to being asked why AIG did not negotiate, perhaps AIG's Directors and Officers who authorized the face-value payments to AIG's contract partners can address the issue of how this conduct measures as Good Faith and Fair Dealing with AIG's largest shareholders, then and now--the American Taxpayers.

    Perhaps Federal officials, if any, in charge of how AIG decided to spend the Federal Taxpayer Monies will also address that issue.

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Guiding Principles for Good Faith Insurance Claims Handling.

    For a long time, Insurance Companies issuing Insurance Policies of all kinds have attempted to write "Guiding Principles" for handling insurance claims in Good Faith.  It is to their credit that they have done so.

    These written Principles may often be a guide to standards of handling claims in either third-party cases, which involve liability insurance claims,  see First State Insurance Co. v. Utica Mutual Insurance Co., 870 F. Supp. 1168, 1176 n. 17 (D. Mass. 1994), aff'd mem., 78 F.3d 577 (1st Cir. 1996):  Download First State insurance Co. v. Utica Mutual Insurance Co. (D. Mass. 1994), affd mem., or in first-party cases involving the policyholder's own claim under her, his or its own policy of insurance.  See Glassalum International Corp. v. Albany Insurance Co., 2005 WL 1214333 *4 (S.D.N.Y. May 23, 2005)(case involved claims for Property Damage resulting from Hurricane)(subscription required for Westlaw):  Download Glassalum International Corp. v. Albany Insurance Co. (S.D.N.Y. May 23, 2005).  See Appendix 8, Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" (Thomson-West Publishing Co., Third Edition in progress).

A corresponding post on this same subject can be found at "Insurance Claims and Issues" Web Log, at www.insuranceclaimsissues.typepad.com.

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