Claims and Bad Faith Law Blog

Fiduciary Duties, High Income for Execs, Low Income for Corps.

    Fiduciary duties are implicated in this report of a lawsuit filed in State Court in Oklahoma.  See Gretchen Morgenson, "Fair Game/Shareholders Who Act Like Owners" p. 1, col. 6 (New York Times Nat'l Ed., SundayBusiness Section, Sunday, March 29, 2009).

    The plaintiffs in the lawsuit hold huge numbers of shares in Chesapeake Energy Corporation.  The plaintiffs seek "books and records" or apparently an accounting.  The reported plaintiffs include the Louisiana Municipal Police Employee Retirement System.  The reason alleged to have an accounting reportedly is a large amount of money paid to "the company's chief executive" while the corporation reportedly lost money.   According to the linked newspaper report, there may be allegations on the face of the Complaint that the Directors may have breached their fiduciary duties to the shareholders by paying out large amounts of 'compensation' to people who were in charge of the corporation -- and of the shareholders' investment -- during a time that the corporation lost much money in contrast.

    It will be hard for Chesapeake to challenge the motivation of the police officers who have sued it for an accounting, to say the least.

    In addition, this lawsuit and others like it are the appropriate response to the increasingly large number of commentators who seem to decry the lack of public outrage at those who allegedly caused or may have caused the Financial Collapse.  Our judicial system was put in place over time precisely in order to channel public outrage away from violence and into acceptable vehicles such as holding alleged wrongdoers accountable at law and in equity, and providing people with the opportunity to defend themselves.

    Separate and apart from any "books and records demand" or accounting relief which may be requested in the current Complaint, this lawsuit and others like it raise an interesting question:  What are the Fiduciary Duties of Directors who vote to award Officers and other corporate executives large amounts of money from the coffers of corporations which performed poorly during the period covered by the new compensation award? 

    If anyone has a pdf copy of the publicly filed Complaint, I would appreciate a copy, with thanks.  In the interim, time will tell what allegations and claims have been made and how they fare in the Oklahoma State Court lawsuit.

A related post can be found this day at www.insuranceclaimsissues.typepad.com.

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Fiduciary Duties of Repeat Bailouters: Pay Limits and Reduced Perks?

    Do the Fiduciary Duties of Officers and Directors of Repeat Bailout Borrowers require them to limit their pay and reduce their perquisites?

    Maybe the Fiduciary Duties of Directors and Officers of Serial Bailout Borrowers do require those things.  It is something to think about, among other things floated by Allan Sloan, "Deals/Lawmakers Need to Translate Rhetoric Into Real Reform on Wall Street" p. D2, col. 3 (Washington Post, Tuesday, March 3, 2009).

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Fiduciary Duties Come at a Price.

    The enforcement of Fiduciary obligations does not come without cost.  There is a cost.  When litigation is filed as a result of alleged Breaches of Fiduciary Duties there are attorney's fees and Court costs, for example.

    Sometimes these expenses can reportedly equal or exceed the cost to investors of allegedly flawed Fiduciary conduct in relation to finances, for example.  See Dealbook summary and link to article by Diana B. Henriques, "Lehman Loss Just the Start for Money Fund"  p. B9, col. 4 (New York Times Nat'l Ed., Business Day Section, Friday, February 27, 2009)(reporting on a statement issued by the Defendants of the Reserve Primary Fund and its managers, "facing a blizzard of litigation" touched off when they announced that the Fund was "breaking the buck" or reporting a share price of less than one dollar after Lehman filed for Bankruptcy; the Defendants said that these lawsuits against the managers and the Fund "would ultimately cost its investors more than Lehman did.").

    If there were no enforcement, even occasionally, would there be fulfillment of Duty?  If so, how often?

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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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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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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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Directors and Officers and Fiduciary Duties.

    Fiduciaries are accountable when they breach their fiduciary duties.   The accountability that adjusts behavior most often, is in the form of a lawsuit for money damages flowing from the alleged breach of the fiduciary duties.

    Questions arise concerning the duties and relationships, if any, that are owed by and among corporate officers, directors, shareholders and consumers.  Lawsuits have reportedly been filed challenging the decisions of officers or directors to enter into certain mergers and acquisitions.  See generally Julie Creswell, "Market Place/Price Paid For Merrill Is Rising" p. B1, col. 6 (New York Times Nat'l Ed., Business Day Section, Saturday, January 24, 2009).

    Some question compensation decisions.  They point to the presumed "fiduciary duties" of a corporation's compensation committee concerning officers or employees who may have been paid too much money for the services that were, or were not, performed to the corporation's benefit. 

    Some of these questions start out concerning all fiduciaries, then they tend to be asked only about highly publicized individuals.  Fiduciary duties belong to all fiduciaries, not just a few.  Many of the alleged breaches of fiduciary duties seem to center around the spending of shareholder money by officers and directors of publicly held corporations.  In particular, questions about fiduciary duties arise in this context especially when the spending in question  confers a personal benefit on the indivdual which appears to be at odds with any perceived benefit to the publicly owned corporation.

    Broadly stated, examples of questioned behavior by officers of publicly held corporations have recently included:

$1.2 Million to redecorate an office;

$87,000 for a rug;

$68,000 for a credenza;

$35,000 for a water closet utility device (i.e., a commode); and

Paying bonuses earlier than ever before in history, days before the corporation was acquired by another corporation which received Federal Taxpayer Money in order to acquire the first corporation.  See, e.g., Julie Creswell and Louise Story, "John Thain, Merrill's Former Head, Is Out At Bank of America" p. A1, col. 1 (New York Times Nat'l Ed., Friday, January 23, 2009), published online with the headline, "Thain Resigns Amid Losses at Bank of America"; Andrew Ross Sorkin, "Dealbook/The Titans Take It On The Chin" (New York Times Online Tuesday, January 27, 2009)

    These are decisions made by one person, as it turns out, but similar seeming self-preferential decisions have been made by many corporate officers and have recently come to light.

    Officers are not alone in being the focus of questions concerning possible breaches of fiduciary duties.  Directors too have come under scrutiny.  Directors are not always figureheads; at one corporation alone, they reportedly receive "upwards of" $200,000.00 a year in compensation for serving as directors -- yet, at that same corporation, a bank, reportedly "shareholder advocates" have some concern because only 2 out of 17 (soon to be 20) total directors are known to understand the workings of that bank, i.e., "to understand financial risks and rein in managers."  Louise Story and Julie Creswell, "Bank of America Board Under Gun From Critics" p. B1, col. 2 (New York Times Nat'l Ed., Business Day Section, Wed., January 28, 2009).

    Culpable or not, officers and directors would be well advised to make sure that the appropriate Director's and Officer's Insurance Companies are faithfully paid their Premiums and that they have been and wil continue to be put on notice of these charges and claims -- and lawsuits if any.  See also a post on www.insuranceclaimsissues.typepad.com concerning such damages claims potentially involving Fiduciary Duties and Director's and Officer's Insurance Coverage if any.

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Fiduciary Duties, Denials, and Universal Disputes.

    An excellent laying bare of the major implications of the allegations against Mr. Bernie Madoff including the possibility of Breaches of Fiduciary Duties was written by Rabbi Wesley Gardenswartz, "The Perfect Response to the Madoff Debacle/Bernard Madoff's Confessed Ponzi Scheme Assaults Four Core Jewish Values" (Boston Globe Online, Sunday, December 28, 2008)..

    With due respect, Rabbi, the implications and in particular the Fiduciary Duties are universal.  See generally Tom Petruno, "Betrayal of Trust a Wall St. Tradition" (Los Angeles Times.com, Saturday, December 20, 2008).

    Many Claims have been made against many persons, see, e.g., McNelly Torres, "Investors' Complaints Against Financial Brokers Soar" (South Florida Sun-Sentinel.com, Saturday, December 20, 2008), archived online as of Friday, December 19, 2008, and many of the accused are denying any Duties let alone their Breaches.  See, e.g., James Mackintosh, Peggy Hollinger and Haig Simonian, "UBS Seeks to Deny Duty Over Madoff Funds" (Financial Times.com, Friday, December 19, 2008), updated and archived as of Saturday, December 20, 2008 under the new headline, "UBS Seeks to Absolve Itself From Madoff Fund Safeguarding Needs".

    Time and the Courts will tell.

HAPPY HOLIDAYS and A HAPPY NEW YEAR to ALL!

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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.  

 

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).

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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.

Economy Falls, Litigation Rises: Fiduciary Duty, D & O Claims Rise, Too.

    The falling economy has already produced corporate bankruptcies, job layoffs, and Government investigations.  And a rise in the numbers of claims and lawsuits.  Reportedly, "[i]insurance companies [are] the top target for litigation ...."  Lindsay Fortado, "U.S. Company Lawyers Expecting Litigation Surge, Survey Says" (Bloomberg. com, Tuesday, October 14, 2008).

    Lawsuits filed in the last 12 months included a large number of lawsuits against Insurance Companies.  Id.  In such a climate, many claims implicating Fiduciary Duties, Good Faith and Fair Dealing, or not, and Director's and Officer's Insurance Coverage, are on the horizon, and many others are already 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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Socialized Risk, Private Gain?

    Do Directors and Officers of lending institutions have a Fiduciary Duty to the Shareholders of their Corporation which involves giving money back to the Corporation if they do not do their jobs well?  What about Directors and Officers of Corporations in general, including Corporations that are not lending institutions?

     In an editorial about "financial-industry executives," "bankers," and "financiers" on Good Friday, 2008, the New York Times  observes:

But as a rule, they won't have to return the money they made in the good days when they were making all the crazy bets that eventually took their banks down.

Editorial, "Socialized Compensation" p. A22, col. 1 (New York Times Nat'l Ed., Friday, March 21, 2008).

     Why not?

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