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Author: Lawrence Cunningham

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Congrats to Mary Schapiro, SEC Chair Nominee

Mary Schapiro.jpgUS President-elect Barack Obama announced his intention to nominate Mary Schapiro as Chair of the Securities and Exchange Commission. We at GW Law School, from which Ms. Schaprio graduated in 1980, are delighted. We wish her well in what promises to be a very difficult period for the SEC. Already, questions arise about the orientation Ms. Schapiro will bring, raised sharply in Susan Antilla’s Bloomberg column today. From the Obama transition team web site is the following biography of Ms. Schapiro.

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W Presidential Library

The following letter is making rounds in philanthropic circles. Some hyperbole is evident. But, hey, times are tough.

Dear Fellow Constituent:

The George W. Bush Presidential Library is now in the planning stages and accepting donations. The Library will include:

1. The Hurricane Katrina Room, still under construction.

2. The Alberto Gonzales Room, where you forget everything.

3. The Texas Air National Guard Room, where you don’t even have to show up.

4. The Walter Reed Hospital Room, where they don’t let you in.

5. The Guantanamo Bay Room, where they don’t let you out.

6. The Weapons of Mass Destruction Room, though no one has been able to find it.

7. The National Debt Room, which is huge and has no ceiling.

8. The Tax Cut Room (only the super rich, if any are left, can enter this one).

9. The Economy Room, which is in the toilet.

10. The Iraq War Room. (After you complete your first visit, the stern librarians make you go back for a second, third, fourth, and sometimes fifth visit.)

11. The Dick Cheney Room, in an undisclosed location, but complete with shooting gallery.

12. The Environmental Conservation Room, still empty, though full of promise.

13. The Supreme Gift Shop, where elections may be on sale.

14. The Airport Men’s Room, where some Senators have been observed hanging about.

15. The Decider Room, complete with dart board, magic 8-ball, Ouija board, dice, coins and straws.

The library will include many famous Quotes by George W. Bush, including the following:

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Times Softens SEC Bashing

SEC Seal.gifOn Monday, I posted my opinion that people should be cautious in rushing to rebuke the Securities and Exchange Commission for any failures leading to the Madoff Ponzi scheme. Also on Monday, the New York Times engaged in such a rush. In today’s paper, the Times softens that stance. These views may have some bearing on whether the SEC survives, is dismantled or reconstituted in coming financial regulation reform.

My post said charges against the SEC for failure in the Madoff case should be looked into but that it was equally likely that the charges would prove incorrect. Above all, I opined that talk of SEC blame for the Ponzi scheme risks distracting from manifestly pressing matters of systemic significance arising in the general financial crisis.

In Monday’s Times Stephen Labaton painted a very unflattering piece on the SEC, emphasizing its alleged failures to interdict the Madoff scam, and quoting Chris Cox, current SEC Chair, as acknowleding some fault. The story, which ran on page B6 and spanned 876 words, called the Madoff episode the “latest black eye” for the SEC. It also mentioned the SEC’s failure to anticipate the problems at Bear Stearns, and cited SEC inspector general reports on “several major botched investigations” (although without noting that those reports have been contested by other SEC officials).

The Monday story also reported on other rumor-based and word of mouth complaints about morale among SEC staff, even assertions of a “hollowing out” of the agency under Bush administration directives.

In today’s paper, Mr. Labaton offers a different view.

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Spreading Blame in Ponzi Scheme

When word of Bernard Madoff’s alleged $50 billion Ponzi scheme broke last Friday, my systemic worry was whether the fund was audited by a prominent auditing firm. Public revelation of an auditor’s involvement in such a fraud would almost certainly destroy it. Cf. Arthur Andersen amid Enron (2002).

If one of the four very largest auditing firms (Deloitte, Ernst, KPMG or PWC) were involved, the world would face an additional crisis by reducing from 4 to 3 the number of auditing firms capable of auditing most global companies. Indeed, such added crisis could occur if one of the next three largest firms (BDO Seidman, Grant Thornton or McGladrey Pullen) were implicated in such a fraud.

Fortunately, Madoff’s vehicle was not audited by one of those 7 firms (it was apparently audited by a storefront neighborhood accountant). Yet there is continuing fallout from this fraud that, some assert, does implicate one of the large 7 firms. In a putative class action lawsuit filed yesterday, New York Law School is suing investment advisor, Ezra Merkin, and his outside auditor, BDO Seidman.

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Yeshiva University Remains Strong, President Writes

YU_flame.gifEchoing Dave Hoffman’s post reporting from the President of Yale University, the President of Yeshiva University, Richard Joel, circulated a note to consitutencies to assure them, in light of both allegations concerning Bernard Madoff and prevailing economic adversity, that the Univesity is “financially strong,” student financial support “will not diminish,” and staff pensions are unaffected. President Joel continued as follows:

We have been engaged over the last two months in reviewing our budgets to seek ways to cut our operating costs due to global economic realities. We will continue to do so and remain committed to advancing our crucial mission of providing an education that ennobles and enables our students

Bernard Madoff is no longer associated with our institution in any way. The University had no investments directly with Madoff. Last Thursday night, we were informed by Ascot Partners, a vehicle in which we had invested a small part of our endowment funds for 15 years, that substantially all its assets are invested with Madoff. The Ascot fund was managed by J. Ezra Merkin who has served as a University trustee and chairman of the investment committee. Mr. Merkin has resigned from all University positions.

In the most recent statement from Ascot, Yeshiva’s investment was valued at about $110 million, which represents about 8% of our endowment. While these facts are disappointing, we need to remain focused on the larger picture. We are but one of many institutions and individuals that have been impacted.

. . . [T]he University’s endowment, taking into account the Ascot loss, is currently estimated to be approximately $1.2 billion, down from approximately $1.7 billion on January 1, 2008. That loss of 28%, calendar year-to-date, compares with an S&P loss of 38% and Dow Jones loss of 32%. While certainly this represents a painful decline, we are in the same or better position as many universities.

Although this decreased endowment must factor into our long term fiscal plans, it will have minimal impact on day-to-day operations. Total income from endowment last year represented 13% of the University’s operating income. Much more critical to our future health is the continued level of financial support from the YU family, philanthropists, and friends. So, while we are in a healthy and strong position to move forward, we must use the moment to address all concerns that this situation has illuminated.

In light of recent developments, we have decided to examine our existing conflicts policies and procedures, and governance structures to assist us in this process. We have engaged Sullivan & Cromwell and Cambridge Associates, internationally renowned and respected institutions with recognized expertise in corporate and institutional governance, to ensure that our policies and procedures and structure reflect not only best practices, but the gold standard — the standard to which we aspire for all our endeavors. We will be working closely with our advisors over the coming weeks and months and I’m confident that we’ll emerge stronger than ever.

. . . We all should use these times to reflect on our blessings but also to reflect on our responsibilities. We should constantly be communally introspective and focus on advancing our ideals. The times are appropriate for us to focus on our core values, to practice and refine them and to share them with the world. We can and should always advance. Yeshiva University is committed to engaging in that conversation with other people of good will. . . .

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Required versus Probable Reform and the Madoff Distraction

dollar sign.jpgThe press, politicians and reformers are devoting extraordinary attention to a Ponzi scheme whose only peculiarities are scale and duration. Compared to ongoing global financial devastation, this is trivial. Yet this attention may lead politicians to distract focus from their role in the deeper problems that matter far more.

Recriminations against the Securities and Exchange Commission arise from allegations it has made (complaint here) that Mr. Madoff operated a large-scale Ponzi scheme involving tens of billions of dollars over perhaps decades and bilking scores of sophisticated parties. SEC critics include prominent securities law professors Jim Cox (Duke) (SEC may “have a hell of a lot to answer for”) and Joel Seligman (Rochester) (“a debacle for the SEC”).

Critics express concern that the SEC may have failed to investigate investor tips (see Wall Street Journal story here); failed to regulate sufficiently Madoff’s investment advisory services or fund vehicles; or failed to enforce existing regulations. Calls are for both investigation and greater regulation, many pinning hope on the incoming Obama administration to institute such searching and effect requisite change.

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Oversight Panel Report Grim, Tough, Inviting

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Americans are being formally invited to participate in discussingthe ongoing federal program to stabilize the country’s economy. The invitation is by the five-member panel Congress created to oversee the program’s implementation. The panel also issued its first report yesterday, signed by the panel’s Chair, Harvard Law Professor Elizabeth Warren, plus AFL-CIO Associate General Counsel Damon Silvers and New York Superintendent of Banking, Richard Neiman. (One panel member, Rep. Jeb Hensarling of Texas, voted against issuing the report and the fifth panel seat is vacant.) The report contemplates asking ten tough questions about the program that give a sense of its tenor:

1. What is Treasury’s Strategy?

2. Is the Strategy Working to Stabilize Markets?

3. Is the Strategy Helping to Reduce Foreclosures?

4. What Have Financial Institutions Done With the Taxpayers’ Money Received So Far?

5. Is the Public Receiving a Fair Deal?

6. What is Treasury Doing to Help the American Family?

7. Is Treasury Imposing Reforms on Financial Institutions that are taking Taxpayer Money?

8. How is Treasury Deciding Which Institutions Receive the Money?

9. What is the Scope of Treasury’s Statutory Authority?

10. Is Treasury Looking Ahead?

The report’s further tenor can be gleaned from its Introduction, which is very sobering indeed, and excerpted below (with footnotes omitted and emphasis added).

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Sloppy, Inconsistent Federal Corporate Governance

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Lawmaking is a sloppy spectacle, perhaps especially amid crisis like now when Congress offers conditional financial assistance to save private banks and car makers. It is possible that once the entire process is complete a coherent law will result. So far, Congressional actions are not encouraging—and may worry even those scholars and policy analysts who may generally prefer moving from state-by-state corporate law production to a federal corporate law regime.

First, there appears to be no principled basis to distinguish the federal corporate governance conditions proposed to be imposed on the auto industry under the House bill (HR 7231) voted up yesterday and the comparatively loose conditions imposed on the financial industry under the economic stabilization act passed two months ago.

Principal examples are limitations on dividends (to be imposed on car makers but not on banks), limitations on corporate jets (car makers can’t own or lease them but banks can) and limitations on executive compensation (stringent for Detroit, weak for financiers).

Second, the draft House bill has some internal inconsistencies and provisions that are redundant because they already exist in federal law. These concern standards for executive compensation and corporate governance to be specified by a Presidential designee. 12(b)(2).

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“Yet, he ought to pay his rent.”

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“Yet, he ought to pay his rent,” is a famous legal conclusion from the grand case of Paradine v. Jane evoked by Mark Edwards recently in this blog, a wonderful early specimen in the law denying excuse from contractual obligation due to supervening events. Later chestnuts (like Taylor v. Caldwell to Krell v. Henry) relax the rigid stance denying impossibility, impracticability or frustration of purpose as excuses from contractual obligation, but only if the risks arising from a supervening event (fire, flood, riot, disease and the like) are not allocated, expressly or implicitly, by contract.

The common law’s navigation of these doctrines prompt parties to include in contracts express provisions excusing performance of obligations upon the occurrence or non-occurrence of stated supervening events. Parties can include any sorts of events they wish. A common example of the kinds of clauses that result, often generically described as force majeure clauses, follows:

“If either party to this contract shall be delayed or prevented from the performance of any obligation through no fault of their own by reason of labor disputes, inability to procure materials, failure of utility service, restrictive governmental laws or regulations, riots, insurrection, war, adverse weather, Acts of God, or other similar causes beyond the control of such party, the performance of such obligation shall be excused for the period of the delay.”

Pending in New York court is a claim that a similar sort of clause enables the real estate developer, Donald Trump, and companies he controls, to delay repayment of obligations for borrowed money to Deutche Bank, and a syndicate of other banks. The borrowers want a declaratory judgment that prevailing real estate market conditions are within such a clause and beyond the borrowers’ control. Accordingly, they want to lawfully delay repayment of a $40 million installment due last month under a $640 million construction loan. The substantive argument is that sales of condo and hotel units the construction loan supported have failed to materialize as anticipated (only $204 million have closed and $353 million are under contract).

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Footnotes in Delaware Judicial Opinions

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Casebook editors, including Professor Stephen Bainbridge of UCLA, complain about the prodigious length of recent Delaware corporate law judicial opinions, especially those written by its Chancery Court. As I edit a round of recent cases for my spring course and new edition of my casebook, I add a related complaint: the proliferation of footnote use in Delaware court opinions. This practice tends both to lengthen opinions plus complicate practical tasks facing teachers and editors.

As a practical matter, a style has developed in Delaware over the past decade of inserting case citations and other authorities in sequentially numbered footnotes rather than in textual discussion. This practice mirrors the style traditionally used in scholarly writing and is a sharp departure from the standard practice in judicial opinions and litigation briefs.

For a casebook editor, this is annoying because it requires tracking relevant footnotes separately and then preparing selected footnotes or, for ease of student reading, relocating the relevant case citations from footnotes into bracketed citations within the text.

As to length, it is no longer uncommon to read Delaware corporate law opinions with more than 50 footnotes and a fair number bloat more than 100 footnotes. Many contain meditations on matters remote from the issues the court is required to address. They sometimes present long string cites, increasingly to include scholarly articles and treatises.

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