Banking Law Prof Blog

Corporate Philanthropy - Or Lack Thereof

In my Corporate Governance Class today, we were discussing the pros and cons of corporate philanthropy.  Lo and behold, when I returned to my office I spotted this article in today's New York Times, describing Apple as one of America's "least philanthropic companies" as identified by the Stanford Social Innovation Review.

Link to article:  "The Mystery of Steve Jobs's Public Giving" by Andrew Ross Sorkin:http://dealbook.nytimes.com/2011/08/29/the-mystery-of-steve-jobss-public-giving/

(ag:  Aug. 30, 2011, in Corporate Governance

Shades of Arthur Andersen: SEC Shredding Documents

The Senate Judiciary Committee is looking into allegations brought by SEC Enforcement Division attorney and whistleblower Darcy Flynn that the Securities and Exchange Commission (SEC) illegally destroyed documents relating to preliminary investigations of, among others, Bernard Madoff, AIG, Lehman Brothers, Goldman Sachs, and Deutsche Bank -- literally thousands of files over the past twenty years. 

No wonder we aren't seeing prosecutions of Wall Street wrongdoers who brought us the financial crisis.  Senator Chuck Grassley, the ranking Republican member of the Senate Judiciary Committee is particularly concerned about this destruction of records at the SEC.

Unfortunately, the SEC also has a terrible track record with its revolving door.  Enforcement Division attorneys, even Division Chiefs, frequently move directly to high paying jobs at companies that are the subject of investigations, including some of those listed above as having their preliminary investigations records destroyed.

The SEC also has a bad record of firing or retaliating against whistleblowers.  In fact, the whistleblower here, Darcy Flynn, is represented by Gary Aguirre, a former SEC staff attorney who received a $755,000 settlement in June 2010 as a result of his lawsuit charging wrongful termination in 2005 when he was investigating a prominent hedge fund.

No surprise:  The SEC has not been cooperative with either the Congressional investigation or requests for explanation from the National Archives and Records Administration.  The SEC was supposed to keep records for 25 years -- time to see a pattern of possible illegal activity on the part of companies investigated.  The SEC made its own policy to destroy records as soon as a preliminary investigation was closed.

I was reminded of the cartoon that surfaced during the Arthur Andersen records destruction case: 

An Arthur Anderson partner says to his secretary, "Did you get my message to ship the Enron documents to the Feds'?" The secretary responds, "Oh no, I thought you said rip the Enron documents to shreds."

The SEC doesn't even appear to have that excuse.

Link to NY Times article:  http://www.nytimes.com/2011/08/19/business/file-disposal-still-an-issue-for-sec.html

(ag) Aug. 20, 2011, in Securities Law

New Ratings Model for Residential Mortgage-Backed Securities

Fitch Ratings is rolling out a new "two-step stress test" to estimate losses on a Residential Mortgage-Backed Securities issue, calculating a sustainable value when home prices are first reduced and again with further declines in value.  The goal is to more accurately determine the effect of declining borrower equity and falling home prices on the losses in the mortgages. Fitch will also incorporate larger economic factors in projecting loan performance.

According to a Housing Wire article"

"In short, credit protection will increase materially during housing booms accompanied by 'unsustainable home prices,'" Fitch said. "Conversely, credit protection will decrease as 'bubbles deflate' and risk in the housing market neutralizes."Fitch initially introduced the new method in February and provided a few tweaks since."

The ratings agency now combines the sustainable market value with the original loan-to-value ratio of the loan to form what it calls an sLTV, "the most predictive variable of borrower defaul."

The new model will apply to both new and existing RMBS deals.

Thanks to Attorney Dan Tyson for calling this new Fitch ratings model to my attention.

LInk to article:  http://findarticles.com/p/articles/mi_m0EIN/is_20110202/ai_n56781180/

(ag) Aug. 16, 2011, in Ratings Agencies, Securities, Economy

In re Lehman Brothers Securities and ERISA Litigation

Here's another significant securities law opinion out of the Southern District of New York, holding that a class action lawsuit brought by purchasers of Lehman Brothers' debt and equity securities survived a motion to dismiss because it properly stated claims under the Securities Act and Securities and Exchange Act against Lehman Brothers, its former officers and directors, and its underwriters.

I'll be reading this case more closely to see how it squares with the U.S. Supreme Court opinion in Janus Capital.

Lehman's auditor, Ernst & Young, was a defendant in the same lawsuit. Most claims against the auditing firm were dismissed.

Link to In re Lehman Brothers Securities and ERISA Litigation: http://www.knowledgemosaic.com/gateway/courtcase/Lehman.072711.pdf

Link to New York Times article "Lehman Case Hints at Need to Stiffen Audit Rules" by Floyd Norris: http://www.nytimes.com/2011/07/29/business/in-lehman-case-a-hint-that-audit-rules-are-lacking-floyd-norris.html?_r=1&ref=business

(ag) Aug. 12, 2011, in Securities Law

60 Minutes on Robo-Signing

This program discusses "robo-signing" and identifies "Linda Green" as a real person, a shipping clerk who appeared on documents as VP of more than 20 banks for documents signed by her and others forging her name because it was short and easy to sign. So what does a "robo-signer" make? $10 an hour.

LInk: http://www.cbsnews.com/video/watch/?id=7375936n&tag=contentMain;contentBody

(ag) Aug. 12, 2011, in Lending Issues

Fed to Hold Interest Rates Low Until Mid-2013

The Federal Open Market Statement (FOMC) yesterday said in plain English that the Fed's intention is to hold rates low for at least the next two years because the economic recovery has been slower than anticipated and unemployment is up.  Here's what they said:

 "To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.  The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."  

Many question why the FOMC would create an explicit expectation of low interest rates for a specific and lengthy period of time without allowing much flexibility for future developments and, in effect, fostering the expectation that conditions will not improve any time soon. 

Three FOMC members, Dallas Federal Reserve Bank President Richard Fisher, Minneapolis Federal Reserve Bank President Narayana Kocherlakota, and Philadelphia Federal Reserve Bank President Charles I. Plosser, voted against the decision to publicize a timetable for keeping interest rates low.

Link to FOMC Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm

(ag) Aug. 10, 2011, in Economy, Economy/Interest Rates

9th Cir. Says No Preemption of State Law Prescribing Post-Repossession Notice

Thanks to Greg Pulles of Briggs & Morgan, Minneapolis, MN, for calling my attention to the Ninth Circuit opinion in Aguayo v. U.S. Bank (Opinion filed Aug. 1, 2011).

In Aguayo, the Ninth Circuit reversed a trial court decision to dismiss a consumer class action lawsuit based on a California law requiring a car loan lender to provide certain post-repossession notices to a defaulting borrower prior to selling the repossessed car. Under the California law, If the lender fails to provide the required notices, the lender is barred from collecting any remaining deficiency after the car is sold.

U.S. Bank claimed federal preemption of the state law.  The lower court agreed and dismissed the case, but the Ninth Circuit reversed and remanded.  This case arose prior to the passage of Dodd-Frank and was decided on the basis of the National Bank Act (NBA) and OCC's 2004 regulations. 

The Ninth Circuit noted that state consumer protection laws have historically been protected from preemption, absent compelling evidence of a Congressional intention to preempt. 

The district court found express preemption.  The Ninth Circuit reversed and remanded.

Two provisions of the OCC's regulations are at issue: 

1. Under the first provision, national banks are exempt from state laws concerning "[d]isclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents[.]" Aguayo, 658 F. Supp. 2d at 1232-33 (quoting 12 C.F.R. § 7.4008(d)(2)(viii)).  The district court held the state law notice requirements are "disclosures" as well as "credit-related documents" under the OCC's regulation and therefore expressly preempted. 
2. The second provision of the OCC's regulations at issue is the "savings clause" found in Subsection (e) of the same regulation. The savings clause explicitly lists state laws that are not preempted, including state laws pertaining to "contracts" and "rights to collect debts." 12 C.F.R. § 7.4008(e)(1), (4). The Ninth Circuit held that the district court erred in refusing to apply the regulation's savings clause, and that the California state law post-repossession notices are "disclosures" that would not be considered "credit-related document" (because after the car has been repossessed, there is no continuing credit relationship, only debt collection issues). 

What is the impact of this decision going forward? 

• The opinion may indicate a shift in the willingness of courts to more closely examine national bank claims of federal preemption. 
• On the other hand, the rationale may be confined to the Ninth Circuit and limited to debt collection cases under California law.
• One stumbling block for U.S. Bank was its use of state law UCC provisions relating to self-help repossession but then contending that it was not bound by state law provisions regarding post-repossession collection of the remaining outstanding debt. 
• The Ninth Circuit relied on the 1996 U.S. Supreme Court opinion in Barnett Bank of Marion County v. Nelson for the federal preemption standard. 
• Note that the facts of this case predate the Dodd-Frank Act, with its preemption provisions. 

Link to opinion:  http://scholar.google.com/scholar_case?case=12251569512417146855&hl=en&as_sdt=2&as_vis=1&oi=scholarr

(ag) Aug. 10, 2011, in Federal Preemption

S&P Downgrades U.S. Credit Rating

Yesterday, Standard & Poor's downgraded the U.S. credit rating from AAA to AA+.

According to S&P, "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."

Confidence in U.S. treasuries, the U.S. economy in general, the U.S. stock market, real estate market, and global markets will all be impacted.  For now, two points: 

1. Has Congress learned any lessons to the effect that political brinksmanship is not in the U.S. best interest? Probably not.
2. Given the credit rating agencies role in mis-rating collateralized debt securities and derivatives, should we view this as a more stringent view of their own credit rating function?  Or is it an overreaction to past criticism?  Is the downgrade a true reflection of U.S. creditworthiness? 

(ag) August 6, 2011, in Economy, Credit Rating Agencies, Global Markets  

 

More About Poison Pills

Here's a question I received:  So, Talbot’s, as well as Kodak’s, recent adoption of a pill . . .Is there a significant change in the thinking about poison pills?

Some background on Poison Pills or Shareholders Rights Plans:

Poison pills were invented in the 1980s as a means to defend against hostile takeovers.  A poison pill is a type of shareholder rights plan, that can be triggered by an event that signals a hostile takeover in the works The trigger is acquisition of or offer to acquire a block of stock, for example 15 percent of the company’s voting stock. A poison pill, which can be invoked and rescinded by the board of directors, could give existing shareholders the right to double their share holdings at a nominal price.  This dilutes the percentage of stock held by the individual or group seeking a hostile takeover, making it more difficult and expensive for their takeover to go forward.

Corporate governance literature posits that the "market for corporate control" requires managers to operate corporations effectively or face hostile takeover bids.  In the last 10 years, poison pills have been viewed with a certain amount of disfavor since they protect entrenched management by making a takeover more difficult and thereby removing market discipline.  Managers and the board may have their own interests to protect (keeping their jobs and perks) that do not necessarily align with shareholder interests -- be that maximizing short term share price or preserving the long-term value of the company.  

On the other hand, the positive aspect of poison pills includes the ability of management to avoid the type of corporate raiders rampant in the 1980s when this mechanism was developed.  Poison pills also allow management time to elicit a higher bid which is beneficial to shareholders. 

Delaware case law tells a very interesting story about proper and improper uses of poison pills.

The pros and cons of poison pills have not changed. 

Two interesting points: 

1.  Despite opprobrium, they are still being used. 

2.  Two of the original players, Martin Lipton (inventor of the poison pill) and Carl Icahn (not in the Talbot's deal but in Clorox) are still intensely involved in the poison pill arena.  Carl Icahn is one of the original "corporate raiders" of the 1980s, although he has burnished his image somewhat to the effect that he intends to improve the companies he acquires through hostile takeover bids (and indeed, that the takeover bid itself shocks management back onto the right track) rather than "looting" them.

(ag) Aug. 4, 2011, in Corporate Governance 

 

U.S. Court of Appeals Unfavorable Decision for Dodd-Frank Rulemaking

The U.S. Court of Appeals for the D.C. Circuit overturned SEC regulations promulgated under Dodd-Frank based on the SEC's failure to conduct an adequate cost-benefit analysis.  Although other agencies charged with promulgating Dodd-Frank regulations lack the same cost-benefit standard, all future Dodd-Frank regulations are at risk.  At a minimum, this will delay regulations as agencies try to beef up cost benefit analyses.

At issue is a rule adopted pursuant to Exchange Act Rule 14a-11, requiring public companies to provide shareholders with information about, and their ability to vote for, shareholder-nominated candidates for the board of directors. Petitioners argued that the SEC promulgated the rule in violation of the Administrative Procedure Act, 5 U.S.C. § 551 et seq.  The SEC is required by Section 3(f) of the Exchange Act and Section 2(c) of the Investment Company Act of 1940 to consider a rule’s effect upon efficiency, competition, and capital formation.

The SEC's options are:

• Seek a panel rehearing;
• Appeal to the Supreme Court;
• Accept the decision and do nothing; or
• Start over with the entire rulemaking process for this regulation.  

Link to opinion Business Roundtable and U.S. Chamber of Commerce v. SEC (Decided July 22, 2011):  http://online.wsj.com/public/resources/documents/ProxyAccessDecision07222011.pdf

 (ag) Aug. 3, 2011, in Securities Law, Dodd-Frank; Corporate Governance

The Poison Pill Is Alive and Well

Reports are that  the board of directors for women’s clothing retailer Talbots adopted a shareholder rights plan, or a poison pill, a day after a private equity firm disclosed that it had acquired a big stake in Talbots.

 Link to article:  http://dealbook.nytimes.com/2011/08/02/talbots-adopts-poison-pill/?src=dlbksb

(ag) Aug. 2, 2011, in Corporate Governance

 

SEC's Revolving Door: "You Need to Set a Thief to Catch a Thief"?

Quoting FDR's explanation for naming Joseph P. Kennedy the first head of the SEC ("You need to set a thief to catch a thief"), Columbia Law School professor John C. Coffee Jr. says this may explain why the SEC hires out of the ranks of Wall Street firms that contributed to the financial crisis. 

As the New York Times Deal Book points out, this practice creates embarrassing conflicts of interest that may impede SEC enforcement actions.

Link to article:  "Revolving Door at S.E.C. is Hurdle to Crisis Cleanup" by Andrew Ross Sorkin:  http://dealbook.nytimes.com/2011/08/01/revolving-door-at-s-e-c-is-hurdle-to-crisis-cleanup/

(ag) Aug. 2, 2011, in Enforcement, Financial Regulatory Reform, Securities Law

Corporate Governance Issues: State Law Competition

Here's an article I'm currently thinking through.  I heard the author, Robert Ahdieh, talk about his theory that debate over whether state corporate law is a race to the bottom or a race to the top is misplaced.  The better way to look at the competition among states in the corporate law arena, he suggests, is that the states compete for efficiency, not on the substance of corporate law. 

Managerial competition is what "advances the project that has motivated corporate law since Adolf Berle and Gardiner Means - effective regulation of the separation of ownership and control. State competition, by contrast, does not promote a race to either the top or the bottom in shareholder-managerial relations."

Link to "Trapped in a Metaphor:  The Limited Implications of Federalism for Corporate Governance":  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1537748

(ag) Aug. 1, 2011, in Corporate Governance

Dodd-Frank: Death by A Thousand Cuts

Wondering why Republicans no longer seek outright repeal of Dodd-Frank?  They think they can more effectively destroy it by cutting funds to agencies that would implement regulations, delaying the regulations themselves, or otherwise taking small steps to hamstring the legislation.

"Republicans would have to replace it with something, or risk being labeled as unconcerned about the causes of the financial crisis. Making minor changes to a law is much easier."

Link to article:  "From Full Repeal to Piecemeal:  Why GOP Changed Tack on Dodd-Frank" by Kevin Wack:  http://www.bankinvestmentconsultant.com/news/dodd-frank-act-republicans-banking-industry-2674458-1.html

 (ag) Aug. 1, 2011, in Dodd-Frank

KPMG Says Banking Woes Will Continue

"There is no foreseeable end to the slump in financial sector mergers and acquisitions, according to a report by KPMG, as uncertainty over new regulation continues to dampen banks’ appetites for big deals."

Link to article:  "No Big Ticket Banking M&A In Sight" by Sebastian Walsh:  http://www.efinancialnews.com/story/2011-08-01/no-big-ticket-mergers-in-sight?mod=sectionheadlines-AM-IB

(ag) Aug. 1, 2011, in Economy