December 8, 2006
Shilling for Seton Hall Law Schhool by Dean Hobbs
The Dean of Seton Hall, Patrick E. Hobbs, has written a letter to the WSJ responding to Richard Epstein's op-ed of Nov. 28 in the same paper. Professor Epstein makes the point that the United States Attorney for New Jersey over stepped the bounds of his office when he forced Bristol-Meyers to endow a chair of ethics at his alma mater, Seton Hall Law School, as a condition to granting a deferred prosecution agreement settlement to criminal charges. The Dean of Seton Hall rose to the bait and used the opportunity to tout the Seton Hall program. His bragging on ethics education, no less, did not deal with the ethical problem of his school's accepting a chair ( i.e., aiding and abetting an ethic breach) from a company that had been coerced by a federal prosecutor to give it. This is a highly controversial practice. Prosecutors should not use their office to fund their alma mater. Indeed, one can make a good argument that prosecutors should not use their office to fund any chartable institution this way. Analogies abound: We, for example, routinely condemn corporate insiders' use of gifts to the alma maters of outside directors as a way of compromising the outsiders' integrity (is it a bribe?). How is this different?? Has the company paid a version of a kickback to the prosecutor in the form of a gift to an alma mater?? It is, of course an ethical question, that the Dean ignores completely in his rush to hype his school's ability to teach -- well -ethics.
Nasdaq is raising its fees and tying in new services (market data distribution) to the fee increase. Customers are complaining about the increase and competitors in the data distribution business are complaining about "tying", an antitrust violation. The SEC will decide whether Nasdaq can raise its fees. Great. The agency has what is wants -- it has created a regulated utility type oversight function -- it has put itself in the cat bird seat of a state utility commission. We should not have allowed it. Competitive trading markets, not trading markets as regulated utilities, would have been a far preferrable system. The SEC has worked years to get into this position and it is almost there. To reverse the trend, the SEC should tell trading markets they can charge whatever they want within traditional antitrust rules. Customers who do not like the fees can trade elsewhere.
New York Times on Wages, Oops
Four weeks after the election, in which Democratics screamed about wage stagnation and New York Times featured multiple op-eds on the uneven distribution of wealth due to Bush administration practices, we get a front page New York Times news story noting that wages really are surging in relationship to prices. Oops. Does this paper have no shame?
Supreme Court May Fix an Old Error on Antitrust Law
The Supreme Court has agreed to hear and decide Credit Suisse First Boston v Billing, a Second Circuit opinion denying a motion to dismiss an antitrust case against the Wall Street underwriting industry based on share allocations in IPOs. The Wall Street Journal editorial page and Wall Street itself have whined about the holding, which I believe to be correct. Since the sixties, the Supreme Court has held that the SEC, enforcing the securities laws, and not the DOJ, enforcing the antitrust laws, has ultimate control over the competitive activities of Wall Street investment banks. The holding produced the unfortunate consequence of empowering the SEC to run the underwriting community like a public utility rather than a competitive industry. Industry wide rules (read anticompetitive rules) were fine as long as the SEC thought they were sound; the SEC tried to engineer a market (with the assent of the players) rather than let the market engineer itself (with rules against fraud as the boundary). The SEC has, as a consequence, chosen well with some rules and not so well with others (a classic government regulator). Exposing investment banks to robust antitrust regulation, which the SEC itself is loath to do, would have given us a far more vibrant and healthier trading market. In the end, however, the issue will not turn on policy, but on the obscure doctrine of "implied repeal." Did Congress, in passing the 33 and 34 securities acts, intend to pre-empt the older anti-trust legislation and cede anti-trust authority to the SEC??
SEC to Drop "Uptick" Rule
The SEC has announced that it will propose rules to repeal the "uptick" rule on short selling. The rule allows traditional short selling only after positive (or neutral) price moves. A pilot program, suspending the rule for some stocks, has been in place since 2005 and shown no ill effects on stock prices. The rules is a depression era hold-over (based more on fear than reason) and has always been ill-advised. Now if the SEC will also ferret out other short selling prohibitions, such as those that affect mutual funds, absolute trading strategies, if free of fraud, will once again be unregulated.
December 7, 2006
Not a Good Day
American business did not have a good day. Fannie Mae announced that it has to restate its financials, reducing earnings by a whopping $6.3 billion to correct for several years of cooking the books. Stockholder equity increased by $4.1 billion, however. It took Fannie Mae $1.5 billion in fees to over 3,000 consultants to figure out what its numbers should have been. Home Depot announced the results of an internal investigation that revealed it had routinely back dated options over a 19 year period and at all levels of the company. Employees were added or subtracted to the option plans without formal authorization. Compensation was understated by over $200 million. There was "no evidence of intentional wrongdoing by the company managers or its board," however. Huh? This is the company that also awarded unearned bonuses to its CEO, Robert Nardelli.
December 6, 2006
In re IPO Securities Litigation
A panel of the Second Circuit reversed a district court order granting class action status to one of the largest securities class actions in history, In re IPO Securities Litigation. The order affects six "focus cases" in the class action (that also includes 300 or so other consolidated actions ). In the class action plaintiffs accused Wall Street banks of manipulating the prices of IPOs in the late 90s. The suit was against 309 issuers and 55 underwriters and the plaintiff class had over 7 million members. The suit alleges, among other things, illegal allocations of hot shares, laddering (agreements to purchase in the after market), and misleading analyst recommendations. It is a whole-scale indictment of the nation's underwriting practices. The focus cases contained the core of the important allegations against the Wall Street underwriting community. The Second Circuit held that there were to many individual questions among class members to satisfy the commonality requirement for certifying a class. The Second Circuit decision is a major defeat for Milberg Weiss, a major victory for Wall Street, and will have a long term dampening effects on the ease of bringing large scale securities class action litigation (unless it is reversed en banc or by the Supreme Court -- both long shots).
Two recent studies on lawsuits in the United States provide detail for what we all know: We are a litigation happy nation.
The studies show that litigation in the United States continues to grow, with each year setting new records, and that no other country has costs even close to ours, even if normalized for population or GDP. There can be no doubt: Litigation, suing or getting sued, has become a defining characteristic of doing business in the United States.
One of the country’s most respected law firms, Fulbright & Jaworski, recently released a survey of 310 in-house counsel on their litigation costs (2006 Litigation Trends Survey). In-house counsel are lawyers employed by companies to manage their pending cases. A selection of their findings demonstrates the volume and scope of legal actions against companies in the United States.
For companies with sales of $1billion or more last year, a United States company faces an average of 556 pending lawsuits, with fifty fresh suits filed each year for over one-half the companies. Insurance companies report a average of 1,600 pending cases; energy company report 364 pending cases; retail companies 333, financial services companies 300, and manufacturers 206.
The size of the claims is staggering. The seven in ten of the billion dollar firms were defending at least one lawsuit claim more than $20 million last year and several companies noted that they were facing over 50 new lawsuits of $20 million each (for a total exposure of over $1billion).
On top of the pending cases, companies face multiple pending arbitration and regulatory proceedings. A number of companies reported more than fifty pending regulatory proceedings.
Legal fees in the survey averaged $12 million annually, with several companies spending over $35 million.
There were some surprises in the Fulbright & Jaworksi survey. The in house counsel listed employment litigation has their top litigation concern. As noted by Stephen Dillard, who presented the results of the survey, “the workplace has become a legal minefield over issues ranging from pay and promotion to harassment and discrimination, and claims of wrongful termination.” Contract disputes were second more cited, followed by Intellectual Property Disputes, personal injury filings, regulatory actions, products liability claims, toxic torts, securities actions and antitrust issues.
The securities and products liability class actions get most of the headlines but are not the top litigation concern of the in house counsel.
Similarly, the most recent survey (U.S. Tort Costs and Cross-Border Perspectives: 2005) by the Tillinghast business of Towers Perrin, a well-known financial consulting firm, found that payments in tort cases reached a record $260 billion in 2004 (its latest full year of data). This is $866 per person in the United States. Medical malpractice costs for 2004 totaled $28.7 billion and grew at over 11.7 percent since 1975, the highest growth rate for any of the torts over that period.
The growth of tort costs in the United States is unique among the world’s developed countries. Since 1950 tort payment costs, adjusted for inflation, grew at over nine times the rate of population growth in the United States. The costs are 2.2 percent of United States Gross Domestic Product (GDP) as compared with 1.1 percent in Germany, 0.8 percent in Japan, and 0.7 percent in the United Kingdom.
At issue, of course, is whether our system of private litigation, producing results that are dramatically different than those in any other developed country, is better or worse than the systems of other countries. Trial lawyers, who are not neutral observers, have long maintained that our system is superior, providing relief to those who deserve it. Business leaders, who are also not neutral observers, believe the system facilities the equivalent of economic extortion. The truth is probably somewhere in between.
All have to admit, however, that the newest numbers are staggering, both in their absolute amount and in their annual rates of growth. There seems to be no top or equilibrium to the litigation. This alone suggests that we need to think about taking more effective steps to contain the numbers.