September 20, 2008
Complexity and Disclosure Regulation
Posted by Jeff Lipshaw
The only upside for me, I suppose, of the financial turmoil this week is that I'm teaching securities regulation so there is something exciting and topical to discuss. Reading Joe Nocera in the New York Times this morning and thinking about a timely piece of scholarship just posted on SSRN, it occurs to me there is some insight into the regulation issue here, even though I have no clue how to translate it into something that works as a practical matter.
The introductory portion of securities regulation (at least in the Choi and Pritchard casebook) deals with the appropriate form of regulation in markets where information is highly asymmetric, and the feedback loops are relatively long. (The counter-example is buying and selling salt water taffy that tastes like cod liver oil - you may not have known it would be disgusting when you bought it, but it doesn't take long to figure out that something is amiss.) What we discuss at the outset is the difference between merit regulation and disclosure regulation; in short, the 1933 Act, by and large, does not regulate the substance and merit of the securities offering, but rests on the assumption that markets will work more efficiently if material information about the issuer is disclosed.
I have long been skeptical of rational and cognitive solutions for what seem to me to be irrational and non-cognitive problems. This was my criticism of a lawyerly proposal in which venture capitalists would be required to disclose risks to entrepreneurs - since they don't even see risk in the same way, how is this going to work? Nor am I convinced that the strong or even the weak efficient capital market hypothesis holds (in terms of all or some information being efficiently worked into share prices). It also why I'm skeptical of Elizabeth Warren's proposal for a Financial Product Safety Commission on consumer credit (at least as one that has only disclosure powers, and not merit powers). But there's little doubt in my mind that at some level of widely understood kinds of information, the disclosure system works pretty well. That is, if you look at the way analysts cover companies in industrial or service industries, it doesn't take too much extraordinary brainpower to replicate the financial models and do a pretty good job of anticipating who is going to succeed and who is going to fail. That's not to say that the ordinary retail investor understands, but the institutional buyers do, and that's what drives the market.
On Wednesday, a student asked, "so what will the regulatory solution be?" (Or something like that.) I hadn't thought it through at the time, but I was pretty sure we didn't want merit regulation (e.g., the current ban on short-sales), but I wasn't sure how disclosure regulation was going to help. Of course, disclosure regulation morphs into merit regulation when it becomes apparent from the disclosure that nobody should be investing in this scam!
What if you have companies issuing securities not in pretty well understood industrial or service businesses, but in businesses that require the equivalent of understanding quantum string theory or decoding the human genome? Yes, that's great, there's disclosure, but either nobody understands it, or so few people do that truly robust and efficient markets in the securities never arises. Here, as quoted by Joe Nocera, is Henry Paulson, on the mortgage-backed securities that facilitated irresponsible borrowing and lending: "The inability to determine their worth has fostered uncertainty about mortgage assets and even about the financial condition of the institutions that own them." In short, even the experts have insufficient information.
Steven Schwarcz (Duke) has posted a number of timely and insightful pieces on this, including a Utah Law Review article on the failure of disclosure regulation in the subprime crisis. Most recently, however, he suggests in Complexity as a Catalyst of Market Failure: A Law and Engineering Inquiry that there is really a double-barreled effect here: the securities themselves are too complex to understand, and the system itself under which the securities are traded, or the contracts are signed is complex and fragile in an engineering sense.
I suggested to Steve that the thesis seems intuitively correct. Most deal lawyers know that the more complex the deal, the more difficult to get it to close. Moreover, I have experience in putting together several highly complex joint ventures between large and sophisticated multi-national companies. When you cannot reduce the structure of the business to something even the executives can understand, they will figure out something they do understand, and work to that goal, whether or not it was the one originally intended. For example, assume that for tax and public reporting purposes (i.e., what you consolidate and what you don't), you structure a joint venture reciprocally so that the European parent owns two-thirds of the equity of the joint venture entities in Europe and the U.S. parent owns two-thirds of the equity of the joint venture entities in North America. But the real opportunities are in Asia. Do the participants in the venture focus on the most efficient plan to exploit the Asian market for the overall benefit of the venture? Or do they look at the 33% spread between gaining the business in one JV entity over the other, and compete with themselves rather than for the ultimate success of the business? (I'm not making this up.)
My point is that even relatively simple business structures can promote unintended consequences because people either don't understand the dynamics, ignore them, or talk themselves into believing that they are manageable. Multiply this by an entire industry of credit instruments, and you have a market full of unintended consequences in which millions of people trade, presumably relying on efficient capital markets to protect them, when in fact there can't be an efficient capital market because too few people actually understand what's going on.
I have no idea how to draw the line I've just suggested. I have shelves full of closing books with relatively complex leveraged buyout financing or conduit municipal bond financing that most people don't understand, but which do not pose much of a threat to the financial system as we know it. The deal struck between AIG and the Fed doesn't seem all that complex to me, but that hasn't stopped much of the relatively sophisticated world from thinking that the Fed now owns 80% of AIG. I don't understand the complexities of wheeling electrical power, or how the telecommunication system allows me to be posting this note, or even how the guts of my computer do what they do. And I'm no worse off. It strikes me, however, that the problem is that those "masters of the universe" punching the computer keyboard of the financial system think they understand what's going on inside, and they don't.
September 19, 2008
Does This Make Mike Frisch The Best Person In The World?
Posted by Alan Childress
Hardly, but at least he is not Keith Olbermann's "Worst Person In The World" today. That honor falls to the Illinois lawyer (Scott Robert Erwin) whom Mike first called out on this blog in his March post, Fees For Striptease Arrangement Reprehensible. It turns out that reducing legal fees by demanding in-office lap dancing from a client is . . . unethical. Who knew. A reader, Wick Chambers, nicely summarized Erwin's conduct, in comments: "Hard to believe and gross." The story was eventually picked up by the Chicago Tribune and then the WSJ Law Blog. But Mike made it (indirectly) to msnbc? That may be his 15 minutes of fame. Disclaimer: Mike is not responsible (even indirectly) for Keith's leering "pro bono" joke.
I thought Mike and our readers should know. I also like the fact that if you google Mike Frisch lap dancing, now something immediately comes up. Plus a place to query Learn more about Mike Frisch lap dancing. And maybe a link to Amazon where you can Buy books on Mike Frisch lap dancing.
Anders on Making Lawyers More Organized and Efficient
Posted by Alan Childress
Kelly Lynn Anders, an associate dean at Washburn's law school, has published with Carolina Academic Press a practical book on keeping lawyers on top of things, called The Organized Lawyer. Here is a brochure and ordering information: Download anders20flier.pdf. (We previously noted her view of the series John Adams at this post.) Also, you can reach her at firstname.lastname@example.org. Her table of contents is:
2. Your Organization Type
3. Office Layouts
4. Desk Arrangements
5. Paper and Electronic Files
6. Financial Recordkeeping
7. Planners and Electronic Organizers
8. Organizing Your Home Office
9. Alternative Work Areas
10. Home and Office Libraries
11. Personal Services
13. Your Professional Wardrobe
14. Keeping on Track
An attorney who had facilitated the unauthorized`practice of a disbarred lawyer and made a misrepresentation was disbarred by the New York Appellate Division for the Second judicial Department, notwithstanding evidence in mitigation of sanction:
The respondent asks the Court to consider his remorse and contrition for the mistakes he admittedly made and "for issues that should have been handled differently and more appropriately." In addition, the respondent has presented numerous character letters from professional colleagues and long-time associates attesting to his competence and integrity, as well as one from his wife detailing the respondent's charitable and trusting nature, her own distrust of Pugach[the disbarred lawyer], and the hardships which the family would endure if he were to lose his license to practice law.
Notwithstanding the mitigation advanced and the character evidence submitted, the record reveals that the respondent afforded so little regard to his law license as to allow a disbarred felon to use his name freely on court papers and to advertise himself as his paralegal. In addition, the respondent knowingly made a misrepresentation to this Court during the course of oral argument. Under the circumstances, the respondent is disbarred. We note that the letter dated April 7, 2008, submitted to the Court by Pugach, which has elicited objections from both the Grievance Committee and the respondent, has not been considered in this proceeding.
The misrepresentation to the court was a statement that the representation was`pro bono when the attorney had been paid $1,000. (Mike Frisch)
Go Ahead, Make My Day
The Illinois ARDC has filed a complaint alleging ethical misconduct by the elected State's Attorney for Union County. The accused was named as a defendant in a civil action instituted by a former employee alleging wrongful termination. According to the complaint, he refused service of process at his office, advised his wife to assist him in avoiding service at home, called`the fire department to chase off the process server and, when approached in the parking lot to his office:
Dees [the process server] arrived at the courthouse a few minutes later and saw Respondent drive up, park his car in the courthouse parking lot, and emerge from his vehicle. Dees approached Respondent in the courthouse parking lot after he emerged from his vehicle. Dees identified himself, displayed his badge, told Respondent that he was a process server, and called Respondent by name. At this point, Respondent pulled a .380 semi-automatic handgun from his pocket and pointed it at Dees. The gun magazine was loaded.
As Respondent pointed the handgun at Dees, Dees identified himself once again as the man who had been at his office the day before. Respondent continued to point the gun at Dees, and Dees tossed the summons and complaint at Respondent’s feet and left.
At the time that Dees identified himself, displayed his badge, informed Respondent that he was a process server, and called Respondent by name, Respondent knew that Dees was a process server who was trying to serve him with a complaint in Case No. 3:07-cv-00618.
Respondent was not authorized by state or federal law to carry a concealed weapon.
I wonder if the bar authorities had any difficulty serving the complaint. (Mike Frisch)
A Firm Resolve
The Mississippi Supreme Court denied the petition for reinstatement of a lawyer who had lost his license as a result of a conviction for paying a sheriff's deputy to not appear in court in connection with drunk driving charges against his clients. The court noted a number of charitable activities in the wake of Hurricane Katrina (his wife owns a Holiday Inn in Gulfport) but questioned`the extent to which the charity was attributable to the petitioner. The court concluded that there was insufficient evidence of "a firm resolve to live a correct life." A dissent would grant the petition, noting that readmission had been granted on similar showings in cases involving equally serious misconduct and contending that it was unfair to consider the application of a rule change adopted after the order of disbarment that would make the petitioner ineligible for reinstatement. (Mike Frisch)
Wave Of The Future
The Mississippi Supreme Court has`amended its mandatory CLE rules to allow participation in online and telephonic courses to satisfy the annual obligations. (Mike Frisch)
September 18, 2008
Gambling, Not Mental Issues, Caused Misappropriation
The Massachusetts Supreme Judicial Court rejected the contention that an indefinite suspension was unduly harsh in a disciplinary matter involving misappropriation of client funds. The claim of mitigating evidence did not justify a lesser sanction:
While there may be circumstances where medical, psychological, or other mitigating factors will warrant a reduction from the presumptive sanction, this is not such a case. The record supports the special hearing officer's findings, adopted by the board, that the respondent's long-standing financial problems, exacerbated by gambling large sums of money over a substantial period of time, rather than a medical or psychological disability, caused the misappropriation of client funds. See Matter of Johnson, 444 Mass. 1002, 1004 (2005) (while personal and financial difficulties surely caused respondent anguish, professional difficulties and financial reversals began years before misconduct and could not "excuse or explain abdication of professional responsibilities"). In particular, the special hearing officer declined to credit testimony that the respondent suffered from a "fugue" or dissociative state during the period of misappropriation. This is consistent with the special hearing officer's finding, among other things, that the respondent was "less than candid with her therapist concerning her serial and systematic misuse of clients' funds for personal uses," and that her professional activities during that period belied a " 'fugue' state." The special hearing officer's observation is well taken that "methodical and systematic" misuse of funds for personal purposes is inconsistent with any conclusion that the respondent was operating under a cognitive disability.
The case is`Matter of Johnson, decided today. (Mike Frisch)
Former State Senator Reinstated
A former state senator who had served as majority or minority leader of the state senate was reinstated to practice by the Wisconsin Supreme Court. He had been suspended for two years as a result of a felony conviction for misconduct in office and being party to campaign contributions in excess of the legal limits. The court concluded:
We note that Attorney Chvala had practiced law for more than 20 years without ever having been subject to professional discipline prior to his current suspension. In addition, although Attorney Chvala's professional misconduct arose in the course of his work as a state senator and was a serious breach of the public trust, it did not directly relate to his work as a practicing lawyer representing clients. Based on the referee's findings of fact, we have no reason to believe that Attorney Chvala will not comport himself in accordance with his professional obligations as an attorney, and we therefore grant Attorney Chvala's petition for reinstatement.
I have no idea whether reinstatement is appropriate here. I do not think that criminal conduct is any less serious if committed while in public office as opposed to in connection with the practice of law. (Mike Frisch)
"Flagrant Disregard Of The Law"
The Ohio supreme Court publicly reprimanded a former judge for conduct described on the court's web page as follows:
The Supreme Court of Ohio today publicly reprimanded former Xenia Municipal Court Judge Susan L. Goldie for violating the Code of Judicial Conduct by imposing sanctions including jail sentences against defendants in cases before her court without affording those defendants due process “in flagrant disregard of the law.”
The Court adopted findings by the Board of Commissioners on Grievances & Discipline that Goldie, who left judicial office in December 2007, exceeded her authority and denied the defendants due process in three cases involving offenders who had failed to pay fines or to comply with court orders imposed in previous appearances before her court. In one case Goldie imposed nine consecutive jail terms totaling 270 days for contempt of court on a defendant without conducting a required hearing to determine whether the defendant was financially able to pay overdue fines and court costs from prior traffic and criminal convictions.
The court's decision is linked here. (Mike Frisch)
Ethics Charges In Political Hiring
The Illinois ARDC has filed a second complaint (we reported the charges against another lawyer last week) alleging that improper political considerations were used in hiring for public positions. The complaint alleges:
Starting in 1995, continuing through 2004, prior to hiring or promoting to fill positions in her department, Respondent met with representatives of the Office of Intergovernmental Affairs ("IGA"), a division within the Office of the Mayor of the City of Chicago, in order to receive a list of names. Respondent knew that those named on the list were individuals who were expected to be interviewed and hired for certain positions within her department because of their political involvement, affiliation or work on certain political campaigns.
After receiving the list from IGA, Respondent granted interviews to the individuals on the list.
Prior to the interviews, Respondent notified the department hiring panels of the names on the IGA list, and she communicated to the hiring panels that those who were named on the IGA list were expected to get the job, so they should adjust their interview score sheets accordingly.
Following the hiring panel scoring process, Respondent reviewed the ratings of each candidate and sometimes changed a score, or generated a new ratings sheet and discarded the old one, in order to ensure that an individual on the IGA list would obtain the position over other applicants.
Do these charges provide a roadmap for possible disciplinary charges against Michael Elston and Monica Goodling? One element missing in the DOJ hirings that is present here is an injunction forbidding the use of political considerations. (Mike Frisch)
More on Debt-Equity, Transparency, Line-Drawing, and the Forest and the Trees
Posted by Jeff Lipshaw
I posted the gist of this as a comment over at Conglomerate, but I want to add a point about what seems to me to be a common over-reaction. One theme seems to be that perhaps the Fed is playing fast and loose with interpretations of its own authority. Perhaps. It doesn't seem that way to me, but there's no precedent here. It seems to me, however, an over-reaction to confuse close reading of text with attempts to finagle, fool, deceive. There's a line to be drawn, and that's the point here.
To recap: did the Fed have the authority to take "equity warrants" as a way of getting additional security for or return on its loan? [I still don't know what the trigger is on the warrants, and don't know if they expire merely because the debt is repaid, as some commenters have suggested. In my description of credit facilities in the prior post, the warrants would not expire merely because the debt was repaid. If they do expire upon repayment, they are still not "collateral," but a device that serves as an economically equivalent substitute, because to post collateral you have to have rights in it (e.g. own it!), and AIG doesn't have rights in (i.e. own!) its own stock.] Debt versus equity is a line that has existed in the law forever, as are well-accepted forms of financing, like sale-leasebacks, in which the economic substance is very, very similar to ownership plus loan. Reporting and transparency is another issue, but I don't think that's the critical one here. Another example is the law under Articles 9 and 2A of the UCC that attempt to distinguish a true lease from the mere granting of a security interest.
The inherent issue in any system that classifies by way of language is the (I apologize, but here it goes) linguistic "family resemblance" problem (see Wittgenstein). That is, debt and equity resemble each other in some ways, and one can, without any malevolence, work the edges. That's not to excuse attempts to make things opaque or stupidity, but it's what lawyers have always done. It's why good counselors tell their clients who are working the trees to make sure they step back and look at the forest.
One of the things I come back in many of my classes is the linguistic conundrum of definitions. Again, use the Howey test in securities law - is it really the definition we are applying ("a person invests his money....") or are we using a paradigm of stock versus not-stock and analogizing things in the middle? See John Searle's introduction to Speech Acts on this point - to criticize a definition or a distinction means that you have some a priori idea of what the difference is by which you can criticize the definition!
The AIG Deal and Debt Versus Equity
Posted by Jeff Lipshaw
My claim to fame is ego not hubris (there's a subtle difference), so I'm not going to sit here in the middle of the upheaval and claim to know that it is the end of free markets as we knew them or that the invisible hand will get everything settled just fine. It was, however, kind of neat to go off-topic in two business law classes yesterday and, as Usha Rodrigues observes, be cool (a rare event in my life!). I'm also not panicking. The one thing I told both classes was to look with some skepticism at anybody on Today, Good Morning America, The Situation Room, or Larry King Live who assesses the situation without a preface to the effect that this is all very, very complex and not really capable of being reduced to a sound bite. People are, as far as I can tell, getting it wrong. On the other hand, I tried to find the actual AIG-Fed deal documents yesterday, and could not, so I too am speculating.
I've been e-mailing back and forth with David Zaring, however, about his post analyzing the Fed's authority to do this deal in this form. The loose interpretation of the events is that the Fed "bought" AIG, or "took control" of AIG. If you frame the issue that way, it does indeed seem difficult to fit this within Section 13(3) of the Federal Reserve Act:
In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System . . . may authorize any Federal reserve bank . . . to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank. . . . All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.
I moved from litigation to transactional work in the late '80s, and made my bones doing leveraged "vulture capital" deals. Our clients would swoop in and buy up troubled companies (mostly automotive suppliers). The financing consisted of "credit facilities" (the closing books are sitting on my shelves here) we used to negotiate with GE Capital and Westinghouse Capital in those halcyon days of being able to own companies with very little of your own skin in the game (i.e. lots of leverage!). The credit facility would consist of a term loan and preferred stock to buy the company, a revolving credit line for working capital, and warrants as the "equity kicker."
We need to zero in on these warrants, because as I read the press reports (not having seen the documents), the so-called "80% ownership" the Fed got was in the form of "equity participation warrants." This isn't collateral in the sense of an asset owned by AIG and capable of being foreclosed on if there is a default on the loan. (In contrast, what IS collateral is, for example, the shares in National Union Fire Insurance, which writes a huge chunk of the D&O coverage in the U.S. and I believe is nicely profitable.) Warrants are options to buy the stock - a contract right to own in the future, not present ownership.
The reason that lenders like GE Capital took warrants is that they didn't want to own equity (other than the preferred stock). What they wanted to do was exercise the warrants when the leveraged company got sold or went public (known in the parlance as "flipping" the company). The warrants served the purpose of making the potential return on the credit facility commensurate with the risk. What I'm suggesting, if in fact I'm correct about the structure, is that warrants as part of a loan package were ephemeral ownership at best.
Since nobody is going to "flip" AIG, it's less clear to me how the warrants produce value. Let's assume that AIG survives and even thrives. At some point, the government exercises the warrants and there is a humungous public offering of now extremely valuable AIG stock, and the Fed gets a return commensurate with having loaned $85 billion. Or the government sells the warrants and never owns any of AIG even for a fleeting moment.
The rest of the "control" of AIG occurs, I'm assuming, in the positive and negative covenants of the loan agreement. I had the good fortune of teaching the classic partnership case of Martin v. Peyton yesterday, in which the issue is whether the lenders are partners of the borrowers when part of the pay-back involves a profit-sharing plan, and the lenders have significant "control" rights (such as veto power on transactions, etc.) The holding of the case is that, notwithstanding all of the conditions, this is still fundamentally debt and not equity - that is, the lenders are not co-owners of the borrower. David thinks that the Fed's directive to change out the AIG CEO is evidence of "control;" it just doesn't strike me that way. It's the classic case of good lawyers being able to write affirmative covenants as negative covenants - we aren't telling you who to hire, we're just holding a veto over who you do hire, and we veto the incumbent.
So while the transaction may be unprecedented, the Fed doesn't own, and almost certainly never will own AIG. And, by the way, there is precedent for the government swooping in and owning a private enterprise. Way back when I was in law school at Stanford, Victor Palmieri offered a course (I didn't take it) called Crisis Management, the subject of which was the failure of the Penn Central railroad, and the creation of Conrail. Now it's true Congress authorized the creation of Conrail, and it was a private corporation all of whose stock was owned by the United States. But if the government really wants to own AIG (I seriously doubt it!), there's time. As I recall, when Citicorp agreed to acquire Travelers Insurance, which included Salomon Smith Barney, there was this little impediment called Glass-Steagall that had to get amended or repealed before the deal could close.
The bottom line: in complex financing, you reach a very fine line between debt and equity. Nobody can claim to have it absolutely right. But in my world, the equity kicker just sounds like part of the credit package, not "ownership." Accordingly, it didn't seem such a stretch to think it fell within "such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe."
September 17, 2008
Wisdom about Wisdom
Posted by Jeff Lipshaw
I was hoping a moderate conservative would say this, and David Brooks of the New York Times did. It's what was flashing through my mind as I imagined Secretary Paulson and Chairman Bernanke yesterday explaining a credit swap first to President Bush. I then flashed forward to the same conversation with President Palin. Here's an excerpt:
In the current Weekly Standard, Steven Hayward argues that the nation’s founders wanted uncertified citizens to hold the highest offices in the land. They did not believe in a separate class of professional executives. They wanted rough and rooted people like Palin.
I would have more sympathy for this view if I hadn’t just lived through the last eight years. For if the Bush administration was anything, it was the anti-establishment attitude put into executive practice.
And the problem with this attitude is that, especially in his first term, it made Bush inept at governance. It turns out that governance, the creation and execution of policy, is hard. It requires acquired skills. Most of all, it requires prudence.
What is prudence? It is the ability to grasp the unique pattern of a specific situation. It is the ability to absorb the vast flow of information and still discern the essential current of events — the things that go together and the things that will never go together. It is the ability to engage in complex deliberations and feel which arguments have the most weight.
How is prudence acquired? Through experience.
* * *
Sarah Palin has many virtues. If you wanted someone to destroy a corrupt establishment, she’d be your woman. But the constructive act of governance is another matter. She has not been engaged in national issues, does not have a repertoire of historic patterns and, like President Bush, she seems to compensate for her lack of experience with brashness and excessive decisiveness.
ABA Section on Family Law Holds Conference Early October in Arizona
Posted by Alan Childress
2008 Fall CLE Conference
October 2-5, 2008, Camelback Inn—Scottsdale, AZ
"Come for the CLE, stay for the sun, spa, and golf! Your whole family will enjoy the Southwest and all the amenities the Camelback Inn resort offers! Create great memories on the green, the hiking trails, the tennis and basketball courts, or just relaxing by the pool(s)." Link is here. The CLE component, Oct. 3-4, includes ethics hours, ADR, reproductive technologies, pensions, and trial tips. Ethics topics include conflicts of interest and related issues, and this intriguing session:
Lawyers in LaLa Land: Images of Legal Ethics & Professionalism in the Movies
Program Producers: Lori Nelson, Salt Lake City, UT, and Jonathan Wolfe, Livingston, NJ
"This fast-paced program will discuss legal ethics, professionalism and trial practice techniques using examples from your favorite legal movies. The information is current, relevant, practical and fun. This is a presentation that can’t be missed."
Moderator: Lori Nelson, and Speaker: Andrew Schultz, Albuquerque, NM
I Have Won The El Gordo Lottery Sweepstake
Posted by Alan Childress
Such a good day for me. First, my habitual wearing of baggy and underwear-revealing pant ensembles is held to be constitutionally protected. The fashion trend is, of course, called layering. Sort of an odd moment in the last decade to suddenly locate a copy of the Constitution, but hey I will take it.
Then I am told (by the email) that I won several euros, which equals a plethora of dollars, from the poorly named but generous EL GORDO SPANISH SWEEPSTAKE LOTTERY COMPANY S. A. Is someone saying I "won the el gordo lottery" just a polite euphemism for telling me I am fat, or is this for real? I remember times when I was rejected by law firms even though I never applied to them -- so winning this may be like that, in reverse. On the off-chance it is for real, I plan to storm into the dean's office today and quit. Time to put on my best MC Hammer outfit, with layers, for that showdown. Although I like my job, I am not one of those lottery winners--often with really bad jobs--who immediately announce they would not quit their job. Then why were you playing the lottery, idiot?
In other good news, I solved the mystery of those awful push polls conducted against John McCain in South Carolina during the 2000 primaries: it turns out that phone listeners were really just asked about McCain as the father of the blackberry. Now it makes sense and was not so surreal. Though one senator yesterday rightly noted that, if McCain had indeed invented the BlackBerry, that'd be reason enough to grade him down. I personally oppose all BlackBerry users--they click it right in front of you at meetings while you are talking, as if it is a TV remote control and you are getting muted, or your channel changed. Right after quitting my job, I would like to tell off the inventor of that device, as well as the Bluetooth guy that makes me unable to tell anymore who is (1) talking to me, (2) talking to their stockbroker, or (3) just schizophrenic. I used to take comfort in making such conversational distinctions. Now I feel stupid when I catch myself answering someone who was not asking me a question or greeting me, even though they were looking right at me when they said it. I wonder if they are thinking I am El Gordo. I prefer to be called El Guapo.
No Safe Haven
The Ohio Supreme Court suspended an attorney for two years with one year stayed on conditions for misconduct that included using his trust account for improper purposes. After his divorce, he incurred "financial obligations that he was unable to fulfill, leading to judgments against him...his business and personal bank accounts were garnished, so he closed them and began depositing personal funds into his IOLTA account to shield them from creditors." The court held that "a lawyer may not use his IOLTA account, which is a tool established for the benefit of the profession, as a 'safe haven' for his money to avoid his personal financial responsibilities." The actions are dishonest and prejudicial to the administration of justice. (Mike Frisch)
Not An Arm's Length Transaction
The New York Appellate Division for the First Judicial Department vacated a grant of partial summary judgment in a legal malpractice action predicated on an alleged conflict of interest. Plaintiff provides trustee and fiduciary liability (TLF) insurance. Defendants had represented plaintiffs for 13 years under a written retainer that contained an nonexclusive representation clause. Defendant then undertook reprsentation of an entity (Legion) that was set up to offer TLF throughout the country. Plaintiff discharged Defendant when it learned of its role in setting up Legion as a competitor and sued on theories of legal malpractice and breach of fiduciary duty.
The court concluded that the nonexclusive language in the retainer did not preclude the suit:
However the various claims asserted by plaintiff are denominated in the complaint, all arise from defendant's failure to adhere to its duty to accord undivided loyalty to its client. It is no defense to defendant's alleged violation of its professional duty that it reserved the right to accept "other employment of a similar or other legal character" during its representation of plaintiff. It is axiomatic that the relationship of attorney and client is fiduciary: "The attorney's obligations, therefore, transcend those prevailing in the commercial market place" and a firm may not circumscribe its professional obligations by purporting to transform the attorney-client relationship into an arm's length commercial affiliation. Thus, a law firm may not evade its professional responsibilities to a client by the expedient of inserting contractual limitations on the firm's ethical duties into the retainer agreement
Because the attorney-client relationship is both contractual and inherently fiduciary, a complaint seeking damages alleged to have been sustained by a plaintiff in the course of such a relationship will often advance one or more causes of action based upon the attorney's breach of some contractual or fiduciary duty owed to the client. The courts normally treat the action as one for legal malpractice only. (citations omitted).
The court further held that the fiduciary breach claim is governed by the same standard of recovery as the legal malpractice claim. (Mike Frisch)
September 16, 2008
In a bar discipline case in which the Bar Association had recommended public censure, the Oklahoma Supreme Court disbarred a judge of the Court of Criminal Appeals who had engaged in misconduct after learning that he had a previously unknown son who was in trouble with the law. As the court found:
At some time before the acts alleged in the Complaint, the respondent experienced marital problems. During that time he renewed his relationship with Dawn Lukasic. She told him they had a son named Loren W., about whom the respondent had no previous knowledge. The young man had fourteen felony charges pending in Grady, Comanche and Stephens Counties. These felony charges included two counts involving drugs, numerous burglary counts, and two counts of concealing stolen property. The respondent retained three attorneys to represent his son, and he took an active role in his son's criminal cases through multiple communications with defense counsel and various Department of Corrections employees. From June 24, 2004, to October 29, 2004, he traveled to the facilities where his son was incarcerated, almost on a weekly basis, at the taxpayer's expense. The real purpose of the trips was to either visit his incarcerated son or to take care of legal and other issues involved in his son's incarceration. On some of the trips he was accompanied by Dawn Lukasic. He filed travel claims seeking reimbursement for these personal trips, claiming he attended project conferences, projects, or meetings of the Regimented Inmate Discipline (RID) Program offered by the Department of Corrections. But there were no RID project conferences, projects, or meetings on the dates for which he filed travel claims. These travel claims were signed by the respondent under oath and under penalty of perjury.
He also contacted one of the three judges who would sentence his son and pressured another judge, repeatedly contacted the defense lawyers, criticized the probation officer in a letter on his court stationary, hired Ms. Lukasic as his administrative assistant and intervened when she was charged with drug possession.
The court concluded that disbarment was the proper sanction:
Notwithstanding the cooperation of the respondent with the Bar Association in its investigation and prosecution of this matter; the fact that the respondent voluntarily repaid the amounts improperly claimed; the respondent's many years with no previous disciplinary record; the domestic stresses of divorce, single-parenthood, and discovery of the fact that he had an adult son charged with multiple felonies; and the high recommendations from testifying lawyers of his current fitness in his practice of law, we find mitigation of discipline unwarranted. In view of the seriousness of the respondent's misconduct while serving in his position as a judge on the Oklahoma Court of Criminal Appeals, we reject the Bar Association's and Professional Responsibility Tribunal's recommendations and find, under these facts, that the respondent should be disbarred from the practice of law and assessed the costs of these proceedings in the amount of $892.53.
The Professional Responsibility Tribunal had recommended a suspension of two years and a day. NewOK.com reports that the former judge represented Ms. Lucasic in connection with drug charges and that they were married after her release from prison.(Mike Frisch)
No Good Deed Goes Unpunished
Once and awhile, I see a bar discipline matter that simply does not merit the imposition of a professional sanction (loyal readers may find this statement hard to believe). A case in point comes from Illinois, where I rarely have occasion to question the fine judgment of the ARDC attorneys.
The lawyer represented the client in marriage dissolution matter. The client was held in contempt for failure to pay his spouse pursuant to a court order. The lawyer held fees from the representation in escrow, paid the spouse from the fees, and was promptly reimbursed by his client. A stipulated reprimand was approved by a hearing board for "advancing or guaranteeing financial assistance to a client while representing the client in pending litigation, in violation of Rule 1.8(d) of the Illinois Rules of Professional Conduct..."
Was this prosecution necessary? (Mike Frisch)