Legal Profession Blog

Vanity Fair on the Collapse of Bear Stearns

In the July 3 Vanity Fair, Bryan Burrough investigated the collapse in-depth from Wall Street sources -- and questioned whether it died of its own weight:

The fall of Bear Stearns wasn’t just another financial collapse. There has never been anything on Wall Street to compare to it: a “run” on a major investment bank, caused in large part not by a criminal indictment or some mammoth quarterly loss but by rumor and innuendo that, as best one can tell, had little basis in fact. Bear had endured more than its share of self-inflicted wounds in the previous year, but there was no reason it had to die that week in March.

What happened? Was it death by natural causes, or was it, as some suspect, murder? More than a few veteran Wall Streeters believe an investigation by the Securities and Exchange Commission will uncover evidence that Bear was the victim of a gigantic “bear raid”—that is, a malicious attack brought by so-called short-sellers, the vultures of Wall Street, who make bets that a firm’s stock will go down.

Part of the blame may go to bloggers.  We live in a different age now, and bloggers and viral videos can change the world fundamentally from sunrise to sunset.  (Just ask Hillary and Barack.) 

Blogreaction to the VF article is, inter alia, here and here.  Also, the "deep capture" website was a bit ahead of the story, cites it, but questions the specific patient zero, Ken Griffin, named by VF.  Says dc's Mark Mitchell, "It will be up to the SEC and DOJ to identify the true culprits, but perhaps they could start by interviewing the hedge fund managers who were short Bear Stearns."  Quite critical blogreaction is also here and here.

Jeff and others will recall that Bryan Burrough coauthored one of the most fascinating books on Wall Street and RJR, Barbarians at the Gate (also a hilarious HBO movie worth renting, with screenplay by Larry Gelbart of M*A*S*H and Tootsie fame). 

[Alan Childress]

California Malpractice Disclosure Rule Moves Forward

The California Bar Journal reports that the State Bar's Board of Governors has "finally" approved a malpractice insurance disclosure rule. The web summary notes;

By a vote of 16-4, the board accepted a compromise rule of professional conduct that a lawyer who does not carry professional liability insurance must disclose that to a client (a) in writing, (b) at the time of engagement and (c) if the representation exceeds four hours.

The recommendation now goes to the California Supreme Court for approval.

“This proposal should not be troubling to the board,” said bar President Jeff Bleich, adding that the “parade of horribles” suggested by opponents to disclosure has not happened in any state with more aggressive policies.

But John Peterson, a governor from Fresno who favors both a disclosure requirement and posting a lawyer’s insurance status on the bar’s Web site, described the proposed rule as “an unnecessary irritant to the attorney-client relationship.”

And to board members who described the compromise as a half loaf that was better than nothing, he retorted that a “moldy half loaf” was not acceptable.

(Mike Frisch)

Elefant Analogizes Some Law Billing Practices To Airlines Charging For Your Second Bag

Posted by Alan Childress

Carolyn Elefant at MyShingle is asking whether certain billing practices make lawyers look, to their clients, like airlines are looking now when they announce new charges for certain practices like checking your second piece of luggage or using unfavored ticketing methods.  Her post is entitled Real Life Marketing Lesson:  Are You Charging Clients Like American Airlines?  It is not so much focused on the ethics of this -- she is not denying one may have spent some time doing the things she talks about -- as on the client relations aspect.  Look for good comments on how to show the clients you respected them this way (by soloist Susan Carter Liebel), and Ed Poll's accepting her baggage analogy but wondering whether it is really just understandable "unbundling" by the airlines.

All I know is that the classic "unintended consequences of social action" in this case meant that I shoehorned my second bag into the USAir overhead bin last Friday and held everyone up for three minutes because I was not going to pay that $25. Sorry.  I suspect many other customers did and will do the same.  So is it really better for the airlines and passengers if normally-checked bags now get moved to the overheads?  Do we not have overhead-bin-overcrowding already?  Can you possibly force a bag into that hole without thinking of Ben Stiller arguing with the flight attendant with chopsticks in her hair in Meet The Parents? 

Taking the cue from Carolyn here, I suspect that the new policies will not, long run, mean extra revenue to airlines but rather longer load times, more disagreements over acceptable carry-on, and increased frustration all around.  If that does not lead to extra revenues and especially profits, what is the point?  And she is saying:  same goes for law billing.

Law Firm Marketing

A section of the District of Columbia Bar is sponsoring a session on law firm marketing on May 20. The blurb from the bar's web page states:

The program is premised on the growing number of law firms that are starting to see the long-term benefits of tapping into their alumni network and maintaining good relations with attorneys who leave. Law firms realize the importance of having well-placed alumni who can help recruit for and promote their firms as well as provide opportunities for business referrals.

Participants of this program will learn about what law firms are doing to assist and stay connected to their alumni at all career stages—associates who do not make partner, associates who choose to practice law in another environment, partners who no longer fit in the firm’s long-term plans, and attorneys who pursue alternative career paths.

(Mike Frisch)

Law, Accounting, Finance, & JD-MBAs

Posted by Jeff Lipshaw

Over at PrawfsBlawg, Adam Levitin  (Georgetown, left) provoked a discussion on the value of the JD-MBA degree, as well as the general shortcomings of business law education.  Let me throw in my two cents' worth.

We need to distinguish between the value of the skills and the value of the degrees.  Whether the benefit justifies the cost is open to question, but it seems to me the M.B.A. skills have value to big deal - big firm lawyers, as well as to small business lawyers.  The whole panoply of M.B.A. skills - accounting, finance, organizational design, marketing - are particularly helpful to lawyers who practice in-house, and who aspire to management as well as law.  The M.B.A. skills are also helpful to lawyers who represent start-ups.  I'm not sure about the entire panoply, but I think a basic grounding in business, and certainly in accounting, would be helpful to someone who is going to hang out a shingle and start a business practice wherever located.

My experience in large corporations is that the J.D. skills are also valuable to people in non-legal positions, but this is a place that the J.D. degree might make a difference.  Moreover, I agree with one of the comments to the effect that we need to be careful about the elite school - elite firm bias.  I suspect the J.D.-M.B.A. degree IS an asset in a limited number of elite openings - investment banking and high level consulting of the Bain-McKinsey-Booz type.  I agree that the M.B.A. portion of the degree (qua degree) is not particularly valuable in the standard recruitment to big law.

I do think the J.D. degree is helpful to non-lawyers seeking to advance their careers in certain non-legal areas, but I recognize that's an empirical assertion founded on my experience, albeit anecdotal. Here's where we have to acknowledge the difference between those schools a huge percentage of whose graduates go on to big law or prestigious clerkships and those where that is not so.  Human resources executives, environmental executives, purchasing (or as we say now, supply chain) people, compliance departments all overlap significantly with regulation, and I think the legal sheepskin does indeed make a difference in one's ability (a) to do the job, and (b) to distinguish oneself from one's peers in doing so.  This may not be a critical consideration at Columbia, which apparently sent 75% of its grads to NLJ 250 firms, but it may be at a lot of other places.

Finally, accounting.  Yes, there are areas of the law that will never really require that you understand the rudiments of accounting.  But they do not include:  trusts and estates, divorce, business litigation, antitrust counseling and litigation, mergers and acquisitions, small town general practice, white collar criminal prosecution and defense, personal (much less business) tax, and much much more.  I used an otherwise fine (and well-regarded) casebook on sales in which the author, in his discussion of the lost profits measure of damages under UCC 2-708, confused the economic concept of fixed and variable costs with the accounting concept of direct and indirect costs.   They aren't the same, and the lawyer who doesn't understand that is apt to do a disservice to his or her client someday.

Bar Shuts Down Unauthorized Practice

The web page of the California State Bar reports that the Bar has taken action to shut down a non-lawyer's immigration practice. The Bar obtained an injunction pursuant to a provision in state law that permits such action based on a showing of unauthorized practice and has taken over the non-lawyer's practice.

"Through the cooperative efforts of the State Bar and the Los Angeles County District Attorney’s Office, we have successfully closed down an operation that preys upon and defrauds our immigrant population,” said State Bar Chief Trial Counsel Scott Drexel. “We believe that this and other similar operations will provide a critical deterrent for those who seek to take advantage of immigrants and others who are in need of legal advice and assistance."

(Mike Frisch)

Abraham LinkedIn Was A Lawyer, But Not Maya Space

Posted by Alan Childress

Over at LawBiz Blog, Ed Poll wonders whether lawyers will adapt to, and adopt, social networking.  In other words, can clients be developed via MySpace and Facebook?  And even if they can, will the lawyers take advantage of the technology?  The answer, he surmises, is largely age-based, yet he advises getting "registered...just in case."  But not at the expense of more traditional networking avenues like "[g]oing to meetings, calling people or sending hand-written notes." 

I would add something that seems to be lost on students and lawyers in an age-based way, too (the other age-way around):  handwritten thank-you notes and other traditional communications are becoming even rarer in light of technology -- and will surely catch the recipient's eye a lot more than they used to, given the effort that seems to be required compared to emails and mass digital means.  Job applicants, for example, who mail a real, cursive thank-you note after an interview will certainly stand out.  Your mother was right, even if she cannot program a universal remote.

Although Maya Space is college-educated and provides links to 31 friends ranging from Paris Hilton to Jesus, his occupation is listed as "observer and guardian."  One will likely have to go elsewhere, virtually or otherwise, for legal counseling or advocacy.

Concluding Remarks to My Agency, Partnership, & LLC Class

Posted by Jeff Lipshaw

If you are about to teach the last class of a semester, and you've spent a total of 2,100 minutes (in a three credit class) or 2,800 minutes (in a four credit class), you may give some thought to what you say in the last five minutes or so.  Not everybody is so inclined.  I can imagine saying "and that wraps up res judicata," closing the book, and walking out.  But that would mean giving up the chance to float some choice platitudes, and floating choice platitudes is why "I'm up here in the booth."

Here, for what it's worth, are today's closing platitudes to the students in Agency, Partnership, & LLC.  And, no, you are not responsible for this on the exam:

I was a litigator for the first ten years of my career before I turned to transactional and corporate work.

Litigation is an incredibly structured way to live out your career.

This is in terms of (a) cases having a beginning, middle, and end in a certain repeating pattern, (b) the docket controlling your life, and (c) your relationship as a lawyer to the rules of advocacy, whether of argumentation or procedure.

People come into your world, and it’s easy to believe that the world is one constituted primarily by law, and norms set by law.  But: 

    - Try to explain hearsay to a normal person.
    - Try to explain the technique of being a deposition witness to a normal person.

Moreover, it is a world in which, all things considered, you exercise a moderate amount of control.  Indeed, my sense of being in control was so developed that I came truly to hate two particular aspects of the litigation process - (1) doing direct examination of my own witnesses where I couldn't lead, and therefore had to rely on the witness, and (2) listening to the other lawyer's cross-examination of my witness (although the borderline unethical tactic of speaking objections during depositions gives some control to those willing to employ it).

Transactional practice is an interesting challenge, and particularly in this area of unincorporated associations, because of the relationship between the default rules and how the world works.

    - First, rather than others being on your legal turf, you are a lawyer out on the business turf.

    - Second, you are obliged to be a master of a web of doctrine.  You must know what the implications are if the default rules of agency, partnership, corporate law, or LLCs apply.

    - Third, you have the freedom, if you have the confidence and the ability, to change almost everything, by crafting a new set of rules.

    - And finally, to be more than a lawyer’s lawyer, you need to understand that it’s a world not necessarily primarily constituted by law:

        - That because the law, or a contract, or a partnership agreement, entitles you to a right or benefit, doesn’t necessarily mean that you or your client are obliged to seize the right or benefit.

        - Indeed, one of my theories is that the willingness to have a legal right, but nevertheless to see it as either tradable or waivable, or simply to let it pass, is the grease that makes relationships, even economic ones, work.

    I thus think of the great business lawyers as simultaneously being professional experts, creative artists, and moral and social philosophers.

    I hope you have gotten some sense of that here.

Law & Society Ass'n Conference (May 29-June 1, Montreal) Has Panels on Legal Profession

Posted by Alan Childress

The annual meeting of the Law & Society Association, this year in conjunction with the Canadian Law & Society Association, will be held in Montreal, Canada, from May 29-June 1, 2008 (with some events, particularly of the Canadian group, a few days after).  Here is program and hotel information, and a guide to the many interesting panels proposed: Download prog_4_10.doc.  Some of them deal with issues of legal business and practice, including trends in big firms and problems of prosecutorial misconduct.  One I look forward to is hearing Marc Galanter and Bill Henderson on "the [new, elastic] tournament of lawyers" and their study forthcoming in Stanford Law Review, as noted on at Legal Ethics Forum here, with a link to the SSRN version of their important paper.

UPDATE:  Other Law & Society panels on the legal profession, law firms, and global practice are listed in comments to this post at LEF, including a May 29 presentation (on biglaw engagement agreements) by one of its editors, John Steele.  That panel goes on my to-do list too.

Is Jack Welch Out of Touch?

Posted by Jeff Lipshaw

I had a flashback to 1996 or so when I saw the Wall Street Journal's front page story on Jack Welch's criticism of General Electric's earnings miss, and his attribution to his successor and current CEO, Jeffrey Immelt, of a "credibiity problem." The next day, Welch apologized for sounding like a buttinski, and a retired one at that, coming across, as he did, like somebody (Greenspan? Weill?) who just can't let go.

What follows is not for the faint of heart, but it's the academic in me. My intended audience here is educated, thoughtful, but not financial or corporate, people. And understand that I have tremendous respect and admiration for Jack Welch's leadership philosophy and rhetoric.

A bit of context may be necessary for those not familiar with the reporting of financial results by public companies in the United States. Under SEC regulations, companies release their results shortly after the end of each fiscal quarter, and just after the end of each fiscal year. In companies like GE, this is an almost inconceivably complex process, involving hundreds of thousands of inputs and outputs into what is known as enterprise resource planning (ERP) software, the most famous of which is SAP, and other financial consolidation programs. But the millions of transactions undertaken by a company like GE get boiled down to what the company earned per share of stock (earnings per share or EPS), and that's what you hear about at times like this.

What does it mean to "miss"? Who sets the target? Well, that's an interesting question. The target is set by a group of people who serve as proxies for the market, called analysts. (These are "sell-side analysts" but we'll leave that to another time.) The analysts work for brokers and investment banks, and they do research on the companies, which the brokers and banks provide to their clients. The analysts construct financial models, and the trick is (a) to have a good model, and (b) to put really good data into it, so as to predict the company's earnings in the succeeding quarters and years.

Sometimes companies help out by actually saying what their EPS target is! In fact, in 1996 or so, that was standard practice. GE would say in January of a year that its expected EPS per quarter was X, Y, and Z, and its expected EPS for the year would be Q. You can imagine the pressure that this put on GE managers to make sure that they achieved their budgets so as not to make a liar out of Jack Welch. Indeed, in this very context, here's a quote from the Journal's article a few days ago on the GE miss:

In 1994, Immelt’s GE Plastics unit missed net income expectations by $50 million, spurring a tough-love speech from his boss, Jack Welch, who told him that if his unit missed its results again, Immelt would be out. Immelt’s observation in a great, frank interview with Fast Company magazine: “Failures are great learning tools — but they must be kept to a minimum.” (In a wry — or “Doh!” — moment, Immelt said of his future ambitions, “I’d love to say I could teach math, but I can’t even help my daughter with that.”)

Now, of course, the question was how GE managed to hit EXACTLY that number every single quarter, year after year. Well, certainly the portfolio is diversified and some businesses will be up while others are down. But I'm afraid you don't get that consistent to the penny without some financial engineering. And that was the world of Jack Welch and the CEOs of the other mega-corporations of the 1980s and 1990s.

As you can imagine, what analysts REALLY don't like is to be surprised. They don't particularly like bad news, but they don't get paid according to the fortunes of the stocks they cover. They make money according to their ability to predict the fortunes of the stocks they cover. So the biggest sin, and the credibility problem if there is one, is the failure to be reasonably transparent. (Note: there is largely no legal duty of transparency. That is, unless you've done something to create a duty to disclose result before the normal reporting dates, there is no duty to disclose.) What has people flummoxed is that Mr. Immelt reaffirmed that GE would come in as expected for the first quarter of 2008 only seventeen days before the end of the quarter.

Now we get into some real subtleties of earnings reporting and earnings management. The stock price is, in theory, the earning power of the company over the long run reduced to present value. In that vein, one doesn't even worry about the difference between earnings and cash flow, because in the long run, they are the same. So a good analyst discounts the hurt of one-time bad events and discounts the help of one-time good events. What she really wants to see is that the ongoing operating engine of the company is robust. But, of course, it's not that simple, because all the one-time stuff has to be accounted for, and the financial statements don't conform to generally accepted accounting principles if they don't. So companies and analysts do pro forma statements to peel away the one-time stuff, unless of course you want to obscure the fact that the ongoing business is having problems, in which case you highlight the GAAP stuff.

Why did GE miss? As I read the reports, for three reasons:

- all of the underlying businesses in GE's portfolio underperformed expectations on an ongoing basis. I can't tell offhand if the credit market problem, which occurred in the last two weeks of March, were accounted for at the underlying business level, but it doesn't make sense that they would be. No, there are economy-related issues, I would think.

- GE had to recognize unusual losses because of the markdown of financial assets because of the credit market problems in the last two weeks of March. This is interesting, because the markdown of assets is not something on which you just pull a switch. It involves an extended analysis and discussion between the company and its auditors. For all I know, GE had not figured out how much it had to report as the loss until thirty minutes before it released its earnings, and that would have been well after March 31.

- GE didn't close some real estate sales, which would have given one-time gains that would have sheltered losses in the two other categories I just listed.

So finally, what's the credibility issue, and why do I think Jack Welch sounded out of touch? It's a real credibility issue not to at least appear to be transparent with your analysts. Personally, were I a public company CEO, I wouldn't give earnings guidance, and I would certainly not give it seventeen days before the books close for the quarter. But analysts predict, even if the company doesn't give guidance, and the tough call is whether to "pre-announce" a miss, so that at least the analysts don't feel unduly sandbagged.

It's also a real credibility issue if the earnings engine of the underlying business is flawed, and you are using the smoke and mirrors of one-time events to make it seem otherwise.

But that's not why I think Welch sounded out of touch. No, to him, the credibility issue goes to EVERYTHING, including all of the macroeconomic forces that touch upon a business. Because part of the GE management myth was that a great leader-manager could indeed stand in front of and hold back the tsunami. And if [s]he didn't, there was always somebody else who could. Which is why Welch could say "I'd be shocked beyond belief and I'd get a gun out and shoot him if he doesn't make what he promised now." As though, along with everything else, and as talented as he is, Jeff Immelt can personally impact the price of oil, the buy-out of Bear Stearns, consumer confidence, and the restructuring of the housing market.

It's a different world now. In the 1990s, Jack Welch was a visionary, preaching the rhetoric (and damn good rhetoric at that!) about learning, and boundarylessness, and values, but it was millennial rhetoric coming out of guys who came to business maturity in the 1950s and 1960s. Yes, CEOs still need credibility, but it's no longer credible to impute the powers of the Imperial CEO even to Jeffrey Immelt.

Is Jack Welch Out of Touch?

Posted by Jeff Lipshaw

I had a flashback to 1996 or so when I saw the Wall Street Journal's front page story on Jack Welch's criticism of General Electric's earnings miss, and his attribution to his successor and current CEO, Jeffrey Immelt, of a "credibiity problem." The next day, Welch apologized for sounding like a buttinski, and a retired one at that, coming across, as he did, like somebody (Greenspan? Weill?) who just can't let go.

What follows is not for the faint of heart, but it's the academic in me. My intended audience here is educated, thoughtful, but not financial or corporate, people. And understand that I have tremendous respect and admiration for Jack Welch's leadership philosophy and rhetoric.

A bit of context may be necessary for those not familiar with the reporting of financial results by public companies in the United States. Under SEC regulations, companies release their results shortly after the end of each fiscal quarter, and just after the end of each fiscal year. In companies like GE, this is an almost inconceivably complex process, involving hundreds of thousands of inputs and outputs into what is known as enterprise resource planning (ERP) software, the most famous of which is SAP, and other financial consolidation programs. But the millions of transactions undertaken by a company like GE get boiled down to what the company earned per share of stock (earnings per share or EPS), and that's what you hear about at times like this.

What does it mean to "miss"? Who sets the target? Well, that's an interesting question. The target is set by a group of people who serve as proxies for the market, called analysts. (These are "sell-side analysts" but we'll leave that to another time.) The analysts work for brokers and investment banks, and they do research on the companies, which the brokers and banks provide to their clients. The analysts construct financial models, and the trick is (a) to have a good model, and (b) to put really good data into it, so as to predict the company's earnings in the succeeding quarters and years.

Sometimes companies help out by actually saying what their EPS target is! In fact, in 1996 or so, that was standard practice. GE would say in January of a year that its expected EPS per quarter was X, Y, and Z, and its expected EPS for the year would be Q. You can imagine the pressure that this put on GE managers to make sure that they achieved their budgets so as not to make a liar out of Jack Welch. Indeed, in this very context, here's a quote from the Journal's article a few days ago on the GE miss:

In 1994, Immelt’s GE Plastics unit missed net income expectations by $50 million, spurring a tough-love speech from his boss, Jack Welch, who told him that if his unit missed its results again, Immelt would be out. Immelt’s observation in a great, frank interview with Fast Company magazine: “Failures are great learning tools — but they must be kept to a minimum.” (In a wry — or “Doh!” — moment, Immelt said of his future ambitions, “I’d love to say I could teach math, but I can’t even help my daughter with that.”)

Now, of course, the question was how GE managed to hit EXACTLY that number every single quarter, year after year. Well, certainly the portfolio is diversified and some businesses will be up while others are down. But I'm afraid you don't get that consistent to the penny without some financial engineering. And that was the world of Jack Welch and the CEOs of the other mega-corporations of the 1980s and 1990s.

As you can imagine, what analysts REALLY don't like is to be surprised. They don't particularly like bad news, but they don't get paid according to the fortunes of the stocks they cover. They make money according to their ability to predict the fortunes of the stocks they cover. So the biggest sin, and the credibility problem if there is one, is the failure to be reasonably transparent. (Note: there is largely no legal duty of transparency. That is, unless you've done something to create a duty to disclose result before the normal reporting dates, there is no duty to disclose.) What has people flummoxed is that Mr. Immelt reaffirmed that GE would come in as expected for the first quarter of 2008 only seventeen days before the end of the quarter.

Now we get into some real subtleties of earnings reporting and earnings management. The stock price is, in theory, the earning power of the company over the long run reduced to present value. In that vein, one doesn't even worry about the difference between earnings and cash flow, because in the long run, they are the same. So a good analyst discounts the hurt of one-time bad events and discounts the help of one-time good events. What she really wants to see is that the ongoing operating engine of the company is robust. But, of course, it's not that simple, because all the one-time stuff has to be accounted for, and the financial statements don't conform to generally accepted accounting principles if they don't. So companies and analysts do pro forma statements to peel away the one-time stuff, unless of course you want to obscure the fact that the ongoing business is having problems, in which case you highlight the GAAP stuff.

Why did GE miss? As I read the reports, for three reasons:

- all of the underlying businesses in GE's portfolio underperformed expectations on an ongoing basis. I can't tell offhand if the credit market problem, which occurred in the last two weeks of March, were accounted for at the underlying business level, but it doesn't make sense that they would be. No, there are economy-related issues, I would think.

- GE had to recognize unusual losses because of the markdown of financial assets because of the credit market problems in the last two weeks of March. This is interesting, because the markdown of assets is not something on which you just pull a switch. It involves an extended analysis and discussion between the company and its auditors. For all I know, GE had not figured out how much it had to report as the loss until thirty minutes before it released its earnings, and that would have been well after March 31.

- GE didn't close some real estate sales, which would have given one-time gains that would have sheltered losses in the two other categories I just listed.

So finally, what's the credibility issue, and why do I think Jack Welch sounded out of touch? It's a real credibility issue not to at least appear to be transparent with your analysts. Personally, were I a public company CEO, I wouldn't give earnings guidance, and I would certainly not give it seventeen days before the books close for the quarter. But analysts predict, even if the company doesn't give guidance, and the tough call is whether to "pre-announce" a miss, so that at least the analysts don't feel unduly sandbagged.

It's also a real credibility issue if the earnings engine of the underlying business is flawed, and you are using the smoke and mirrors of one-time events to make it seem otherwise.

But that's not why I think Welch sounded out of touch. No, to him, the credibility issue goes to EVERYTHING, including all of the macroeconomic forces that touch upon a business. Because part of the GE management myth was that a great leader-manager could indeed stand in front of and hold back the tsunami. And if [s]he didn't, there was always somebody else who could. Which is why Welch could say "I'd be shocked beyond belief and I'd get a gun out and shoot him if he doesn't make what he promised now." As though, along with everything else, and as talented as he is, Jeff Immelt can personally impact the price of oil, the buy-out of Bear Stearns, consumer confidence, and the restructuring of the housing market.

It's a different world now. In the 1990s, Jack Welch was a visionary, preaching the rhetoric (and damn good rhetoric at that!) about learning, and boundarylessness, and values, but it was millennial rhetoric coming out of guys who came to business maturity in the 1950s and 1960s. Yes, CEOs still need credibility, but it's no longer credible to impute the powers of the Imperial CEO even to Jeffrey Immelt.

Is Jack Welch Out of Touch?

Posted by Jeff Lipshaw

I had a flashback to 1996 or so when I saw the Wall Street Journal's front page story on Jack Welch's criticism of General Electric's earnings miss, and his attribution to his successor and current CEO, Jeffrey Immelt, of a "credibiity problem." The next day, Welch apologized for sounding like a buttinski, and a retired one at that, coming across, as he did, like somebody (Greenspan? Weill?) who just can't let go.

What follows is not for the faint of heart, but it's the academic in me. My intended audience here is educated, thoughtful, but not financial or corporate, people. And understand that I have tremendous respect and admiration for Jack Welch's leadership philosophy and rhetoric.

A bit of context may be necessary for those not familiar with the reporting of financial results by public companies in the United States. Under SEC regulations, companies release their results shortly after the end of each fiscal quarter, and just after the end of each fiscal year. In companies like GE, this is an almost inconceivably complex process, involving hundreds of thousands of inputs and outputs into what is known as enterprise resource planning (ERP) software, the most famous of which is SAP, and other financial consolidation programs. But the millions of transactions undertaken by a company like GE get boiled down to what the company earned per share of stock (earnings per share or EPS), and that's what you hear about at times like this.

What does it mean to "miss"? Who sets the target? Well, that's an interesting question. The target is set by a group of people who serve as proxies for the market, called analysts. (These are "sell-side analysts" but we'll leave that to another time.) The analysts work for brokers and investment banks, and they do research on the companies, which the brokers and banks provide to their clients. The analysts construct financial models, and the trick is (a) to have a good model, and (b) to put really good data into it, so as to predict the company's earnings in the succeeding quarters and years.

Sometimes companies help out by actually saying what their EPS target is! In fact, in 1996 or so, that was standard practice. GE would say in January of a year that its expected EPS per quarter was X, Y, and Z, and its expected EPS for the year would be Q. You can imagine the pressure that this put on GE managers to make sure that they achieved their budgets so as not to make a liar out of Jack Welch. Indeed, in this very context, here's a quote from the Journal's article a few days ago on the GE miss:

In 1994, Immelt’s GE Plastics unit missed net income expectations by $50 million, spurring a tough-love speech from his boss, Jack Welch, who told him that if his unit missed its results again, Immelt would be out. Immelt’s observation in a great, frank interview with Fast Company magazine: “Failures are great learning tools — but they must be kept to a minimum.” (In a wry — or “Doh!” — moment, Immelt said of his future ambitions, “I’d love to say I could teach math, but I can’t even help my daughter with that.”)

Now, of course, the question was how GE managed to hit EXACTLY that number every single quarter, year after year. Well, certainly the portfolio is diversified and some businesses will be up while others are down. But I'm afraid you don't get that consistent to the penny without some financial engineering. And that was the world of Jack Welch and the CEOs of the other mega-corporations of the 1980s and 1990s.

As you can imagine, what analysts REALLY don't like is to be surprised. They don't particularly like bad news, but they don't get paid according to the fortunes of the stocks they cover. They make money according to their ability to predict the fortunes of the stocks they cover. So the biggest sin, and the credibility problem if there is one, is the failure to be reasonably transparent. (Note: there is largely no legal duty of transparency. That is, unless you've done something to create a duty to disclose result before the normal reporting dates, there is no duty to disclose.) What has people flummoxed is that Mr. Immelt reaffirmed that GE would come in as expected for the first quarter of 2008 only seventeen days before the end of the quarter.

Now we get into some real subtleties of earnings reporting and earnings management. The stock price is, in theory, the earning power of the company over the long run reduced to present value. In that vein, one doesn't even worry about the difference between earnings and cash flow, because in the long run, they are the same. So a good analyst discounts the hurt of one-time bad events and discounts the help of one-time good events. What she really wants to see is that the ongoing operating engine of the company is robust. But, of course, it's not that simple, because all the one-time stuff has to be accounted for, and the financial statements don't conform to generally accepted accounting principles if they don't. So companies and analysts do pro forma statements to peel away the one-time stuff, unless of course you want to obscure the fact that the ongoing business is having problems, in which case you highlight the GAAP stuff.

Why did GE miss? As I read the reports, for three reasons:

- all of the underlying businesses in GE's portfolio underperformed expectations on an ongoing basis. I can't tell offhand if the credit market problem, which occurred in the last two weeks of March, were accounted for at the underlying business level, but it doesn't make sense that they would be. No, there are economy-related issues, I would think.

- GE had to recognize unusual losses because of the markdown of financial assets because of the credit market problems in the last two weeks of March. This is interesting, because the markdown of assets is not something on which you just pull a switch. It involves an extended analysis and discussion between the company and its auditors. For all I know, GE had not figured out how much it had to report as the loss until thirty minutes before it released its earnings, and that would have been well after March 31.

- GE didn't close some real estate sales, which would have given one-time gains that would have sheltered losses in the two other categories I just listed.

So finally, what's the credibility issue, and why do I think Jack Welch sounded out of touch? It's a real credibility issue not to at least appear to be transparent with your analysts. Personally, were I a public company CEO, I wouldn't give earnings guidance, and I would certainly not give it seventeen days before the books close for the quarter. But analysts predict, even if the company doesn't give guidance, and the tough call is whether to "pre-announce" a miss, so that at least the analysts don't feel unduly sandbagged.

It's also a real credibility issue if the earnings engine of the underlying business is flawed, and you are using the smoke and mirrors of one-time events to make it seem otherwise.

But that's not why I think Welch sounded out of touch. No, to him, the credibility issue goes to EVERYTHING, including all of the macroeconomic forces that touch upon a business. Because part of the GE management myth was that a great leader-manager could indeed stand in front of and hold back the tsunami. And if [s]he didn't, there was always somebody else who could. Which is why Welch could say "I'd be shocked beyond belief and I'd get a gun out and shoot him if he doesn't make what he promised now." As though, along with everything else, and as talented as he is, Jeff Immelt can personally impact the price of oil, the buy-out of Bear Stearns, consumer confidence, and the restructuring of the housing market.

It's a different world now. In the 1990s, Jack Welch was a visionary, preaching the rhetoric (and damn good rhetoric at that!) about learning, and boundarylessness, and values, but it was millennial rhetoric coming out of guys who came to business maturity in the 1950s and 1960s. Yes, CEOs still need credibility, but it's no longer credible to impute the powers of the Imperial CEO even to Jeffrey Immelt.

Is Jack Welch Out of Touch?

Posted by Jeff Lipshaw

I had a flashback to 1996 or so when I saw the Wall Street Journal's front page story on Jack Welch's criticism of General Electric's earnings miss, and his attribution to his successor and current CEO, Jeffrey Immelt, of a "credibiity problem." The next day, Welch apologized for sounding like a buttinski, and a retired one at that, coming across, as he did, like somebody (Greenspan? Weill?) who just can't let go.

What follows is not for the faint of heart, but it's the academic in me. My intended audience here is educated, thoughtful, but not financial or corporate, people. And understand that I have tremendous respect and admiration for Jack Welch's leadership philosophy and rhetoric.

A bit of context may be necessary for those not familiar with the reporting of financial results by public companies in the United States. Under SEC regulations, companies release their results shortly after the end of each fiscal quarter, and just after the end of each fiscal year. In companies like GE, this is an almost inconceivably complex process, involving hundreds of thousands of inputs and outputs into what is known as enterprise resource planning (ERP) software, the most famous of which is SAP, and other financial consolidation programs. But the millions of transactions undertaken by a company like GE get boiled down to what the company earned per share of stock (earnings per share or EPS), and that's what you hear about at times like this.

What does it mean to "miss"? Who sets the target? Well, that's an interesting question. The target is set by a group of people who serve as proxies for the market, called analysts. (These are "sell-side analysts" but we'll leave that to another time.) The analysts work for brokers and investment banks, and they do research on the companies, which the brokers and banks provide to their clients. The analysts construct financial models, and the trick is (a) to have a good model, and (b) to put really good data into it, so as to predict the company's earnings in the succeeding quarters and years.

Sometimes companies help out by actually saying what their EPS target is! In fact, in 1996 or so, that was standard practice. GE would say in January of a year that its expected EPS per quarter was X, Y, and Z, and its expected EPS for the year would be Q. You can imagine the pressure that this put on GE managers to make sure that they achieved their budgets so as not to make a liar out of Jack Welch. Indeed, in this very context, here's a quote from the Journal's article a few days ago on the GE miss:

In 1994, Immelt’s GE Plastics unit missed net income expectations by $50 million, spurring a tough-love speech from his boss, Jack Welch, who told him that if his unit missed its results again, Immelt would be out. Immelt’s observation in a great, frank interview with Fast Company magazine: “Failures are great learning tools — but they must be kept to a minimum.” (In a wry — or “Doh!” — moment, Immelt said of his future ambitions, “I’d love to say I could teach math, but I can’t even help my daughter with that.”)

Now, of course, the question was how GE managed to hit EXACTLY that number every single quarter, year after year. Well, certainly the portfolio is diversified and some businesses will be up while others are down. But I'm afraid you don't get that consistent to the penny without some financial engineering. And that was the world of Jack Welch and the CEOs of the other mega-corporations of the 1980s and 1990s.

As you can imagine, what analysts REALLY don't like is to be surprised. They don't particularly like bad news, but they don't get paid according to the fortunes of the stocks they cover. They make money according to their ability to predict the fortunes of the stocks they cover. So the biggest sin, and the credibility problem if there is one, is the failure to be reasonably transparent. (Note: there is largely no legal duty of transparency. That is, unless you've done something to create a duty to disclose result before the normal reporting dates, there is no duty to disclose.) What has people flummoxed is that Mr. Immelt reaffirmed that GE would come in as expected for the first quarter of 2008 only seventeen days before the end of the quarter.

Now we get into some real subtleties of earnings reporting and earnings management. The stock price is, in theory, the earning power of the company over the long run reduced to present value. In that vein, one doesn't even worry about the difference between earnings and cash flow, because in the long run, they are the same. So a good analyst discounts the hurt of one-time bad events and discounts the help of one-time good events. What she really wants to see is that the ongoing operating engine of the company is robust. But, of course, it's not that simple, because all the one-time stuff has to be accounted for, and the financial statements don't conform to generally accepted accounting principles if they don't. So companies and analysts do pro forma statements to peel away the one-time stuff, unless of course you want to obscure the fact that the ongoing business is having problems, in which case you highlight the GAAP stuff.

Why did GE miss? As I read the reports, for three reasons:

- all of the underlying businesses in GE's portfolio underperformed expectations on an ongoing basis. I can't tell offhand if the credit market problem, which occurred in the last two weeks of March, were accounted for at the underlying business level, but it doesn't make sense that they would be. No, there are economy-related issues, I would think.

- GE had to recognize unusual losses because of the markdown of financial assets because of the credit market problems in the last two weeks of March. This is interesting, because the markdown of assets is not something on which you just pull a switch. It involves an extended analysis and discussion between the company and its auditors. For all I know, GE had not figured out how much it had to report as the loss until thirty minutes before it released its earnings, and that would have been well after March 31.

- GE didn't close some real estate sales, which would have given one-time gains that would have sheltered losses in the two other categories I just listed.

So finally, what's the credibility issue, and why do I think Jack Welch sounded out of touch? It's a real credibility issue not to at least appear to be transparent with your analysts. Personally, were I a public company CEO, I wouldn't give earnings guidance, and I would certainly not give it seventeen days before the books close for the quarter. But analysts predict, even if the company doesn't give guidance, and the tough call is whether to "pre-announce" a miss, so that at least the analysts don't feel unduly sandbagged.

It's also a real credibility issue if the earnings engine of the underlying business is flawed, and you are using the smoke and mirrors of one-time events to make it seem otherwise.

But that's not why I think Welch sounded out of touch. No, to him, the credibility issue goes to EVERYTHING, including all of the macroeconomic forces that touch upon a business. Because part of the GE management myth was that a great leader-manager could indeed stand in front of and hold back the tsunami. And if [s]he didn't, there was always somebody else who could. Which is why Welch could say "I'd be shocked beyond belief and I'd get a gun out and shoot him if he doesn't make what he promised now." As though, along with everything else, and as talented as he is, Jeff Immelt can personally impact the price of oil, the buy-out of Bear Stearns, consumer confidence, and the restructuring of the housing market.

It's a different world now. In the 1990s, Jack Welch was a visionary, preaching the rhetoric (and damn good rhetoric at that!) about learning, and boundarylessness, and values, but it was millennial rhetoric coming out of guys who came to business maturity in the 1950s and 1960s. Yes, CEOs still need credibility, but it's no longer credible to impute the powers of the Imperial CEO even to Jeffrey Immelt.

Is Jack Welch Out of Touch?

Posted by Jeff Lipshaw

I had a flashback to 1996 or so when I saw the Wall Street Journal's front page story on Jack Welch's criticism of General Electric's earnings miss, and his attribution to his successor and current CEO, Jeffrey Immelt, of a "credibiity problem." The next day, Welch apologized for sounding like a buttinski, and a retired one at that, coming across, as he did, like somebody (Greenspan? Weill?) who just can't let go.

What follows is not for the faint of heart, but it's the academic in me. My intended audience here is educated, thoughtful, but not financial or corporate, people. And understand that I have tremendous respect and admiration for Jack Welch's leadership philosophy and rhetoric.

A bit of context may be necessary for those not familiar with the reporting of financial results by public companies in the United States. Under SEC regulations, companies release their results shortly after the end of each fiscal quarter, and just after the end of each fiscal year. In companies like GE, this is an almost inconceivably complex process, involving hundreds of thousands of inputs and outputs into what is known as enterprise resource planning (ERP) software, the most famous of which is SAP, and other financial consolidation programs. But the millions of transactions undertaken by a company like GE get boiled down to what the company earned per share of stock (earnings per share or EPS), and that's what you hear about at times like this.

What does it mean to "miss"? Who sets the target? Well, that's an interesting question. The target is set by a group of people who serve as proxies for the market, called analysts. (These are "sell-side analysts" but we'll leave that to another time.) The analysts work for brokers and investment banks, and they do research on the companies, which the brokers and banks provide to their clients. The analysts construct financial models, and the trick is (a) to have a good model, and (b) to put really good data into it, so as to predict the company's earnings in the succeeding quarters and years.

Sometimes companies help out by actually saying what their EPS target is! In fact, in 1996 or so, that was standard practice. GE would say in January of a year that its expected EPS per quarter was X, Y, and Z, and its expected EPS for the year would be Q. You can imagine the pressure that this put on GE managers to make sure that they achieved their budgets so as not to make a liar out of Jack Welch. Indeed, in this very context, here's a quote from the Journal's article a few days ago on the GE miss:

In 1994, Immelt’s GE Plastics unit missed net income expectations by $50 million, spurring a tough-love speech from his boss, Jack Welch, who told him that if his unit missed its results again, Immelt would be out. Immelt’s observation in a great, frank interview with Fast Company magazine: “Failures are great learning tools — but they must be kept to a minimum.” (In a wry — or “Doh!” — moment, Immelt said of his future ambitions, “I’d love to say I could teach math, but I can’t even help my daughter with that.”)

Now, of course, the question was how GE managed to hit EXACTLY that number every single quarter, year after year. Well, certainly the portfolio is diversified and some businesses will be up while others are down. But I'm afraid you don't get that consistent to the penny without some financial engineering. And that was the world of Jack Welch and the CEOs of the other mega-corporations of the 1980s and 1990s.

As you can imagine, what analysts REALLY don't like is to be surprised. They don't particularly like bad news, but they don't get paid according to the fortunes of the stocks they cover. They make money according to their ability to predict the fortunes of the stocks they cover. So the biggest sin, and the credibility problem if there is one, is the failure to be reasonably transparent. (Note: there is largely no legal duty of transparency. That is, unless you've done something to create a duty to disclose result before the normal reporting dates, there is no duty to disclose.) What has people flummoxed is that Mr. Immelt reaffirmed that GE would come in as expected for the first quarter of 2008 only seventeen days before the end of the quarter.

Now we get into some real subtleties of earnings reporting and earnings management. The stock price is, in theory, the earning power of the company over the long run reduced to present value. In that vein, one doesn't even worry about the difference between earnings and cash flow, because in the long run, they are the same. So a good analyst discounts the hurt of one-time bad events and discounts the help of one-time good events. What she really wants to see is that the ongoing operating engine of the company is robust. But, of course, it's not that simple, because all the one-time stuff has to be accounted for, and the financial statements don't conform to generally accepted accounting principles if they don't. So companies and analysts do pro forma statements to peel away the one-time stuff, unless of course you want to obscure the fact that the ongoing business is having problems, in which case you highlight the GAAP stuff.

Why did GE miss? As I read the reports, for three reasons:

- all of the underlying businesses in GE's portfolio underperformed expectations on an ongoing basis. I can't tell offhand if the credit market problem, which occurred in the last two weeks of March, were accounted for at the underlying business level, but it doesn't make sense that they would be. No, there are economy-related issues, I would think.

- GE had to recognize unusual losses because of the markdown of financial assets because of the credit market problems in the last two weeks of March. This is interesting, because the markdown of assets is not something on which you just pull a switch. It involves an extended analysis and discussion between the company and its auditors. For all I know, GE had not figured out how much it had to report as the loss until thirty minutes before it released its earnings, and that would have been well after March 31.

- GE didn't close some real estate sales, which would have given one-time gains that would have sheltered losses in the two other categories I just listed.

So finally, what's the credibility issue, and why do I think Jack Welch sounded out of touch? It's a real credibility issue not to at least appear to be transparent with your analysts. Personally, were I a public company CEO, I wouldn't give earnings guidance, and I would certainly not give it seventeen days before the books close for the quarter. But analysts predict, even if the company doesn't give guidance, and the tough call is whether to "pre-announce" a miss, so that at least the analysts don't feel unduly sandbagged.

It's also a real credibility issue if the earnings engine of the underlying business is flawed, and you are using the smoke and mirrors of one-time events to make it seem otherwise.

But that's not why I think Welch sounded out of touch. No, to him, the credibility issue goes to EVERYTHING, including all of the macroeconomic forces that touch upon a business. Because part of the GE management myth was that a great leader-manager could indeed stand in front of and hold back the tsunami. And if [s]he didn't, there was always somebody else who could. Which is why Welch could say "I'd be shocked beyond belief and I'd get a gun out and shoot him if he doesn't make what he promised now." As though, along with everything else, and as talented as he is, Jeff Immelt can personally impact the price of oil, the buy-out of Bear Stearns, consumer confidence, and the restructuring of the housing market.

It's a different world now. In the 1990s, Jack Welch was a visionary, preaching the rhetoric (and damn good rhetoric at that!) about learning, and boundarylessness, and values, but it was millennial rhetoric coming out of guys who came to business maturity in the 1950s and 1960s. Yes, CEOs still need credibility, but it's no longer credible to impute the powers of the Imperial CEO even to Jeffrey Immelt.

In Real Estate, Beware the Fraudulent Seller, Too

This post from Calculated Risk dissects sloppy journalistic reporting on the housing and loan crises, and (among many insights) wonders -- in the WaPo story My House. My Dream.  It Was An Illusion. -- why there's little investigation of the ethics of predatory selling as well.  (HatTip to discourse.net.) The author encourages investigative reporters to "get ahead of the curve" on unethical selling, not just post mortems of lender and sales scams.  "Nobody wants to have to report on 'foreclosure avoidance scams' or 'subject to' ripoffs after the fact, like we're only now reporting on predatory lending and predatory RE sales practices after the fact."

It is the kind of close examination of business reporting that Jeff, and hopefully LPB readers, will appreciate.  The blog also has hundreds of good comments to the post.  [Alan Childress]

Some Quick Notes on the Bear Stearns - J.P. Morgan Merger Agreement

Posted by Jeff Lipshaw

Kudos to Steve Davidoff for his quick post with a link to the Bear Stearns - J.P. Morgan agreement.  A couple notes during a quick skim.

1.  I didn't realize from the newspaper accounts that it's not a cash deal at $2.00 a share.  It's in fact a stock-for-stock deal that pegged $2.00 to the J.P. Morgan stock on an exchange ratio of just over .054 shares of JPM for each share of Bear.  So Bear shareholders will continue to ride up or down depending on the markets' reactions generally.  (I see JPM is up five percent already today, so that's some cold comfort - the deal is now worth $2.10.)

2.  The fairness opinion on the price will come from Lazard Freres.  That should be an interesting read.

3.  Wachtell represented J.P. Morgan.  There are no lawyers listed for Bear.

4.  J.P. Morgan can force a shareholder vote even over a "Change in Recommendation" if there is an "Alternative Proposal" that the Bear board must consider in light of its fiduciary obligation.  Not surprisingly, a "force the vote" is a win for the acquiring company, as you'd expect here.  Obvious, the "asset option" to buy the headquarters, which would survive even an alternative deal is another way to lock down the deal.

5.  The Bear directors have the standard continuation of D&O insurance.

6.  The deal was reported as being "locked down" in terms of J.P. Morgan's ability to get out.  That appears to be true.  There is no MAC ("material adverse change") provision as a condition of closing.  The representations and warranties are made only as of the date of signing and not as of the closing.  The "bring down" certificate as to the continued accuracy of the representations and warranties in the closing conditions applies only to the bare minimum:  that JPM is getting pretty much all of the stock, that the deal is authorized, that nobody other than Lazard Freres is a broker, and that Lazard Freres will issue a fairness opinion.  It just goes to show how little you need to make a deal when you gotta make a deal!

[UPDATE:  Jeff has expanded on these thoughts in this post on Concurring Opinions. --SAC]

What do needles and vials in Vegas have in common with Jeff Skilling's appeal?

(Posted by Nancy Rapoport) There's a local scandal a'brewin' in Las Vegas, where several medical centers stand accused of having reused needles and single-use vials in an effort to cut costs--see, e.g., here. Unfortunately, the reuse of needles and vials carries with it the risk of such diseases as hepatitis C and HIV. Here in Las Vegas, several of us have been asking ourselves how health professionals could possibly have gone along with orders to reuse needles and vials, knowing the potential health risks involved. Now Jeff Skilling's lawyers are alleging that the Enron prosecutors deliberately withheld potentially exculpatory evidence during his trial (see, e.g., here, here, here, and here). If these allegations are true, why would the prosecutors do something so obviously dumb and ultimately counterproductive? Personally, I think it's because our parents were right: we tend to play follow-the-leader, especially when we're under pressure. Group norms are a lot more powerful than we tend to pretend that they are, and rules (ethics rules, caselaw, even the fear of sanctions) are not as powerful as deterrents as peer pressure is as a motivator for action. Peer pressure acts in the now, and deterrents are for a later time and place. If the suppression of exculpatory evidence was on as large a scale as Skilling's brief contends, then it wasn't a one-shot action by a rogue prosecutor; instead, it was a team effort to cheat the justice system. As long as we're talking about group behavior, let's throw a little cognitive dissonance into the mix as well: perhaps the prosecutors, having worked so hard on these prosecutions, really wanted to ensure the win, so they talked themselves into withholding exculpatory evidence "for the greater good" of getting a conviction. All of this is conjecture on my part. We don't know enough yet to know what really happened, although things look pretty bad for the prosecutors. My point is that people are good at fooling themselves into doing things that they know are wrong, and groups of people are very good at egging each other on to turn these individual bad decisions into new, and very bad, group norms. From those incrementally bad decisions, we get convictions that may get overturned and people walking into health care facilities hoping to get screened for illnesses and walking out with serious and incurable diseases. All for what? For the sake of saving short-term costs without thinking of the larger, long-term ones. Hey, wait: wasn't that the problem with Enron in the first place?

When the Real Cost of Litigation is Part of the Marketing Budget. . . .

Posted by Jeff Lipshaw

The WSJ Law Blog has a story up on the remarkable decision by Judge Richard Matsch (previously best known for his no-nonsense - cf. Judge Ito - conduct of the Timothy McVeigh trial) to overturn a $51 million IP verdict in favor of Medtronic with an attendant award of attorneys' fees to other side, upheld on appeal by the 10th Circuit, as a result of "overzealous" conduct by Medtronic's lawyers, McDermott, Will & Emery.

A faculty colleague who I respect and admire immensely asked me several weeks ago if, in my long practice experience, there were really were serious cases that companies pursued for reasons that did not involve the merits of the lawsuit itself.  After chuckling for a minute, I said "absolutely, and the best example is patent litigation."  It's because the fact of the litigation casts a cloud on the allegedly infringing product.  And while the IP lawyers tell me that it is abuse of patent to let the sales people tell customers that the other product infringes, (a) you can't monitor that in any effective way, (b) the pleading have a qualified privilege, and (c) the fact of the litigation and the possibility of an injunction is often enough to sway a customer away from the alleged infringer.

Indeed, dollar for dollar, it may be one of those instances in which legal fees really do bring some bang for the buck in terms of the top line. 

So it's nice to see that a well-respected judge has used the only effective tool there is to regulate this - a finding under Rule 11.

I'd also agree with a number of the comments to the WSJ Law Blog that patent litigation seems to be particularly fraught with over-the-top zealousness.  I used to swear that in some of our patent cases the lawyers for both sides had a "nasty discovery dispute letter" quota that they had to fill by way of useless but colorful letters sent by e-mail, overnight courier, and regular mail accusing the other side, variously, of document withholding, destruction, delay, sodomy, bad breath, and unsightly wax build-up.

Florida Legal Ads Restrictions Painted as Silly or Arbitrary by WSJ

Posted by Alan Childress

A useful link and nice summary by Michael Froomkin (Miami) on his Discourse.net blog, relevant to our readers on legal ethics, is found in his post entitled WSJ Says Florida Leads the Nation:

According to the Wall St. Journal’s Objection! Funny Legal Ads Draw Censure, Florida leads the nation in restrictions on the use of animals in lawyer advertising.

Tigers are OK. Lions probably. But no sharks or pit bulls. Go figure.

The article is limited only to animals and TV ads; had they mentioned advertising rules more generally, and especially the evolving rules relating to law firm web pages, they’d have had to mention New York state’s increasingly restrictive policies, quite possibly worse than Florida’s.

In the WSJ article, Florida's bar counsel says it's about protecting the public, while an affected lawyer suing the bar on First Amendment grounds "sees it differently. 'The advertising rules are bizarre,' he says. 'The established legal bar pines for the Eisenhower era.' "

The Deal Professor Rules!

Great and timely column by the newly-anointed Deal Professor, Steve Davidoff, at the New York Times.  Like he needs my endorsement here to get a few more hits....

[Jeff Lipshaw]

The Stoneridge Decision and the Rule of Hyperbole

Posted by Jeff Lipshaw

My curmudgeonly beef today has to do with the hyperbolic use of the phrase "the Rule of Law."  To be sure, misuse of this phrase does not bother me as much as the far more widespread problem of being able to hear "music" coming from other peoples' iPods even though they are standing four feet away on the other side of the subway car and there is a full rush hour's worth of ambient noise.  (Somebody coined a great word for this:  earspill.)  God knows what they are doing to their hearing in there.  I really don't want to have to pay my share of the societal cost of repairing broken eardrums over the next thirty years.  For some reason I shy away from the physical confrontation it would take to tell somebody on the T to turn it down, so I'm turning to a second-best problem to grump about publicly.

Last Friday's Wall Street Journal featured an op-ed by Paul S. Atkins, an SEC commissioner, entitled "Stoneridge and the Rule of Law."  As most everyone knows, the Supreme Court rejected a theory of scheme liability against peripheral actors in a securities law violation in the case of Stoneridge Investment Partners LLC v. Scientific-Atlanta.  As much as I agree with the outcome of the case, however, I am not prepared to say that a result that had gone the other way would have reflected a diminution in the "Rule of Law."

To recap the bidding, the underlying facts of Stoneridge, which had to be taken as true given the procedural posture, were really nasty.  Charter Communications wanted to inflate its 2000 earnings.  Charter was (and is) a cable company and bought cable boxes from Scientific-Atlanta and Motorola.  Charter persuaded representatives of those two vendors to engage in a scheme whereby Charter would actually overpay by $3 per box ($17 to $20) on the condition that the two vendors immediately turned around and spent that money on advertising with Charter at ad rates four to five times the normal rates.  Why?  Because Charter could capitalize the cost of the boxes, but bring the ad revenue directly into current earnings, with the effect of inflating earnings.  For my money, it's simply impossible to believe that the S-A and Motorola people didn’t have some idea about what the purpose behind all this was.

Larry Ribstein, Elizabeth Nowicki, and others have already done a fine job of parsing the pros and cons of the Supreme Court opinion (the primary criticism of which, even from those who support the result, is that the reliance test was misplaced; instead the Court should have held that Section 10b simply does not contemplate "scheme" liability against anyone other than the hatcher of the scheme).   That's not my point here.  I just want to kill the hyperbole.

Commissioner Atkins applauded the recent decision as "the mark of a court that insists on predictability and the rule of law - principles that are fundamental to the protection of investors and success of their investments."  I think I understand predictability, and predictability is certainly one element that theorists suggest marks the "Rule of Law," but mere unpredictability of outcomes is not the only factor in a Rule of Law analysis.  Indeed, the Rule of Law question is a tough nut.  First, there is some doubt whether the question "should the Rule of Law prevail in an ordered society?" is even a meaningful question.  (As Andrei Marmor points out, it's either a tautology if it means that any form of social control is law, or it's a different question having to do with whether good law should prevail.)  Second, lots of theorists have chimed in on the indicia of the rule of law, and we can assume they include more than predictability (see Fuller, Raz, Finnis, et al. on generality, promulgation, no retroactivity, clarity, stability, consistency, etc.).  Third, even if predictability were the only criterion, it's not clear to me that a result the other way (in my view, not a good thing) would have go so far as not to uphold the Rule of Law.

Personally, I think we are all better off saving "Rule of Law" rhetoric for instances in which detainees are convicted in secret hearings without counsel or due process, in which autocratic rulers shut down fledgling democratic institutions with the temerity to challenge the fiats of the autocrat, or in which cases are decided not on argument, but by cash payoffs to the judge.  If the latest outrage doesn't rise to that level, call it bad policy, call it outrageous, call it ridiculous, but leave the Rule of Law alone.

Too Late

A court-appointed criminal defense attorney filed his claim for compensation 54 days after the representation had concluded. There is a statute that provides that the claim must be filed within 45 days. The trial judge nonetheless approved payment. The Iowa public defender sought and obtained review of the payment order.

The Iowa Supreme Court held today that the court exceeded its authority in ordering compensation. The claim for payment is extinguished if not timely filed. (Mike Frisch)

It's Not the Size of the Gift, But the Rationalization that Counts

Posted by Jeff Lipshaw (cross-posted at Concurring Opinions)

When I was at Tulane last year, I got a call from the Times-Picayune to comment on what has now become this story about the Fifth Circuit's recommendation that Federal Judge Thomas Porteous be impeached.  The issue on which I was asked to comment was the propriety of an alleged $1,000 hunting trip to which the judge was treated by a defendant company in a pending maritime injury case, and which was not disclosed to the plaintiff. Looking back at my comments, I now recall what seemed so odd about the whole thing.

"Federal judges by and large have the reputations of being absolute paragons of integrity," said Jeffrey Lipshaw, a visiting professor at Tulane University Law School. "The perception is that they bend over backwards to avoid even the appearance of impropriety."

Lipshaw said Porteous, who makes $165,200 a year, might have considered the value of the excursions so trifling that they would not be seen as swaying his conduct in court. If the judge thought there was something improper about the trips, Lipshaw said, why would he disclose them on his financial reports, which are submitted to the Judicial Conference and remain public record for five years? * * * "It is entirely possible that the gifts in fact did not influence him," Lipshaw said. "But even if in your own mind you know they did not make any difference, and you are just as likely to rule for or against on the merits, the very reason it smells funny is the reason you should not do it."

Yes, why take the tiny benefit and then disclose it?  Assuming the allegations are borne out, this is not as simple as saying a person is crooked.  I see the option backdating issue the same way.  You have managed either by frame of reference (model or game?) or by internal advocacy (call it rationalization) to put aside that moral tickle ("hmm, should I take that hunting trip when I have a case pending with the company; gosh, it's only a $1,000 and I will disclose it on my yearly report?" or "hmm, what's wrong with creating a document that says the options were granted when they weren't; I'm just correcting what is a stupid accounting anomaly?") David Brooks had an insightful New York Times op-ed on Barack Obama a few days back, and I think piece captures the essence of the theme.  Your sense of right and wrong has to predate and transcend the context or the frame.  Brooks observed:  "Many of the best presidents in U.S. history had their character forged before they entered politics and carried to it a degree of self-possession and tranquillity that was impervious to the Sturm und Drang of White House life." You can make an argument for anything, but there's still that smell test.