Amidst the hubbub of the Lay-Skilling trial, it’s a bit 1980’s-esque to harken back to the days of the Savings & Loan debacle. Nevertheless, this interesting DOJ press release caught my eye earlier in the week because it deals with one of the more colorful characters of that bygone era, Edwin T. McBirney, III, the former chairman and CEO of Sunbelt Savings. Sunbelt bit the dust during the shakeout of the S&L’s during the late 1980’s and early 90’s, and the federal government pegged the cost of Sunbelt’s demise at about $1.2 billion.
At any rate, McBirney lived large during the go-go days of Sunbelt. Legend has it that, at one of McBirney’s numerous parties, hundreds of Sunbelt’s customers and friends feasted on lion, antelope and other exotic game while two obese disco singers “entertained” by serenading the guests with “Two Tons of Fun.” At another affair with an African safari theme, McBirney dressed up as the Great White Hunter while guests ate water buffalo ribs and watched a magician make a live elephant vanish.
However, by 1990, the fun had ceased as McBirney pleaded guilty to stealing $7.5 million from Sunbelt in the years before its liquidation and, as part of his 15-year plea deal, McBirney agreed to pay the money back to the federal government. After chirping like a prosecution canary against another savings and loan executive, McBirney’s sentence was eventually reduced to five years and, in 1996, he was released on five years’ probation.
Alas, it seems as if McBirney had a difficult time reconciling his taste for living with his $7.5 million restitution obligation. While in prison, McBirney set up a trust to mask his post-prison earnings, so — upon his release from prison — McBirney was able to get by on as little as $50,000 a year despite the fact that he continued to enjoy a chauffeur-driven limousine, a $600,000 home in North Dallas and expensive meals in trendy restaurants. In short, McBirney never met an expense that couldn’t be written off as a cost of doing trust business.
Well, unfortunately for McBirney, somebody with the federal government finally noticed and, this past Tuesday, the 53-year old McBirney was found guilty on 27 counts of fraud, money laundering and lying to federal authorities about his true income while on probation for his previous conviction. As a result, McBirney now faces another 20 years in the pokey and the forfeiture of $2 million in cash and assets from the trust.
I don’t know about you, but I’m going to miss that guy. ;^)

Although the market for earnings restatements is robust (over 1,200 last year alone), the NY Times Steve Labaton reports that the market for lawsuits based on those restatements is not:

For all of the handwringing in some corners of Washington and in corporate America about vexatious litigation, it turns out that you can count last year’s number of investor class-action lawsuits against accounting firms on one hand.
A mere five cases were filed, according to the tally produced each year by Prof. Joseph A. Grundfest of Stanford Law School, a former commissioner at the Securities and Exchange Commission. The report found a sharp decline in the overall number of securities fraud class actions, as well as a marked reduction in the investor losses claimed by the suits. And it found that the Ninth Circuit, which includes California, a traditional haven for lawsuits because of the large number of technology start-ups, has been “losing its prominence.”
What’s going on?
Professor Grundfest, who has often been critical of what he sees as baseless shareholder litigation, has two explanations. The lawsuits related to the bursting of the market bubble beginning in 2000 are now largely over.
“The pig may have moved through the python,” he said.

The article goes on to note other chilling effects on the class action business fraud lawsuit, such as increasingly pro-business jurists, SOX (not sure about that one), the PSLRA, and the Supreme Court’s Dura decision.

Almost lost amidst the publicity over the first day of testimony in the Enron-related Lay-Skilling trial was the news that a Virginia federal grand jury had issued indictments against former General Re Chief Executive Ronald Ferguson, former General Re Chief Financial Officer Elizabeth Monrad, General Re’s former Assistant General Counsel Robert Graham, and the former AIG reinsurance executive Christian Milton on charges of conspiracy to commit fraud for their roles in a controversial five-year-old transaction that has been at the center of the governmental investigations into AIG and General Re over the past year.

Of course, AIG is Maurice “Hank” Greenberg’s old company and General Re is a division of Warren Buffett’s Berkshire Hathaway.

Ferguson and Ms. Monrad are now the two highest-level former General Re executives to be charged with crimes in the General Re-AIG accounting investigation, and Mr. Milton is the only former AIG executive to have been charged in the probe. Last summer, two former General Re employees — John Houldsworth and Richard Napier — copped pleas on fraud charges and presumably will testify against the newly-charged executives.

Let’s get this straight.
Last year, American International Group’s board effectively canned its chairman and CEO, Maurice “Hank” Greenberg — the man responsible for building the company into an insurance industry behemoth over the past generation — in order to make nice with New York AG Eliot Spitzer.
Meanwhile, Mr. Greenberg is only 80 years old, so he needed to find something to do after AIG unceremoniously dumped him. Accordingly, Greenberg began paying more attention to the affairs of C.V. Starr & Co., the company closely-owned by Greenberg and other former and current AIG executives that used to provide a compensation perk for AIG executives. C.V. Starr’s relationship with AIG dates from the late 1960s when AIG became a public company — in fact, among C.V. Starr’s major assets are its shares in AIG.
Several subsidiaries of C.V. Starr have long sold AIG insurance policies to big manufacturing companies, so Greenberg last year decided to expand C.V. Starr’s sales operations by selling insurance policies for other companies. Two of those companies are Ace Ltd. an insurer run by Mr. Greenberg’s son, Evan Greenberg, and a unit of billionaire businessman Warren Buffett’s Berkshire Hathaway Inc. By the way, Mr. Buffett may have ratted out Greenberg to Spitzer to save his own skin, but that’s another story.
With that backdrop, it’s with more than a touch of irony that AIG is now suing C.V. Starr to stop Starr’s subsidiaries from selling insurance policies for companies other than AIG. The lawsuit accuses the Starr subsidiaries of “flagrant misconduct and self-dealing contrary to the best interests of AIG” by diverting a third of a business portfolio otherwise intended for AIG to the Berkshire unit. C.V. Starr counters by pointing out the knotty little detail that the six-page contract governing the relationship between the Starr subsidiaries and AIG does not provide that the Starr agencies will exclusively sell AIG policies.
Thus, even though AIG may have hedged the risk of an Enronesque experience by dumping Mr. Greenberg, it remains far from clear that the AIG board’s sacrifice of Greenberg at the altar of the Lord of Regulation was in the best long-term interests of AIG’s shareholders. Not only did AIG lose the executive primarily responsible for the company’s value, but it also gained a formidable — and a particularly motivated — competitor.

When I first saw this Washington Post article earlier today that assessing the overall effect of Sarbanes-Oxley on corporate governance in the post-Enron era, I thought about posting a piece on it, particularly given that SOX does not really deter what its supporters seem to suggest that it should. However, I got busy with other things and passed on it.
Now, I’m glad I passed on posting about the WaPo article because Larry Ribstein does a far better job than I ever could have. In this devastating post, Larry systematically eviscerates each point that the SOX advocates raise in support of the legislation, and then observes in closing:

What this article is really about, in my view, is the yawning gap between what the promoters of SOX and corporate crime prosecutions are saying about the results of their efforts, and the reality.

John over at the Wired GC provides this timely and informative post about the troubling implications of the criminal case against Ellen Roth, the 61-year-old former in-house lawyer at a U.S. subsidiary of German electronics-maker Siemens.
As Peter Lattman noted here, Ms. Roth was indicted last week in Chicago on charges that she helped set up a sham company to facilitate Siemens winning a $49 million radiology contract at a Chicago-area hospital. The indictment alleges that Ms. Roth was ìthe principal corporate decision-maker responsible for creating the legal entityî that established a sham partnership with a minority-owned business, which gave Siemens an advantage in obtaining the contract.
Not only does the case involve the now common problem that corporate officials can no longer rely on any attorney-client privilege of their employer, Larry Ribstein notes in this post that Sarbanes-Oxley could be used to expand the web of criminal liability much further than just the company’s general counsel:

The indictment says that ìSMS [the Siemens sub] relied on Roth to ensure legal compliance with the applicable ordinances.î Might this sort of thing trigger liability of the parent corporation or senior executives, either at the subsidiary or the head office, who certified adequacy of internal controls? Did they see the relevant business organization documents, including the email that the indictment says shows the absence of the requisite profit-sharing arrangement? If not, is the failure to examine or to insist on seeing those documents the absence of an internal control of which management had the requisite knowledge to trigger SEC sanctions under Section 302 and 906 of SOX (the latter includes criminal sanctions), or civil liability under 10(b) or 10b-5?

This NY Times article reports that federal prosecutors are investigating three lawyers of Dallas-based Jenkens & Gilchrist ó Paul Daugerdas, Erwin Mayer and Donna Guerin ó in its widening investigation into questionable tax shelters. Messrs. Daugerdas and Mayer are apparently no longer with the firm, and although Ms. Guerin remains with the firm, she apparently is no longer a partner. Previous posts over the past couple of years on the tax shelter investigation are here, and previous posts Jenkens & Gilchrist’s involvement in the matter are here.
One particularly interesting snippet from the article is that sealed documents in one of the civil lawsuits against Jenkens & Gilchrist apparently reveals that Mr. Daugerdas earned $93 million in fees from 1999 through 2003 designing the tax shelters and providing accompanying opinion letters in support of them. Not surprisingly, that revenue generation made Mr. Daugerdas one of the wealthiest single participants in the tax shelter business. Indeed, the documents apparently establish that the Chicago-based tax practice that Mr. Daugerdas led in the late 1990’s generated $267 million in fees from its work on tax shelters. Of that amount, about a third went to Jenkens & Gilchrist, while the rest went to other partners, including $28 million to Mr. Mayer from 1999 through 2003 and $4 million to Ms. Guerin.
Although the Times article reports that Jenkens & Gilchrist itself is not a target of the investigation and is cooperating with prosecutors, there is little question that the investigation has taken a toll on the firm as it defends itself in more than a dozen lawsuits over its work on tax shelters. As the Times article notes “partners and clients have left the firm [and an] $82 million settlement between Jenkens & Gilchrist and about 1,100 wealthy investors who bought invalid tax shelters using its opinion letters is still awaiting court approval.”

This Wall Street Journal ($) article reports that New York AG (“attorney general” or “aspiring governor,” take your pick) Eliot Spitzer is shocked, yes, shocked that he and his office may be subjected to discovery in the civil lawsuits that Spitzer is pursuing against former AIG chairman and CEO Maurice “Hank” Greenberg and former NYSE chairman and CEO, Richard Grasso:
The Journal reports that a subject of the defense’s quite reasonable discovery requests in both the Grasso and Greenberg lawsuits involve internal reviews that the NYSE and AIG conducted after both companies had been pressured by Spitzer to oust the executives. Grasso and Greenberg contend that the internal reviews — which mirror Spitzer’s cases against the two men — were shams because the companies had incentives to blame past managers to curry favor with the Lord of Regulation:

“Mr. Spitzer was personally involved in pressuring a firm to help the AG’s office try to make a case against Grasso, and he ought to be willing to explain that,” says [Gerson] Zweifach, [a] Grasso lawyer.
“We have many reasons to believe the AG colluded with AIG to concoct an investigation that would justify the forced retirement of Mr. Greenberg and baseless ‘fraud’ accusation made by the AG on national TV,” said Nicholas A. Gravante, Jr., an attorney for Mr. Greenberg with Boies, Schiller & Flexner LLP. “We intend to use every available legal option to force the AG to turn over all evidence to which Mr. Greenberg is entitled.”

H’mm. I wonder whether Spitzer’s dockside bully tactics will work on a civil court judge?

Andrew Weissmann, the former head of the Enron Task Force who stepped down last year at the conclusion of the Task Force’s disastrous Enron Broadband trial, is joining the New York office of law firm Jenner & Block where he will specialize on internal corporate compliance and investigations, including representation before the Justice Department, the Securities and Exchange Commission, and state and local authorities. Peter Lattman — whose WSJ Law Blog has quickly become one of my daily reads –comments on Weissmann’s hiring in the context of the New York legal scene here.
Meanwhile, as a result of Weissmann’s dubious prosecutions while leading the Task Force, four Merrill Lynch executives have unjustly had their careers destroyed and their personal freedom lost, and thousands of employees around the country lost their jobs as an American accounting icon was improperly prosecuted out of business.
That’s not the typical resumÈ that one would think would land a partnership at a prestigious law firm.

This fascinating Rhonda Rundle W$J article profiles Southern California attorney Seymour Lazar, who was indicted last year for supposedly taking illegal kickbacks from Milberg Weiss Bershad & Schulman, the former law firm of securities fraud plaintiffs lawyers, William Lerach and Melvin I. Weiss. Earlier posts on the investigation into Milberg Weiss are here.
The 78 year-old Lazar — who Peter Lattman characterizes as “one classic dude” — is in poor health and may not even make it through his criminal trial that is slated to begin later this year, but he is well enough to make the clearest statement to date of the government’s theory of the case against Milberg, Weiss:

During the recent discussion at his home, Mr. Lazar denied he had conflicts of interest or that the payments were illegal. He said he had taken litigation “ideas” to Milberg Weiss, which paid referral fees to his lawyers, including Mr. Selzer’s firm. Those lawyers in turn allocated some of the fees to pay Mr. Lazar’s personal bills from real-estate lawyers, appraisers and other professionals, he said. It’s not unusual for lawyers to pay referral fees and Mr. Lazar said he had no reason to think the arrangement was improper. Milberg Weiss “gave me part of their fees after the court set the fees and after they got paid,” he said. The fees amounted to 5% to 10% of Milberg Weiss’s compensation on some, but not all cases, he said. The payments, he maintained, didn’t reduce recoveries for other members of the class.
Lawyers for Milberg Weiss say Mr. Lazar wasn’t paid to be a plaintiff. Referral fees, they say, are lawful.

If this is all the government has, then my sense is that the government has a very difficult case against the Milberg Weiss lawyers. Not only are many of the alleged overt acts far beyond the applicable statute of limitations (prosecutors will probably try to bootstrap those acts through a conspiracy charge), proving that referral fees paid to law firms were really disguised kickbacks for Mr. Lazar will be problematic, to say the least. Prosecutors will have to establish that presumably legal referral fees were used to pay Mr. Lazar undisclosed and illegal payments for serving as a class representative. In short, the government’s theory of criminal liability against the Milberg Weiss lawyers is based on an undisclosed oral side deal. Sound familiar?
By the way, it’s with more than a touch of irony that Mr. Lerach is now the target of an investigation that is strikingly similar to the prosecution of agency costs that Mr. Lerach and his new firm are wildly profiting from in connection with the Enron class action securities fraud case. So it goes in the wacky world of criminalizing agency costs.