Category Archives: Legal – General

The Lord of Regulation goes after the Oracle of Omaha

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buffett way.jpgAlmost on cue, this Wall Street Journal article($) is reporting that Warren Buffett, the famed investor who is chairman and CEO of Berkshire Hathaway Inc., will be questioned by regulators next month over his involvement in the transaction between Berkshire’s General Re insurance unit and American International Group Inc. that has led to the resignation of Maurice “Hank” Greenberg as AIG’s chairman and CEO.
Here are the previous posts on the probe into AIG and Berkshire, and a NY Post article from last week that reported on a leak from New York Attorney General Eliot Spitzer‘s office that Mr. Buffett was not a target of the investigation.
H’mm. I guess Mr. Spitzer has changed his mind.
Mr. Buffett’s interview is scheduled for April 11, a day before Mr. Greenberg’s interview unless he has decided to assert his Fifth Amendment privilege in light to his resignation from AIG. At this point, Mr. Spitzer’s office and the Securities and Exchange Commission are handling the probe, although Justice Department lawyers will also be present at both interviews.
Mr. Buffett will be questioned specifically about his involvement in a 2000 reinsurance transaction between AIG and General Re that regulators contend allowed AIG to boost its financial position improperly. The transaction shifted half a billion of expected claims to AIG from General Re along with a commensurate amount of premiums. AIG booked the premiums as revenue and then added $500 million to its reserves to account for its obligation to pay the claims at a time when market analysts were questioning whether AIG had adequate liability reserves. Regulators contend that the premium was designed to ensure that AIG was not at risk and, therefore, that the half billion was improperly booked as premium revenue. For its trouble, General Re received a $5 million commission on the deal and now even more investigative scrutiny into similar transactions with other companies.

The headhunter business of the Lord of Regulation

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new job.jpgThis Corporate Counsel article reports on the cottage industry in placement services that New York AG (“Aspiring Governor”) Eliot Spitzer has developed in regard to his multiple investigations of big insurance companies. Seems as though a number of those companies (listening AIG and Berkshire?) are hiring former prosecutors as executives in connection with the companies’ efforts to soften the blow of such investigations.
Although not mentioned much in the MSM, the most notorious example to date was Marsh & McLennan’s decision to promote a Spitzer friend and former supervisor in Spitzer’s AG office — Michael Cherkasky — to CEO after Spitzer indicted there would not be a settlement so long as Jeffrey Greenberg (son of current Spitzer target, Maurice “Hank” Greenberg) remained in control. Then, in January, Marsh hired E. Scott Gilbert — a former Assistant U.S. Attorney in Manhattan — to serve as chief compliance officer. Finally, this past December, former prosecutors also took on compliance roles at two other insurers that are under investigation — The Hartford hired Ronald Apter as its new deputy associate counsel for compliance and AIG named associate general counsel Mari Maloney as its chief compliance officer.
Business executives cannot view this trend of hiring former prosecutors as compliance officers with warm and fuzzy feelings. As companies adopt a strategy of appeasing regulators regardless of the nature of their probes, the companies are increasingly cooperating with the investigators, requiring executives to waive their self-incrimination privilege as a condition of maintaining their employment, and cutting a settlement check as quickly as possible to satiate the regulators. Accordingly, prosecutors with ties to Mr. Spitzer should keep their resumes current — you just never know when the next business subject of the Lord of Regulation is going to need some “assistance” in regard to a governmental investigation.

But what about this issue?

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maurice_greenberg.jpgThe NY Times Gretchen Morgenson provides this lucid analysis of the deal that prompted American International Group’s board to call upon Maurice “Hank” Greenberg to step down as AIG’s CEO after a generation of phenomenal wealth building for AIG shareholders. Here are the prior posts on AIG and Mr. Greenberg’s mounting troubles.
Ms. Morgenson asserts that the purpose of the questionable transaction that led to Mr. Greenberg’s ouster was to mask AIG’s declining financial performance from the market. Unless AIG’s stock price was maintained, AIG risked overpaying for American General Insurance Co. in 2001, which was a key acquisition in Mr. Greenspan’s strategy of diversifying AIG’s insurance business.
Nevertheless, Ms. Morgenson’s analysis fails to address the nuance that the transaction in question was not performed in Mr. Greenberg’s basement where no one could see it. Rather, it was a material transaction that was fully disclosed after careful review and approval by AIG and General Re’s executives, auditors and attorneys. Presumably, Mr. Greenberg would not have approved the transaction without such disclosure and approvals. In fact, Ms. Morgenson’s article simply assumes that the transaction was at least wrong without even entertaining the notion that numerous experts in such transactions had approved the transaction and are prepared to defend AIG’s booking of it.
Despite all this, Mr. Greenberg faces a possible indictment on criminal charges that could result in a substantial prison sentence in the autumn of his long and successful business career. In a couple of weeks, Mr. Greenberg will be removed from the the board of directors of the company he built into a financial powerhouse unless he waives his privilege against self-incrimination in connection with the regulatory investigation into the transaction.
Maybe AIG took risks with certain transactions that should result in restatement of its earnings and reserves. Although the value of AIG’s shares are fallen 24% for over $46 billion in market value since the beginning of the above-described probe, perhaps the value of such shares should be hammered in the market as a result of such a restatement. But do we really want the government criminalizing talented people such as Mr. Greenberg simply because he approved a questionable transaction that multiple experts in such deals had previously blessed?
That a reporter of Ms. Morgenson’s stature does not even mention that troubling issue reflects just how socially acceptable it has become for the government to abuse its awesome police power to criminalize merely questionable business transactions.

Tracking the changes in the Bankruptcy Code

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bankruptcy.jpgThe American Bankruptcy Institute has put together this first rate site tracking the upcoming changes in the U.S. Bankruptcy Code that will go into effect later this year. This is an essential resource for anyone involved or interested in insolvency or reorganization law.

The Lord of Regulation demands even more from AIG

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aig building.jpgIn what is becoming a typical development in such sagas, this NY Times article reports that the board of financial services giant American International Group Inc. is considering a move to restate its financial statments as a result of suspected accounting mistakes on its financial statements that may total as much as $3 billion from as many as 30 different insurance transactions. Here are the earlier posts on the the government’s assault on AIG.
As the governmental probes into AIG’s accounting is now far broader than what was believed just a week ago, the AIG board is assessing whether to restate its financial statements in regard to an additional 60 transactions that internal AIG investigators have identified as being potential problems. The potential errors under scrutiny occurred over five year period and include the possible booking of revenue and income prematurely and improperly transferring liabilities off the company’s books. Many of the deals in question could have been designed either to boost AIG’s reserves or to “smooth the earnings” of the company to meet Wall Street expectations.
Gosh, isn’t this starting to sound downright Enronesque?.
Nevertheless, even a multibillion-dollar writedown of earnings should not damage AIG’s long-term financial stability much. The company had net income of over $11 billion last year on revenue of almost $100 billion.
Former AIG chairman Maurice “Hank” Greenberg, who remains as AIG’s nonexecutive chairman, is tentatively scheduled to give a sworn statement to investigators from New York AG Eliot Spitzer’s office and the SEC on April 12. At the rate this scandal is developing, Mr. Greenberg better think seriously about stepping down and taking the Fifth. It is becoming increasingly clear that the Lord of Regulation is going to want more from AIG than simply financial sacrifices.

The Schiavo case

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TerriSchiavoCase230x150.jpgA number of friends have asked me why I have not blogged on the Terri Schiavo case, to which I have stolen Eugene Volokh‘s reply that “I know nothing about the Schiavo matter, and — despite that — have no opinion.”
As we have seen with the Enron case, when a case becomes as sensationalized in the MSM as the Schiavo case has over the past several weeks, battle lines get drawn politically, increasingly shrill views compete for the public’s limited attention, and wise perspectives tend to get lost in the shuffle. Bloggers can find thoughtful views — such as those of Professors Bainbridge and Ribstein — but, let’s face it, the vast majority of the public do not read blogs.
At any rate, I wanted to pass along a couple of informative articles on the Schiavo case that will appear in next month’s New England Journal of Medicine. Timothy Quill, M.D. is a nationally-recognized expert in palliative care and end-of-life issues who is a professor of medicine, psychiatry, and medical humanities at the University of Rochester, School of Medicine and Dentistry. In this article, Dr. Quill dispassionately reviews what has occurred in the Schiavo case, and then makes the following observation:

In considering this profound decision, the central issue is not what family members would want for themselves or what they want for their incapacitated loved one, but rather what the patient would want for himself or herself. The New Jersey Supreme Court that decided the case of Karen Ann Quinlan got the question of substituted judgment right:

If the patient could wake up for 15 minutes and understand
his or her condition fully, and then had to return to it, what would he or she tell you to do?

If the data about the patient?s wishes are not clear, then in the absence of public policy or family consensus, we should err on the side of continued treatment even in cases of a persistent vegetative state in which there is no hope of recovery. But if the evidence is clear, as the courts have found in the case of Terri Schiavo, then enforcing life-prolonging treatment against what is agreed to be the patient?s will is both unethical and illegal.

In the same issue, George P. Annas, J.D., the Edward R. Utley Professor and Chair Department of Health Law, Bioethics & Human Rights at Boston University School of Public Health, pens this article in which he reviews the legal precedent relating to the Schiavo case and criticizes Congress for ignoring it. In so doing, Professor Annas observes the following:

There is (and should be) no special law regarding the refusal of treatment that is tailored to specific diseases or prognoses, and the persistent vegetative state is no exception. “Erring on the side of life” in this context often results in violating a person?s body
and human dignity in a way few would want for themselves. In such situations, erring on the side of liberty ? specifically, the patient?s right to decide on treatment ? is more consistent with American values and our constitutional traditions.

Hat tip to the HealthLawProf blog for the links to these articles.

Morgan Stanley tries to fire Kirkland & Ellis in Perelman-Sunbeam litigation

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Kirkland (600 dpi).jpgA Florida state district judge in the high-profile lawsuit that financier Ron Perelman is pursuing against Morgan Stanley in connection with Mr. Perelman’s failed investment in Sunbeam Corp. ruled yesterday reports Law.com($) that the discovery abuses that Morgan Stanley and its counsel — Kirkland & Ellis — have engaged in during the litigation have been “offensive.”
As a result, the judge ruled that she would instruct the jury during the upcoming trial that Morgan Stanley had a role in helping Sunbeam conceal accounting fraud that reduced the value of Mr. Perelman’s investment in Sunbeam. The ruling increases the already high risk that a jury will find against Morgan Stanley and force the firm to pay Mr. Perelman some or all of the $680 million he contends that he lost on the investment. In addition, Mr. Perelman is seeking a cool $2 billion in punitive damages. Here is the Wall Street Journal article ($) on the case.
The ruling came a day after Morgan Stanley moved to fire Kirkland & Ellis, its longtime law firm, during jury selection in the case, which is being heard in a West Palm Beach state district court. The trial is currently scheduled to begin April 4.
The case involves a transaction in which Mr. Perelman sold an 82% stake in Coleman Inc., the camping gear company, to Sunbeam in 1998 for $1.5 billion, including $680 million in Sunbeam stock. Sunbeam was Morgan Stanley’s investment banking client in the transaction. The value of Mr. Perelman’s holding in Sunbeam dropped dramatically in the wake of accounting fraud at Sunbeam, which ended up filing a chapter 11 case in early 2001.
For the past several months, Morgan Stanley and Kirkland have been the subject of a number of adverse rulings and scathing in-court comments from the Florida state court judge, who has characterized Morgan Stanley’s behavior in the transaction as grossly negligent and has suggested the firm has purposely withheld information from the court and Mr. Perelman.
In an extraordinary development, Morgan Stanley on Tuesday placed Kirkland on notice of a potential malpractice claim arising out of its representation of Morgan Stanley in this case. The judge ruled yesterday that Morgan Stanley could replace Kirkland, but gave the firm only a week — not their requested six months — to do so and prepare for trial. Thus, Kirkland will probably end up having to try the case for Morgan Stanley while operating under a potential malpractice claim from its client.
If Morgan elects to keep Kirkland on the case in light of the judge’s refusal to grant a lengthier postponement, this will not exactly be the environment in which allies enjoy preparing for litigation combat.

The real reason why Barry might not play?

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barrybonds.jpgBaseball fans are opening their newspapars this morning to this article reporting that star San Francisco Giants slugger Barry Bonds, the best baseball player of his generation, might not play this upcoming season because of a minor knee injury and the effect that media scrutiny of Bonds’ steroid use has had on his family. However, as Paul Harvey would say, “here’s the rest of the story.”
Turns out that Bonds’ former mistress — Kimberly Bell — is apparently singing like a canary to the same federal grand jury in San Francisco that has been investigating the alleged illegal distribution of steroids that resulted in the indictment of certain individuals affiliated with BALCO (previous posts here and here). This San Francisco Chronicle article reports that Ms. Bell has not only testified that Bonds admitted to her that he used steroids, but that he gave her $80,000 from autographing baseballs in increments of just under $10,000 to avoid currency transaction reporting requirements. Federal prosecutors do not look kindly upon such activities.
As noted in this earlier post, Bonds allegedly claimed in his grand jury testimony several months ago that that he did not understand that some of the supplements that his BALCO trainer was giving him were steroids. Inasmuch as Ms. Bell’s alleged testimony reflects that prosecutors may be preparing to charge Bonds with perjury, currency reporting violations, and possible tax evasion, Bonds’ lack of desire to play this season may have more to do with preparing a criminal defense than anything else.

Professor Ribstein on the Law and Economics of Blogging

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ribstein.jpgProfessor Ribstein over at Ideoblog is presenting a workshop on blogging at the University of Illinois (perhaps to take their minds off of Bruce Pearl, see this previous post). In organizing the event, the Professor has developed this insightful “blog article” that outlines the various legal, economic, and political issues that have arisen in the field of blogging. The Professor is encouraging readers to comment on the issues raised in his blog article, which he will then include in the final draft of his paper. Check out this innovative approach to developing ideas, which is the key goal of Professor’s Ribstein’s first-rate blog.

Updating the Yukos case — Yukos throws in the bankruptcy towel

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fed cthouse.jpgRussian oil giant and former U.S. debtor-in-possession under chapter 11 OAO Yukos waved “good-bye” to the Houston federal courthouse yesterday by announcing that it would no longer pursue an appeal of U.S. Bankruptcy Judge Letitia Clark’s decision last month that dismissed the company’s chapter 11 case for lack of jurisdiction. Here are the earlier posts on the Yukos saga.
Yukos had requested both Judge Clark and U.S. District Judge Nancy Atlas to stay the order dismissing Yukos’ chapter 11 case pending the company’s appeal of that order, but both judges denied the stay request on the grounds that Yukos had failed to show a reasonable probability of success on the merits of its appeal. Yukos apparently concluded that its chances for a stay pending appeal at the Fifth Circuit Court of Appeals — not to mention its slim chance for success on the merits of the appeal generally — did not justify further machinations in the U.S. federal courts.
Yukos’ decision closes the chapter on an interesting “go for broke” chapter 11 strategy in its running battle with the Russian government. Although establishing bankruptcy jurisdiction in the United States federal courts for a Russian company was always a longshot, Yukos management does not have many alternatives left for attempting to salvage any value for shareholders. Despite the attraction of potentially lucrative business opportunities in Russia, the lesson of the Yukos case is that the Russian government remains a very powerful opponent of maintaining strong and valuable business interests there.