Ann Woolner of Bloomberg.com attended the Fifth Circuit oral argument on the appeal of Jamie Olis’ sentence and files this report. She is optimistic, as I am, that the Fifth Circuit will reverse Olis’ 24 year sentence and remand his case back to U.S. District Judge Sim Lake for resentencing. Earlier posts on the Olis case over the past year are here.
Following this post from last week, the Senate Judiciary Committee approved bankruptcy “reform” legislation on Thursday that imprudently makes it harder and more expensive for people to discharge their personal liability for substantial debts in bankruptcy. Given Congress’ Republican majorities, the long disputed measure appears to be on track to be signed into law.
This bankruptcy reform bill is similar to others that have been batted around Congress several times during the past seven years, but each time the bills have been stymied by a combination of Democratic opposition and Republican obstinance. A nearly identical bill to the one that the Judiciary Committee just passed has been introduced in the House.
The bill’s main flaw is that it takes a “one shoe fits all” approach that would likely funnel most individuals into Chapter 13 cases under which the debtor proposes a plan to repay debts based on the debtor’s income. In attempting to accomplish that dubious goal, the bill threatens to create a huge bottleneck in the U.S. Bankruptcy Courts by requiring that the Bankruptcy Judge make a threshold determination in each personal bankruptcy case of whether the debtor is, in effect, a “good” debtor, who is simply down on his or her luck, or a “bad” debtor, who is just trying to avoid paying his or her debts. If the debtor is not sufficiently “good” to justify a complete discharge of personal liability for his or her debts in a liquidation under chapter 7 of the Bankruptcy Code, then the Bankruptcy Judges are to funnel them into a chapter 13 case.
Just to give you an idea of the administrative nightmare that this ill-conceived requirement will likely cause, note that 1.6 million personal bankruptcies were filed in the 12-month period ending September 30, 2004, according to data from the Administrative Office of the U.S. Courts. Bankruptcy Courts already have extraordinarily busy dockets, and plopping such a time-consuming process at the outset of each personal bankruptcy case on top of those crowded dockets is simply contrary to any reasonable notion of judicial economy.
Moreover, this bill does not have the support of of a wide coalition of business leaders and the leading academic experts in insolvency law, such as the then new Bankruptcy Code enjoyed when it was passed in 1978. In comparison, this reform bill is supported primarily by narrow special interests — financial institutions in the credit card business — that want to make it harder for debtors to discharge their liability for substantial credit card indebtedness. As a result, the bill makes individual bankruptcy more expensive and difficult, which undermines one of key incentives of insolvency law — that is, a fresh start for a person who desires a second chance and an opportunity to put their financial house in order.
Meanwhile, just to make certain that the bill has bipartisan contributions of bad ideas, the Committee accepted amendments from Senator Edward Kennedy that would limit companies on the brink of a chapter 11 reorganization from from paying key employees retention bonuses and would require a special trustee to be appointed in cases where corporate fraud is suspected. Not surprisingly, retention bonuses and fraud were hot button items in the politically-charged chapter 11 case of Enron Corp.
However, preventing a financially-troubled company from attempting to keep its key employees from deserting a sinking ship is a particularly bad idea because those employees are often the most important factor in planning a successful reorganization under chapter 11 that will pay creditors a dividend and preserve jobs in a community. Consequently, by taking away a financially-strapped company’s flexibility to retain key employees, Congress is increasing the risk that the company will end up in a liquidation, which means that creditors recover nothing and the community in which the company is located loses jobs. Similarly, requiring a special trustee in cases involving corporate fraud is simply unnecessary and more political grandstanding — the Bankruptcy Code already provides for the appointment of a trustee under such circumstances.
At least Judiciary Committee Democrats are promising a floor fight next month, in which they expect to propose at least 50 amendments to the bill. Moreover, Sen. Charles Schumer plans to propose the same amendment that has doomed a couple of the previous bills in the recent past — a provision that would prohibit protesters from using bankruptcy to obtain a personal discharge of liability for paying court fines resulting from intentionally blocking abortion clinics. Perhaps those tactics will prevent this ill-advised and unnecessary legislation from being enacted.
Former University of Texas and current Harvard Law School professor of law Elizabeth Warren made these comments in her Congressional testimony on the bill, and closed with this recommendation to the Judiciary Committee:
Don’t press “one-size-fits-all-and-they-are-all-bad” judgments on the very good and the very bad. Spend the time to make the hard decisions. Leave discretion with the bankruptcy judges to evaluate these families. Based on the Harvard medical study and other research, I think you will find that most debtors are filing for bankruptcy not because they had too many Rolex watches and Gameboys, but because they had no choice.
You have a choice. It’s a choice that you’re making for the American people. Adopt new bankruptcy legislation. Establish a means test that targets abuse. But do not enact a proposal written to address myth and mirage more than reality. Do not enact a proposal written for 1997 when the problems of the American corporate economy in 2007 deserve far more attention and the problems of the American middle class can no longer be ignored.
Overwhelmingly, American families file for bankruptcy because they have been driven there — largely by medical and economic catastrophe — not because they want to go there. Your legislation should respect that harsh reality and the families who face it.
This bankruptcy reform bill is not without its good aspects, such as the provision that would limit the “race to the bottom,” in which bankruptcy courts in certain jurisdictions use the liberal venue provisions of the Bankruptcy Code to market themselves to debtors’ lawyers who often choose the venue of big business reorganization cases. However, the bad provisions in this bill far outweigh the good, and Congress simply does not need to be wasting time on bad bankruptcy bills at a time when action on other key domestic issues is far more pressing.
As creditors pick through the scraps of bankrupt Austin-based sandwich shop franchisor Schlotzsky’s (previous posts here), attorneys for those creditors teed off on former company owners and chief executives — brothers John and Jeff Wooley — in a San Antonio federal court in a lawsuit that alleges that the brothers ruined the company through a series of reckless transactions that drained cash at critical junctures.
As is typical in most reorganizations of retail businesses, the sale of the assets typically does not generate enough cash to pay any dividend on unsecured creditors’ claims. Thus, those creditors are often left with no prospect for any recovery on their claims unless they can extract some funds through a lawsuit against the company’s former owners or third parties that took advantage of the company’s financial difficulties. Normally, the success or failure of such a strategy is more directly related to the net worth of the targets of such a lawsuit than the validity of the claims asserted in the lawsuit.
The hearing on whether Russian oil company and American debtor-in-possession OAO Yukos‘ chapter 11 case should be dismissed began on Wednesday in U.S. Bankruptcy Judge Letitia Clark’s Houston courtroom as Hugh Ray, Deutsche Bank AG‘s lawyer, urged Judge Clark to dismiss the case because U.S. courts lack a jurisdictional basis to reorganize the crippled Russian oil giant. Here are the previous posts on the Yukos saga over the past year.
Mr. Ray contended that Yukos changed the dates of documents related to a $2 million bank account in an effort to create a bogus basis for jurisdiction in U.S. courts. Yukos filed its chapter 11 case in December in an effort to seek relief from the Russian government’s decision to auction Yukos’ main asset — the huge production unit Yuganskneftegaz (“Yugansk”) — to collect on $28 billion in alleged back-tax claims. Deutsche Bank had led a financing group that intended to fund a bid for Yugansk that Russian natural gas giant OAO Gazprom was going to make, but Judge Clark’s temporary restraining order at the outset of the Yukos case chilled Western Banks from financing an auction bid. Russian authorities eventually sold the Yugansk unit to a shell Russian company named Baikal Finance Group, which Russian state oil company OAO Rosneft then quickly acquired. As a result, the effect of the Yugansk auction is that Yukos’ main production unit has been nationalized by the Russian government.
Meanwhile, Stephen Theede, Yukos’ CEO, testified that seeking reorganization relief for Yukos under Russian law would have been a futile effort because the Russian government would not allow Yukos to commence a reorganization case in Russia. Inasmuch as the Russian government has frozen Yukos’ assets and frozen its bank accounts, Mr. Theede testified that only protections of U.S. bankruptcy law provide the potential legal relief necessary for Yukos to fight the Russian government’s efforts to liquidate the company. Mr. Theede has been operating Yukos out of London while Bruce Misamore, Yukos’ chief financial officer, is operating out of Houston. Mikhail Khodorkovsky, the former Yukos chief executive and at one point the largest owner of the company, continues to be imprisoned in Russia.
Inasmuch as the result of the Yugansk auction effectively nationalized one of Russia’s main oil assets, the Russian government’s blunt methods have created increased uncertainty in Western capital markets regarding the security of investment in Russian companies. So, the result of the Yukos chapter 11 case in Houston is being watched carefully by Western investing markets. Stay tuned.
This Washington Post article does a good job of analyzing the strategy of impeaching the credibility of an adverse witness with the witness’ prior bad acts, which is not always as effective a trial strategy as it would seem on the surface. The strategy is coming into full focus this week as Bernard Ebbers’ attorneys prepare to cross-examine chief prosecution witness Scott Sullivan, and Richard Scrushy’s counsel takes on former Scrushy confidant, William T. Owens.
Colorful Dallas-based software entrepreneur Sam Wyly, who headed Sterling Software Inc. when it was sold to Computer Associates International Inc. in March 2000 in a $4 billion transaction, has filed an $80 million lawsuit in state district court in Dallas against Ernst & Young LLP, which had audit relationships with both companies. The lawsuit is the latest in a deluge of lawsuits that have been filed over the past year against the Big Four auditing firms, and is only the latest in a string of lawsuits that Mr. Wyly has filed over his disatisfaction with the Computer Associates management and board.
In his latest lawsuit, Mr. Wyly contends that he relied on Ernst & Young’s audit of Computer Associates’ books for fiscal 1999 in making his decision to sell his company in return for Computer Associates stock. Unfortunately, CA’s shares fell 12% in one day about a month later when the company announced that it was delaying its reporting of year-end earnings. Subsequently, the CA stock declined even further when CA failed to fulfill its earnings forecast.
Or course, CA is no stranger to accounting scandals. A $2.2 billion accounting scandal led to criminal indictment of its former chief executive, Sanjay Kumar, late last year along with the resignations and indictments of several other top officials. Although Mr. Kumar has pleaded not guilty to the charges, CA has admitted to backdating contracts and keeping its books open days after they were supposed to be closed on the last day of several quarters in order to book extra revenue.
New York AG (meaning either “attorney general” or “aspiring governor”) Eliot Spitzer and the Securities and Exchange Commission issued subpoenas yesterday to American International Group Inc. in connection with investigations into AIG’s earnings management techniques relating to certain types of insurance arrangements.
Inamuch as many non-traditional insurance products blend insurance with financing, Mr. Spitzer and other government regulators use Enron Corp.’s use of such products to hide billions in debt in off-balance sheet partnerships as justification for these investigations. Thus, regulators rationalize that such investigations are necessary to protect investors from being misled.
More specifically, the “alternative risk” transactions that regulators such as Mr. Spitzer are typically investigating these days in the insurance industry allow insurers to improve their balance sheets in the short run by shifting claims reserves, which cannot pass muster with accounting rules unless risk is also shifted. Thus, speculation is that Mr. Spitzer is investigating whether AIG entered into transactions that essentially allowed AIG to borrow another company’s reserves in order to make its reserves look more robust to investors than they really were.
Mr. Spitzer’s new probe into nontraditional insurance comes on the heels of the announcement last month of the issuance of subpoenas to Berkshire Hathaway Inc., Warren Buffett’s holding company. Those subpoenas sought documentation and information relating to loss-mitigation insurance products from Berkshire’s General Re insurance unit. Speculation is that Mr. Spitzer’s investigation into AIG may be connected to transactions it had with General Re.
Russian oil company and American debtor-in-possession OAO Yukos filed a lawsuit seeking damages of $20 billion late Friday in Houston against Russian natural gas giant OAO Gazprom, its unit Gazpromneft, Baikal Finance and OAO Rosneft for playing a role in the Russian government’s auction of Yukos’ valuable Yugansk unit. Here are the prior posts on the Yukos saga.
In addition to the lawsuit, Yukos filed an outline of its chapter 11 plan of reorganization just days before U.S. Bankruptcy Judge Letitia Clark will conduct a hearing on Gazprom’s motion to dismiss Yukos’ chapter 11 case for lack of jurisdiction.
Yukos filed its chapter 11 case in Houston in an effort to block the Russian government from auctioning off its main asset — the valuable Siberian oil production unit Yugansk — to collect on $28 billion in alleged unpaid taxes. Despite the automatic stay under the Bankruptcy Code and a temporary restraining order that Judge Clark issued before the auction, the Russian government proceeded to auction the Yugansk unit, with an unknown Russian company, Baikal Finance Group, being the winning bidder. Baikal was subsquently acquired by Russian state oil company OAO Rosneft, which effectively effectively nationalized the valuable Yugansk unit.
In the meantime, Yukos’s main shareholder, Group Menatep Ltd., has commenced similar litigation last week seeking $28.3 billion against the Russian government under the international arbitration provisions of the the European Energy Charter Treaty, which protects investors from unfair treatment.
A 144-page Senate Permanent Subcommittee on Investigations report issued this past Thursday provided more embarrassing public disclosures of how the Big Four accounting firm KPMG mass-marketed dubious tax shelters from the late 1990’s through late 2003. Here are previous posts over the past year on KPMG’s tax shelter problems. Here is the Senate subcommittee’s report.
The report is the second on questionable tax shelters that the Senate subcommittee has released that concludes that KPMG has been deeply involved in designing and selling abusive tax shelters since the mid-1990’s. Although the new report focuses to KPMG, it also deals with the the tax shelter activities of Ernst & Young and PricewaterhouseCoopers, several banks, including Deutsche Bank, and the law firm of Sidley Austin Brown & Wood.
Q: What’s the only thing worse than being pursued by a greedy plaintiff’s law firm?
A: Two plaintiff’s firms pursuing each other.