Seventh Circuit Judge Richard Posner takes dead aim at law review articles in this Legal Affairs article, and the hilarious sub-headline sums up his viewpoint:

Welcome to a world where inexperienced editors make articles about the wrong topics worse.

Any article by Judge Posner is well worth reading and this one is no exception. He notes the result of the system of law review articles:

The result of the system of scholarly publication in law is that too many articles are too long, too dull, and too heavily annotated, and that many interdisciplinary articles are published that have no merit at all. Worse is the effect of these characteristics of law reviews in marginalizing the kind of legal scholarship that student editors can handle well?articles that criticize judicial decisions or, more constructively, discern new directions in law by careful analysis of decisions. Such articles are of great value to the profession, including its judicial branch, but they are becoming rare, in part because of the fascination of the legal academy with constitutional law, which in fact plays only a small role in the decisions of the lower courts. Law reviews do extensively analyze and criticize the constitutional decisions of the Supreme Court, but the profession, including the judiciary, would benefit from a reorientation of academic attention to lower-court decisions. Not that the Supreme Court isn’t the most important court in the United States. But the 80 or so decisions that it renders every year get disproportionate attention compared to the many thousands of decisions rendered by other appellate courts that are much less frequently written about, especially since justices of the Supreme Court are the judges who are least likely to be influenced by critical academic reflection on their work.

Read the entire article. Also, U.T. Law Prof Brian Leiter has some interesting comments on Judge Posner’s views.

Longtime Wall Street Journal editorial writer John Fund has written this article for the Institute for Legal Reform in which he addresses the conflict of interest issues that arise in the context of state attorney generals hiring plaintiffs’ attorneys to represent states in tort litigation. Mr. Fund’s executive summary frames the issue in the following manner:

Increasingly, activist AGs are hiring outside plaintiffs? attorneys to represent their states on a contingency-fee basis. Very often, they hire attorneys who have given them major campaign contributions. . .
This pinstripe patronage is not merely unseemly, it represents a dangerous conflict of interest and distortion of incentives. Not only can AGs reward their contributors with no-bid contracts, but the plaintiffs? attorneys, once hired to pursue a lawsuit, have different incentives than the elected officials who hired them. While the AG is sworn to protect the interests of the people of his or her state, an attorney working on contingency has an incentive to pursue only monetary remedies, even if another outcome might best serve the people of the state. And because these attorneys are paid out of the amounts they cover rather than by taxpayers, taxpayers and legislators have no control over them.
At the very least, large state contracts with outside lawyers should be subject to the same sorts of public disclosure and bidding requirements applied to other state contracts. The Private Attorney Retention Sunshine Act ? model legislation drafted by the American Legislative Exchange Council ? has been adopted by five states to restore some measure of democratic control and void a replay of the scandalous back-room deals that plagued the tobacco settlement. That?s a good start.

Read the entire piece.

New York Attorney General Eliot Spitzer cranked up his questionable litigation propaganda machine again yesterday and sued the world’s largest insurance broker — Marsh & McLennan Cos. — on the grounds that it cheated its corporate customers by rigging bids and collecting huge fees from major insurance companies in return for guiding insurance business their way.
The charges were included in the civil lawsuit and in two plea bargains of criminal charges against two insurance executives from American International Group, Inc. (“AIG”). In addition to AIG, Spitzer named Hartford Financial Services Group Inc. and Munich-American Risk Partners in the civil suit as participants with Marsh in the bid rigging and improper fee-paying charges.
This is the latest in Mr. Spitzer’s use of the New York attorney general’s office to sue large companies in an effort to trigger reform in business practices, although some grizzled observers contend that the lawsuits are more about promoting Mr. Spitzer’s political ambitions than reforming business. Earlier posts on Mr. Spitzer’s other lawsuits are here, here and here.
Mr. Spitzer’s latest lawsuit depicts the insurance industry as a corrupt business in which bid rigging and payment of improper fees have become accepted practices. Unlike markets for securities, commodities and other financial products, commercial insurance is bought and sold in private, so most of the business passes through the hands of insurance brokers, who are middlemen who match buyers and sellers in return for a cut of the transaction.
Normally, a company that is shopping to buy insurance advises its insurance broker on the type and amount of coverage that it is seeking and the broker then solicits bids from insurance companies. The broker usually is paid by commission, which is calculated as a percentage of the insurance buyer’s premium payments. It is not unusual for the insurance purchaser to send its premium check to the broker, who then deducts its commission before passing the premium payment on to the insurance company.
Spitzer’s lawsuit does not appear to take direct aim at the system described above. Rather, the lawsuit is going after the brokers from accepting what are called “contingent commissions,” which are payments that insurance companies make directly to brokers based on factors such as the total volume of business a broker does with that insurer or the profitability of that business. Big insurance brokers such as Marsh have been able to demand and receive such contingent commissions in recent years because of the large amount of insurance business that they control.
Spitzer contends that the contingent commissions prompt brokers to book their business where it is most profitable to the broker rather than where it best serves the interest of the customer. client. On the other hand, it’s not like the companies buying such insurance do not know about the contingent commissions and cannot take their business to another broker if they are uncomfortable with such arrangements. Mr. Spitzer’s lawsuit appears to overlook that rather obvious market truth.
As noted in the previous posts, Spitzer has become controversial figure in the financial services industry. This insurance industry lawsuit follows high-profile lawsuits into conflicts of interest that allegedly taint the research of Wall Street analysts and into special trading privileges that big mutual-fund investors enjoy. The probes have tarnished the reputations of some of the country’s best-known and largest corporations, and although the facts differ in each lawsuit, they all have a common theme — the alleged wrongdoing has been going on for years and the corrupt industry is unwilling or incapable of correcting it.
Inasmuch as the state governments handle regulation of insurance, differing regulation standards, controls, and disclosure requirements apply from state to state. Although large insurers and brokers for years have resisted federal regulation of insurance, lawsuits such as Spitzer’s latest may have them rethinking that position.
Wouldn’t that be rich? Big insurers and brokers lobbying with consumer groups for federal regulation of insurance? Politics certainly makes for strange bedfellows!

KPMG LLP and its Belgian affiliate agreed to pay $115 million to settle a shareholder lawsuit in Boston claiming they had failed in their audit work for Lernout & Hauspie Speech Products NV, the defunct Belgian maker of speech-recognition software. The proposed settlement is one of the largest ever by an auditing firm.
As with many software firms, Lernout & Hauspie soared to prominence in the late 1990’s in the field of speech recognition software. The company had a market capitalization of nearly $10 billion on the Nasdaq exchange at one point. But in all to familiar a story, Lernout collapsed in 2000 and later admitted to a massive fraud, which included falsifying approximately 70% of sales in its largest unit. The company has been liquidated.
The suit alleged that KPMG was responsible for Lernout’s false and misleading financial statements and sought damages on behalf of the company’s shareholders. As usual in such settlements, KPMG and its Belgian affiliate publicly stated that they settled to avoid “protracted legal battles” and that they “deny all allegations and any liability.”
However, the settlement does not end KPMG’s nightmare with regard to the Lernout account. Earlier this year, KPMG and its Belgian unit were sued for $340 million by the trustee in Lernout’s bankruptcy case, who is attempting to recover that sum for Lernout’s creditors. Moreover, the Belgian liquidator for Lernout piled on by filing a separate claim for $427.5 million against KPMG’s Belgian affiliate. Finally, KPMG’s work in the Lernout case also remains subject to a Securities and Exchange Commission investigation.
The settlement is the latest in a string of such large settlements for KPMG and other big auditing firms. Last year, KPMG paid $125 million to settle shareholder claims related to its audit of drugstore chain Rite Aid Corp., and $75 million related to its audit of Oxford Health Plans Inc. The largest amount that an accounting firm has paid in settlement of a private shareholder class-action suit remains Ernst & Young LLP‘s $335 million settlement in 1999 related to its audit of Cendant Corp.
In the meantime, many relatively good size companies are finding that they cannot hire the services of the Big Four accounting firms because of the firms’ staffing problems attendant to their larger audit clients.

Colony, Texas-based Pizza Inn Inc. has sued Dallas-based Akin Gump Strauss Hauer & Feld LLP — the company’s former law firm — for $7.4 million in damages alleging that the firm breached its duties to the company when it wrote “golden parachute” severance package agreements for four senior Pizza Inn executives. The lawsuit alleges that the potential payout under the golden parachute agreements was more than twice Pizza Inn’s 2003 net income of $3.1 million and that the firm’s legal services benefited the executives, but not Pizza Inn.
The lawsuit is the latest crossfire in a fight for control of Pizza Inn, of which Dallas-based Newcastle Partners LP owns 32.5 percent. In February, company shareholders approved a plan that gave Pizza Inn board control to Newcastle, including replacing the Pizza Inn chairman with Newcastle’s sole general partner and adding the Newcastle president and two other Newcastle backed members to the board. That development coincided with a Thompson & Knight LLP opinion to the board that that adding the Newcastle-backed board members to the Pizza Inn board did not constitute a change in control. A month later, one of the Pizza Inn executives resigned and sought a $605,882 severance payment under his golden parachute agreement. The other three other Pizza Inn executives with similar severance deals still work at the firm.

This Wall Street Journal ($) editorial examines the recent report issued by the Office of Federal Housing Enterprise Oversight (Ofheo) in regard to Fannie Mae‘s accounting machinations and what it found is troubling, to say the least.
By improperly delaying the recognition of income, Fannie Mae created a cookie jar of reserves and by improperly classifying certain derivatives, it was able to spread out losses over many years rather than recognizing them immediately. Accordingly, Fannie Mae’s managers in any quarter could reach into the cookie jar of reserves to compensate for poor results or add to it to lessen good ones. As the WSJ notes, this arrangement gave Fannie Mae “inordinate flexibility” in reporting the amount of income or expenses over reporting periods, which allowed it to manipulate earnings in order to hit target numbers for executive bonuses for Fannie Mae executives:

Ofheo details an example from 1998, the year the Russian financial crisis sent interest rates tumbling. Lower rates caused a lot of mortgage holders to prepay their existing home mortgages. And Fannie was suddenly facing an estimated expense of $400 million.
Well, in its wisdom, Fannie decided to recognize only $200 million, deferring the other half. That allowed Fannie’s executives — whose bonus plan is linked to earnings-per-share — to meet the target for maximum bonus payouts. The target EPS for maximum payout was $3.23 and Fannie reported exactly . . . $3.2309. This bull’s-eye was worth $1.932 million to then-CEO James Johnson, $1.19 million to then-CEO-designate Franklin Raines, and $779,625 to then-Vice Chairman Jamie Gorelick.

The WSJ concludes:

Fannie Mae isn’t an ordinary company and this isn’t a run-of-the-mill accounting scandal. The U.S. government had no financial stake in the failure of Enron or WorldCom. But because of Fannie’s implicit subsidy from the federal government, taxpayers are on the hook if its capital cushion is insufficient to absorb big losses. Private profit, public risk. That’s quite a confidence game — and it’s time to call it.

New York-based Weil, Gotshal & Manges is a major international law firm that is particularly well-known in bankruptcy and reorganization circles. The firm is counsel for the debtors-in-possession in both the Enron and MCI/WorldCom reorganization cases, which are two of the largest chapter 11 cases in history. Over the past 20 years, Weil has built upon its reorganization expertise to become a well-regarded and well-balanced full service firm.
However, the firm’s nickname within the legal profession — which is the title of this post — makes fun of the firm’s traditionally high fees charged to its clients, and this New York Sunday Times article reports on two pending lawsuits against the firm that reflect another image problem at Weil and other big law firms — i.e., that the firm is more incentivized to make money than to protect the interests of its clients:

Weil Gotshal is embroiled in two lawsuits by former clients who contend that the firm breached its duty to provide them with its undivided loyalty, as state rules on ethics require. The cases – one by the owners of a luxury shop, now defunct, in the Mall at Short Hills, N.J., and one by the pop singer Michael Bolton – stem from very different circumstances. But each case is a cautionary tale for big law firms, experts say.

The fashion boutique’s allegations against Weil are particularly troubling:

[The owners of] Fashion Boutique of Short Hills [are pursuing] their contention that the law firm represented them in a suit against the fashion house Fendi even as it also agreed to represent Prada in another case. A few months earlier, Prada had teamed up with LVMH Mˆet Hennessy Louis Vuitton to buy a 51 percent stake in Fendi.
Weil Gotshal did not tell the owners, Annette C. Fischer and her daughter, Randi Fischer, that it was also representing Fendi’s new owner until seven months after it started working with Prada; by then, a jury was already deliberating the Fischers’ contention that Fendi had used unfair business practices to run them out of business to protect its new flagship store on Fifth Avenue in Manhattan. In the case against Weil Gotshal, Fashion Boutique is seeking $15.5 million, an estimate of the value of lost business.

Despite these troubling allegations, Weil, Gotshal is not shying away from the fight — the firm has asserted a counterclaim against the firm’s former clients in the Fashion Boutique lawsuit for $2.7 million in unpaid attorneys’ fees.
And Mr. Bolton’s allegations against the firm stem from the firm’s attempt to represent the conflicting interests of co-defendants who have potential claims against each other if the claim against them is established:

Mr. Bolton . . . sued Weil Gotshal in New York Supreme Court in Manhattan last December, seeking $30 million. The firm had defended him, along with his publisher, Warner-Chappell Music Ltd. of Britain, and his record label, Sony Music Entertainment Inc., in a 1994 suit contending that Mr. Bolton had infringed someone else’s copyright with his 1991 hit “Love Is a Wonderful Thing.” When a jury found that the song was too much like a 1964 tune of the same name by the Isley Brothers, [Mr. Bolton and the other defendants] were ordered to pay more than $5 million in damages. Mr. Bolton, however, soon learned that he was personally responsible for the entire judgment because his contracts with both Warner-Chappell and Sony said that he would indemnify them in the event of a judgment of copyright infringement.

Expect both of these cases against Weil to be resolved or settled before trial. If Weil cannot resolve the cases through summary judgment, then the firm will not risk allowing a jury to tabulate the damages against the firm. Jurors tend to get out their calculators when assessing damages against a law firm defendant.

Charles A. (“Charlie”) Beckham Jr., a partner with Haynes and Boone LLP in Houston, has been elected as chair of the bankruptcy law section for the State Bar of Texas for a term running through June 2006.
Deborah D. Williamson, a shareholder with law firm Cox Smith Matthews in San Antonio, will serve as vice-chair and will take over the chair position after Mr. Beckham’s term expires.
Mr. Beckham has worked for over 20 years in bankruptcy law in both El Paso and Houston, and has represented primarily lenders and other parties in many Chapter 11 bankruptcy cases, particularly in the oil and gas industry. He currently represents the co-chair of the Creditors Committee in the Enron Corp. chapter 11 case in New York.
The bankruptcy law section of the State Bar of Texas is an 800-member organization and is one of the most active sections of the State Bar of Texas in terms of providing education programs for the legal profession and the public.
Congratulations, Charlie!

Justice Wallace B. Jefferson of San Antonio, the first African American to serve on the Texas Supreme Court, will be named chief justice of the Court today by Governor Rick Perry.
Governor Perry appointed Justice Jefferson to the court in 2001, and he won election to the Court the next year. Justice Jefferson will replace former Chief Justice Tom Phillips, who resigned earlier this summer after serving on the court since 1987.
Justice Jefferson will lead the all-Republican Supreme Court during a tumultuous time. A coalition of school districts has challenged the constitutionality of the state’s school finance system, and a decision in that case is expected shortly from the state District Court in Travis County. No matter how that decision turns out, the decision will be appealed and the Supreme Court is expected to review it.
Governor Perry created somewhat of a stir earlier this year when he predicted to a crowd of supporters in Dallas that the Supreme Court would not force the Legislature to change the school finance system. At the time, Justice Jefferson publicly defended the Supreme Court as vigorously independent and stated that no justices spoke to Governor Perry about the case. Governor Perry later backed off his prediction and confirmed that he had not lobbied any Supreme Court justices on the matter.
Justice Jefferson grew up in San Antonio, the son of a hard-working military family that stressed education. He won a scholarship to an honors program at Michigan State University before attending the University of Texas Law School. After earning his law degree, he went into private practice in San Antonio, where he opened his own law firm in 1991.

This Texas Observer article provides an interesting analysis on how Dallas-based TXU Corp dealt with the carnage in the energy industry resulting from the demise of Enron Corp.