SEC Sued by Investor for Failing to Stop Mr. Madoff's Scheme

Here is a link to an American Lawyer article detailing a defrauded investor's suit against the SEC for failing to uncover and stop Mr. Madoff's fraud. According to the article, plaintiff's counsel is a former SEC lawyer who acknowledges sovereign immunity rules but has tried to plead around them. The claims are asserted under the Federal Tort Claims Act.

Canadian Court Allows Indirect Purchaser Antitrust Class Action

Here is an interesting paper from Davies Ward Phillips & Vineberg on a Canadian trial court decision certifying an antitrust class action for indirect purchasers of hydrogen peroxide products. The commentators view the decision as a potentially significant expansion of Canadian law if the decision withstands appeals. A key excerpt is as follows:


"In Irving Paper, Justice Rady relied on two more recent decisions of the Ontario Court of
Appeal – Markson v. MBNA Canada Bank and Cassano v. The Toronto Dominion Bank – to
frame her analysis of the issue. In her view, these two decisions have overtaken Chadha
and signal a relaxation of the evidentiary threshold prescribed by Chadha. Among other
things, Her Honour interpreted Markson as establishing "that not every class member need
have suffered a loss and so it is not necessary to show damages on a class-wide basis".
Justice Rady also relied on the Ontario Superior Court's 2004 decision in Hague v. Liberty
Mutual Insurance Co. and the Ontario Court of Appeal's decision in Cloud v. Canada
(Attorney General) as authority for the proposition that she was not required to reconcile the
conflicting expert opinions before her regarding the existence of a workable class-wide
means to prove liability.

Another US Plaintiff's Firm Moves into Europe

Mark Lanier's plaintiff's firm is expanding operations into London. As described in the media, the firm is establishing an arbitration practice. Here is the firm's press release and here is a law.com article.

The press release does not say this but one can envision that this effort has larger goals than simply handling some commerical cases. Instead, one can see this move as following a model set by others. That is, branch out to a new market using a product that will pay for itself more quickly than does tort litigation. That is, business litigation for hourly and/or contingent fees usually follows a time line that is shorter than the timeline for tort litigation. At the same time, that business litigation platform provides a basis for developing local skills and contacts that will be exploitable as the market for tort litigation evolves and expands over time.

Vice Chancellor Strine's Comments on Corporate Decision Making and Risk Taking, Including Conflicts of Interest Between Constituencies

One reality of modern life is that large scale corporate actions and decisions can and do profoundly effect the financial and physical lives of innumerable people. To name but a few, consider the financial impacts of the ongoing financial fiasco and large-scale scams exemplified by Mr. Madoff, and consider the physical impacts of now-banned chemicals and asbestos. Accordingly, the subject of corporate decision-making is important to many currently ongoing policy debates that involve both national and international laws.


On the topic of corporate decision-making and regulation, I commend for thought the following words by Vice Chancellor Leo Strine, an experienced and respected Delaware Chancery judge. Note especially his comments about conflicts of interest between corporate constituencies. In that vein, consider also the Parmalat ruling discussed here last week on the in pari delicto defense and its elements.

My view? Mr. Strine's observations are correct. Unfotunately, most judges, legislators and academics do not have the benefit of Mr. Strine's experiences and and so many but not all of our legislatures, agencies and common law courts are making far less than optimal decisions because they do not understand or acknowledge the complexities and conflicts of interest present in much of modern corporate behavior and in many cases presently in litigation. One result is that efforts to legislate or regulate are increasingly ineffectual. Another result is that corporate mistakes and/or fraud are followed by explosions of litigation, and soon all sides are more or less accurately complaining that litigation is too slow and too expensive. And, some times, the lawsuits produce only woefully tiny sanctions for those who were part of or turned a blind eye to grossly illegal behavior. Moreover, because we are human and grow tired of the past, there is a lessening of the attention paid to white papers and committee reports any particular problem, and so attention turns to the next debacle.

Will societies ever break out of this cycle? I hope so, and suggest that doing so requires the arduous but necessary step of making better decisions at the start by hearing from more conflicting constituencies at earlier points in various decision-making processes.


(As a preface for those readers who may not know, Vice Chancellor Strine sits in the Delaware Chancery court that each year is the venue for a large percentage of the major corporate litigation in the US. The judges of that court each year see and resolve myriad legal issues involving corporate decision making at board room levels. The judges often decide cases based on extensive testimony from senior players in the business and m & a world, and the judges also see many of the writings of the decision-makers, some genuine and spontaneous emails and others comprised of legal word smithing designed to provide evidence to support a later defense that the actions were not illegal. These experiences offer the chancery judges some unique windows to look inside corporations to see how decisions in fact are made.)

The comments by Vice Chancellor Shrine are online here, and also are pasted in below in full text. Vice Chancellor Shrine's comments are part the NYT Dealbook pages presenting an online dialogue last week regarding the roots and causes of the financial fiasco. Most of the entries are worth reading. Hat tip to the Conglomerate blog for drawing my attention to the fact that Mr. Strine was a participant.


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" Why Excessive Risk-Taking Is Not Unexpected
October 5, 2009, 1:30 pm



Whatever the possible causes of the recent financial debacle, it seems clear that there is one cause that can be ruled out: that the directors and managers of the failed firms were unresponsive to investor demands to take measures to raise profits and increase stock prices.

Rather, to the extent that the crisis is related to the relationship between stockholders and boards, the real concern seems to be that boards were warmly receptive to investor calls for them to pursue high returns through activities involving great risk and high leverage. Indeed, the recent financial industry debacle is perhaps most surprising for its predictability in light of mundane realities accepted by social scientists of the center left and right.
It is well known that businesses aggressively seeking profit will tend to push right up against, and too often blow right through, the rules of the game as established by positive law. The more pressure business leaders are under to deliver high returns, the greater the danger that they will violate the law and shift costs to society generally, in the form of externalities. In that circumstance, if the rules of the game themselves are too loosely drawn to protect society adequately, businesses are free to engage in behavior that is socially costly without violating any legal obligations.

Moreover, the ability of any particular firm to resist imitating the overly risky, but law-compliant behavior of competitors will be compromised to the extent that managers face criticism or even removal for not keeping up with so-called industry leaders whose high, short-term returns have pleased a stock market filled with short-term investors looking for alpha.

Similarly, when power and influence over corporate activities is exerted by those whose primary interest is immediate gain and who have little or no intention to stay invested until the full costs of risky activity are borne — e.g., certain institutional investors who invest the money of others — corporate managers will have an incentive to be responsive to their demands.

When the marketplace presents opportunities for corporations to generate immediate gains through transactions structured so the profits are taken up front and the risks are perceived as minimal, corporations seeking to please a short-term-focused market are likely to seize them. Risks might be sold immediately to others, or theoretically contracted away through arrangements that look like insurance but don’t involve counterparties meeting the standards that apply to insurance companies. Or perhaps the risk is structured to kick in several years down the road.

Likewise, when institutional investors with strong voting clout encourage corporations to increase leverage in order to engage in stock buybacks, increase dividends or reap higher trading gains, responsive corporate boards may leave their corporations without adequate capital to weather tough times, times when many of the proponents of leverage are likely not to be around as stockholders anymore.

If an industry senses that the United States Treasury has its back in the event that risky activity threatens the industry’s health, its leaders may respond even more freely to these market incentives, because they view the industry as having a form of insurance from the taxpayers. When the industry and its leaders have also designed compensation systems that reward managers for generating short-term profits through risky activity — systems often implemented with the encouragement of investors desiring to give managers a strong incentive to pump up stock prices — managers who might otherwise be more focused on the long-term health of their employers are encouraged to go hellbent for leather for immediate gain, too.

During the last 30 years, it is indisputable that: (1) regulatory standards have been greatly relaxed, giving the financial industry free rein to leverage itself to the hilt and to engage in a wide range of speculative and increasingly opaque, complex activities, often without rigorous safeguards; (2) the power of stockholders to influence the composition of corporate boards and the direction of corporate strategy has been markedly enhanced; (3) institutional investors who hold stocks, on average, for a very brief period of time and are highly focused on short-term movements in stock prices have become far more influential and prevalent; and (4) “pay for performance” compensation systems were implemented to align the interests of managers with stockholders by giving managers incentives to pump up corporate profits in a manner that will increase the corporation’s profits and stock price immediately, rather then durably.

Distilled down, what is most critical is that robust prudential regulation protecting society from risky corporate activity abated, precisely when corporations faced increasingly strong pressures to engage in much riskier endeavors in order to generate short-term results. In the financial sector, this potent cocktail was chased by several governmental interventions to rescue the industry when its “innovative” activities threatened its health, a course of conduct that suggested that the financial industry could take risks other industries could not, because it had a de facto form of federal insurance.

There is, of course, much that is simplified about this description. But, it is in the main true. And it suggests that policy makers need to be mindful of the relationship between the power of the stock market to influence corporate policies and the strength of prudential regulation. Because even diversified long-term stockholders are likely to have an appetite for risk that exceeds what is socially prudent, there will always need to be strong rules of the game to govern industries whose failure poses socially unacceptable risks.

There is no escape from the fact that although corporations are sometimes seen as owned by those who own their equity and elect their boards, the actions of corporations affect a broader range of constituencies, including workers, creditors, consumers and society more generally; no sensible regulatory system can ignore that fact.

The difficulty is compounded when those who directly influence public corporations are not primarily end user investors focused on the long term and keenly worried about excessive risk — think workers who must invest in mutual funds for retirement — but far more likely to be financial intermediaries whose investment horizons are often less than a year.

Strong regulatory standards are indispensable, not simply for society, but also for end-user long-term investors themselves, who bear the long-term costs of corporate idiocy.

Therefore, if the correct policy balance is to be struck regarding regulation of the financial industry and other industries that pose large systemic and societal externality risks, policy makers cannot continue to avoid the obvious alignment problem that now vexes our corporate governance system.

Most Americans invest with a rational time horizon consistent with sound corporate planning. They invest with the hope of putting a child through college or providing for themselves in retirement. But individual Americans don’t wield control over who sits on the boards of public companies. The financial intermediaries who invest their capital do. These intermediaries have powerful incentives — in important instances, not of their own making — to push corporate boards to engage in risky activities that may be adverse to the interest of long-term investors and society. That is, there is now a separation of “ownership from ownership” that creates conflicts of its own that are analogous to those of the paradigmatic, but increasingly outdated, Berle-Means model for separation of ownership from control.

Unless these incentives and conflicts are addressed, it should be expected that corporate boards will continue to face strong pressures to manage their enterprises in a manner that emphasizes the short term over the long term, and that involves greater risk than is socially optimal. As a result, more stringent than optimal prudential regulation will have to be in place to bar the financial sector from taking risks that endanger society as a whole, rather than simply the capital of their investors and the employment of their employees.

There is nothing new about the insight that the more incentives businesses have to generate short-term profits, the more likely it is that they will engage in excessively risky activity, especially if they believe that the risks will be borne by others if they come to fruition. We simply have another hard-learned lesson to point to about the costs of ignoring these realities.

In shaping the future, policy makers might therefore focus on two key objectives: re-instituting sound prudential regulation over financial institutions critical to the overall well-being of our capital markets and economy, and implementing policies that focus stockholders and boards on the objective of having corporations produce wealth in both sound, durable fashion.

Ideally, we want a system where corporate boards are highly accountable and responsive to their stockholders for the generation of sustainable profits. But for that policy objective to be achieved, stockholders themselves must act like genuine investors, who are interested in the creation and preservation of long-term wealth, not short-term movements in stock prices. So long as many of the most influential and active investors continue to think short term, it is unrealistic to expect the corporate boards they elect to strike the proper balance between the pursuit of profits through risky endeavors and the prudent preservation of value.

Leo E. Strine Jr., vice chancellor of the Delaware Court of Chancery, is also the Austin Wakeman lecturer in law of Harvard Law School, an adjunct professor of law at the University of Pennsylvania and Vanderbilt law schools, and a Crown Fellow with the Aspen Institute."

Proposal for National Juries for Mass Tort Cases

Here is a late September post presenting a condensed version of a law review article proposing "national juries" for mass tort litigation. The proposal is from Professor Laura Gaston Dooley, a professor at the Valparaiso University Law School. Looking quickly through her CV at the school website, it appears Prof. Dooley clerked for two years for federal judges and then joined academia. Her work also includes being a part of the "Members Consultative Group, Project on Aggregate Litigation. American Law Institute," which is a group identified here.

Set out below are some excerpts from the condensed version. The proposal makes some interesting points. I've not read the full law review article. The condensed version does not hone in on two topics that seem key to me: state-by state variations in the applicable legal rules, and the manner in which a jury would cope with the applicable and evolving science in a mass tort "toxic tort" case.

See below for the excerpts that most caught my eye.
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"The reexamination problem reflects tension between competing values in complex litigation: Consolidated cases may lead to unconstitutional reexamination of overlapping issues, yet trying individual cases presents problems of efficiency loss and forum manipulation. We must therefore choose between the evil of bifurcation and the evil of inefficient relitigation of the same issue, with the concomitant risk of inconsistent results. A third option—treating a single litigation as a national unit—vests too much power in one local jury to unleash national consequences.

Is there a fourth option? Empanelling a national jury would mitigate reexamination problems while preserving the efficiency gains of aggregation. A national jury would also address the concern that a local citizenry should not decide issues of national importance. And, most importantly, it would vindicate the animating concern of the Seventh Amendment: citizen participation in civil dispute resolution.

Our willingness to work out the logistical details of the national jury proposal and to absorb its inevitable costs is a function of our commitment to citizen participation in large-scale litigation. One difficulty, of course, will be assembling a national jury pool representative of a country as large and diverse as the United States. Even in much smaller jury districts, underrepresentation of minorities on jury venires has sparked an enormous amount of scholarly literature and litigation.8 Congress would have to consider how to assemble a nationally representative venire. A starting point might be to draw candidates for the national jury pool from congressional districts, since those boundaries have already withstood constitutional and statutory scrutiny under election laws.9 The census process could also be used to draw districts.

The expansion of jury pools from local to national may also require us to rethink the size of the venire and the petit jury, as well as verdict format and voting mechanisms. Obtaining some semblance of the required representativeness will no doubt require larger juries than the current six or twelve members. Indeed, in order for a national jury to function, the discussion may well have to shift to how large a group can effectively deliberate without becoming unwieldy.

The grand jury model may prove useful. One can imagine a national jury as a cross between the grand jury and the special jury: Jurors could serve for specified lengths of time, perhaps in particular courts hosting multi-district complex litigation. The learning curve for such jurors would be high. Having decided, say, causation issues in one products liability case, the national jury would have an informational advantage in understanding procedure and applicable substantive law for other cases. And this gain can be realized without sacrificing the democratic makeup of the jury—a quality lost in elitist special juries.

The civil jury, though steeped in history, is not frozen in time. In an era of increasingly complex litigation, the civil jury must adapt structurally to modern disputes while preserving its rich history and constitutional function. Empanelling national juries in cases of national scope may well be the only way to preserve meaningful citizen participation in large-scale litigation."

Transcript of June 25 GM Hearing on Withdrawal of Request for Asbestos Futures Representative

As a result of bugging the clerk's office and the court reporter's office, the transparency-blocking 90 day veil has now been lifted from some of the General Motors bankruptcy hearing transcripts.

Here is the June 25, 2009 transcript that reflects the asbestos plaintiff's lawyers withdrawing the request for appointment of a futures representative. The withdrawal was based on the grounds that there would not be a section 524(g) injunction order entered in the case and that orders entered in the case do not bind future claimants.

So, the asbestos personal injury litigation saga no doubt will go on as to GM at least for future claims. And, just as the bankruptcy court orders do not bind future personal injury claimants, the orders also should not bind underlying case co-defendants which decide to bring in those cases a contribution or apportionment claim against the new GM entity, if it survives.

Who Will Invest in UK Law Firms When It Becomes Legal in 2011 ?

Law firms as an investment opportunity for non-lawyers? You bet. It is by now well-known that an Australian plaintiff's firm went public back in 2007. This August 3 article from Bloomberg covers the reality that in 2011, it will become legal in the UK for non-lawyers to invest in law firms, and describes several groups that say they are interested in investing in UK law firms.