Friday, February 27, 2009

Corporate Governance Standards under TARP - the Rundown

When it comes to TARP (and by TARP I mean the EESA, and by the EESA I mean the ARRA), everyone’s talking about compensation limits. But there is a lot more to the new standards imposed on recipients of TARP funds by the recent legislation, and this is your one-stop, ten-minute guide.


TARP is the Troubled Asset Relief Program, which was established under the Emergency Economic Stabilization Act of 2008 (EESA). The language of TARP was then slightly amended and finalized in the American Recovery and Reinvestment Act (ARRA), which was signed by President Obama on February 17, 2009.

You can access the full text of the ARRA
here, and the section on corporate governance and compensation limits - Division B, Title VII, Section 7001 - is at the very end. You can also access the full text of the EESA here.

What are the corporate governance requirements under TARP as amended?

All TARP recipient companies are required to establish and follow certain standards. Some are pretty non-controversial, while others might surprise you.

  • Unnecessary and Excessive Risks - Limits on incentives that encourage Senior Executive Officers (SEOs) to take “unnecessary and excessive risks that threaten the value” of the company while TARP funds are still owed.

  • Clawbacks - Recovery of any bonus paid out to a SEO or the next 20 most highly-compensated employees, if that bonus was “based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate.”

  • Golden Parachutes - Prohibition on any golden parachute payment made to a SEO or the next 5 most highly-compensated employees paid out while TARP funds are still owed. “Golden parachute payment” is defined in the previous section as “any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued.”

  • Long Term Restricted Stock - Prohibition of any bonus or incentive compensation other than long-term restricted stock, provided that the stock does not fully vest while TARP funds are still owed, and is not greater than 1/3 of the receiving employee’s total annual compensation. This one is unique, however, because the amount of employees it applies to depends on how much in TARP funds the company has received. The number is a sliding scale between 1 and 20, but each level includes a clause that states “or such higher number as the Secretary may determine is in the public interest” - hence the numbers are just a minimum guideline.

  • Manipulation of Reported Earnings (or what I like to call the “duh” provision) - Prohibition of any compensation plan that would “encourage manipulation of the reported earnings” so as to increase compensation of any of employees.

  • Compensation Committees - Establishment of a Board Compensation Committee that is “comprised entirely of independent directors” and meets at least semi-annually. TARP recipients that are privately-held may have their Board of Directors stand in for the independent compensation committee.

  • Luxury Expenditures - Establishment of a “company-wide policy regarding excessive or luxury expenditures” such as “entertainment or events; office and facility renovations; aviation or other transportation services.” (See Bank of America, Northern Trust, Merrill Lynch, the Auto CEOs, et al. I think we’re all pretty familiar with why this section was necessary.)

  • Certification of Compliance - The CEO and CFO of each TARP recipient has to file a certification of compliance; if the company is publicly traded, the compliance certification goes with the annual SEC filings. As those of us who have taken Securities Regulation know, certifying compliance can be a painstaking and risk-laden process, but that’s why you keep attorneys around.

Now here are some of the more interesting requirements:

  • Say-on-Pay - All TARP recipients must institute a say-on-pay policy. A say-on-pay provision is a non-binding advisory vote by shareholders on executive compensation plans as disclosed in the CD&A section of SEC filings. Boards do not have to follow the results of the shareholder vote, but are strongly encouraged to do so. Say-on-pay has had some momentum in recent years, mostly from institutional investors, but this is the first time the practice has been mandated in any way.

  • Retroactive Review of Executive Compensation - The Treasury must review all “bonuses, retention awards, and other compensation” paid out to SEOs and the next 20 most highly-compensated employees for each TARP recipient to “determine whether such payments were inconsistent with” the purposes of TARP or contrary to the public interest. If the Treasury finds inconsistency, they will negotiate appropriate reimbursement to the federal government. Okay, but here’s the catch - while most people are assuming that the Treasury is only going to be reviewing 2008 and 2009 bonuses, there is no actual time limit to retroactivity set out in the legislation. While a recipient could argue that bonuses paid out before 2008 were irrelevant to the current economic crisis or to the compensation limits in the legislation, the Treasury still retains the right to review any compensation practices for the applicable employees going back in time indefinitely.

  • Repayment - This section was added to the legislation after opponents of Barney Frank’s amendments (say-on-pay) argued that we were getting ahead of ourselves in oversight. Therefore, TARP recipients reserve the right to repay TARP funds “without regard to whether [they have] replaced such funds from any other source.” Also, the Treasury must liquidate warrants associated with the recipient’s funds at the current market price. While understandable that the emphasis here is on repayment, this provision has the potential to be incredibly dangerous.

So what now?

Look for more discussion on say-on-pay initiatives. Say-on-pay is a very effective way for boards to give the appearance of relinquishing control over executive compensation while not really being bound to the shareholders’ decision. But it also carries the power to make boards accountable by highlighting situations when they choose to override shareholders’ decisions, and perhaps pay the consequences with a proxy fight.

Also, it will be interesting to see the how the final section on repayment plays out. I know we’re getting ahead of ourselves discussing repayment already, but the fact that TARP recipients themselves have the power to decide how and when repayment takes place puts the spotlight squarely on the corporate boards who are seen as having created the mess in the first place.

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Geithner Interview on Banking Stress Tests

The NPR Planet Money Podcast interviewed Treasury Secretary Timothy Geithner on Wednesday about the Treasury's stress testing of U.S. banks. The interview explains a lot of the banking portion of the financial crisis in simple terminology and provides a map of the government's plans to alleviate the credit crunch. Read More......

Thursday, February 26, 2009

SEC & CFTC May Get Bigger Budgets

According to The Wall Street Journal President Obama is asking for a 13 percent increase in the SEC's budget and a 44 percent increase for the CFTC.

This would put the SEC's budget at over $1 billion and the CFTC would be at $160 million. The administration hopes the SEC will use the additional funds to "pursue a risk-based, efficient regulatory structure that will better detect fraud and strengthen markets." With the money, the CFTC would increase staff, and would like to regulate credit derivatives.

I am not taking issue with the spending, but I am interested in knowing what the money would be better spent on. Should the SEC and the CFTC spend more on prosecuting violations, imposing additional rules, or some combination of the two?

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Wall Street Bountyhunters?

The Freakonomics blog discusses the possibility of the SEC instituting bounties for frauds exposed by whistleblowers. This sounded unrealistic to me until Steven Dubner pointed out that the IRS already does this. Read More......

Wednesday, February 25, 2009

Index Funds Losing Popularity?

The Wall Street Journal reports that E-Trade will be closing down all four of its index-linked mutual funds. E-Trade claims that the company is financially healthy, so this step may be a response to a reduction in investor demand in index funds.

Index funds seek to replicate market returns, instead of attempting to generate absolute returns. This means that unlike an actively-managed fund that aims to "beat the market" by picking winning stocks and to turn a profit whether or not the market is in a slump, an index fund's purpose is to match the market return, even when that return is negative. Investing through an index fund allows an investor to eliminate much microeconomic, company-level risk through the high level of diversification achieved by investing in an entire index of stocks rather than just a few stocks.

However, index funds are still subject to the macroeconomic risks that affect the entire economy like inflation and credit illiquidity. As the current economy continues to sink into recession, stock indicies are unlikely to see much growth in the near future, making index fund investing a losing strategy in the short run. Index fund investors may now be heading for the doors to gain short-term gains through actively-managed funds or to prevent further losses by retreating from the capital markets entirely. Either way, this trend may only last as long as the recession because once investor optimism returns (however long that takes), investors will likely once again see index funds as the best way to ride the wave of a rising economy.
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Tuesday, February 24, 2009

Inside Trader Gets Comeuppance

The New York Times reports that today Judge Deborah A. Batts sentenced former broker David Tavdy to 63 months in minimum-security federal prison.

A year ago Tavdy pleaded guilty to conspiracy and securities fraud charges filed by the Securities and Exchanges Committee following the exposure of a massive insider trading ring on Wall Street. Tavdy was one of 13 involved in what authorities at the time considered "one of the most pervasive insider trading rings since the 1980s."

Between 2002 and 2006, Tavdy made 10.3 million dollars off of security transactions made after receiving tips from Mitchel S. Guttenberg, a former UBS executive. Guttenberg was sentenced to 6.5 years last November for his part in the scheme.

Despite Tavdy's statement that "I made a mistake and I regret it," Judge Batts reflected that this was not an isolated case and Tavdy and his cohorts made millions off of insider information. The year time between the pleading and the sentencing tends to dull the severity of Tavdy's actions. Some might even ascribe to the mentality that Tavdy made a few mistakes and got caught up in a bad situation.

However, if you look back at some of the details reported a year ago in The New York Sun, the only mistake Tavdy and his cohorts seem to have made was getting caught. Cash deals, disposable phones, secret codes, blackmail, and bribery - sounds more like an organized crime ring than a simple broker getting caught up in the paper chase. Furthermore, Tavdy wasn't just some average joe who stumbled upon some nonpublic information. He knew exactly what he was doing. He was a broker. He payed for nonpublic information. He used the information to make massive illegitimate profits. He should be punished accordingly.
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Honest Services Fraud

We have all read about alleged $50 billion Ponzi schemes and massive, Enron-like scandals. And most of us are probably not too concerned about being caught up in such scandal. However, a recent article in the ABA's Section of Business Law addresses an issue that should hit closer to home: honest services fraud.

As the article indicates, because of the vagueness of Section 1346 of Title 18 - which makes honest services fraud a federal crime - any lack of integrity or fundamental unfairness on the part of a company could possibly lead to criminal prosecution. Although some forms of services fraud are obvious, such as when a law firm fails to disclose a blatant conflict of interest, other forms of fraud are less clear. Specifically, problems arise in deciding where to draw the line because "Congress did not define the term 'honest services.'"

To illustrate this potential confusion, the article lists a few seemingly innocent scenarios that involve some form of deception. For example, the author asks whether fraud is committed when an associate at a law firm writes a complaint letter on firm stationary to a retailer who has sold him shoddy merchandise. I'm no expert, but I'd like to think that no criminal action could be sustained without some intentional deception on the part of this imaginary associate. Still, the requisite intent under the statute is unclear, and some courts have held that "honest services fraud could be sustained only where the conduct was enforceable in tort." But, this does little to clarify the statute, as the line that distinguishes crime from tort is often blurred.

It is debatable whether the honest services fraud statute is unconstitutionally vague. Regardless, it is obvious that in these times of heightened scrutiny, attorneys and corporate employees must represent themselves with an increased sense of cautiousness and responsibility.
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Monday, February 23, 2009

Madoff Acounting Firms May Be Liable

As the Madoff scandal unfolds, so are the lawsuits. And various accounting firms, who oversaw the books at Bernard L. Madoff Investment Securities LLC, may be legally vulnerable.

The National Law Journal reports that one Bloomington, Minnesota accounting firm, McGladrey & Pullen LLP, has been hit by lawsuits alleging that it failed to detect problems in two seperate Ponzi schemes -- the $50 billion investment scam by New York financier Bernard Madoff and the $3.5 billion alleged "electronics" scheme by Wayzata, Minnesota businessman Tom Petters.

McGladrey & Pullen was accused of negligence and failure in its professional duty of care in audits of two investment firms that financed the allegedly fraudulent electronics purchasing scheme by Petters in a federal suit in October. Ellerbrock Family Trust v. McGladrey & Pullen, No. 08-cv-5370 (D. Minn.). Petters, founder of Petters Group Worldwide, was indicted last year on 20 counts of fraud, conspiracy and money laundering.
A second lawsuit was filed in Connecticut state court on Jan. 30 by Maxam Capital Management. Maxam accuses its own accountants of negligence for failing to detecting the Madoff fraud, in which Maxam invested all its $280 million assets. Maxam Absolute Fund v. McGladrey & Pullen, No. FBT-cv-09-5021972-5 (Bridgeport, Conn., Super. Ct.).
The article points out that there are three levels of financial reviews: audited, reviewed and compiled. An accounting firm that compiles financial information just plugs numbers into a spreadsheet, but a full-blown audit tries to independently verify financial claims.

In the Madoff case, it has been discovered that the auditors accepted financial statements generated by Madoff's auditor from a very small unknown accounting firm. Accordingly, there is definitly reason to believe that the auditors acted negligently or with some level of knowledge.

With the astronomic size of losses at stake, lawyers will have to be creative in trying expand the scope of liability to as many people as possible.
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Sunday, February 22, 2009

RiskMetrics Group Webcast – The Downsides to Executive Compensation Limits

RiskMetrics Group held a webcast yesterday highlighting key points for the upcoming proxy season, and much of the hour focused on the future of executive compensation.

I thought it was particularly noteworthy when one of the speakers emphasized the need for clear, direct ruling and recommendations – specifically from the SEC – on the new compensation limits and how they will be most effective. He brought up three unintended but likely consequences of the compensation limits:

  1. An executive race to the bottom – because the compensation limits only apply to companies that receive TARP funds, executives may be more likely to leave firms where their compensation is limited for firms that never had to receive TARP funds in the first place.
  2. Inappropriate emphasis on repayment – because the compensation limits only apply until the government funds have been repaid, executives may be more likely to repay the loans back more rapidly than is prudent for the interests of the firm and its shareholders so as to relieve themselves of compensation limits.
  3. Self-imposed restraints – because the compensation limits only apply to certain members of a firm such as corporate officers and directors, capable and talented executives may avoid being promoted so as not to be subject to the compensation limits.

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NY Times Economix Blog Joins the Discussion on Executive Compensation

The Economix blog argues against traditional economics-based models of executive compensation.

Ideally, boards would act as faithful representatives of the shareholders. Therefore, boards are assumed to structure the compensation of executives to also be aligned with shareholders’ interests. This is a phenomenon known as “optimal contracting,” with shareholders as principals and board members as their agents.

How often optimal contracting actually occurs, however, is up for debate. The Economix blog defers to the book “Pay Without Performance: The Unfulfilled Promise of Executive Compensation” to make its argument.

The authors of Pay Without Performance argue that American corporate governance really functions under a “managerial power” model, where CEOs enjoy enough power over boards to dictate their own compensation, subject only to an “outrage” constraint. The “outrage” constraint is described in the book as the shareholders’, the media’s, and the public’s reaction to what they might learn about executive compensation, thus rooting the success or viability of compensation on the practice of secrecy. This worked for a long time, as compensation was broken up to into multiple components not easily summarized in a single figure – that is, until the SEC required corporations to disclose more detail on executive compensation.

So can we characterize the current legislation on executive compensation limits as this “outrage” to which the authors of Pay Without Performance referred? How far will we take this outrage? What other forms might it take in the future? What will be the most effective channel for this public outrage - and will our normal democratic channels be enough to quell the public?
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Friday, February 20, 2009

NBA and its Teams not Spared in Continuing Economic Crisis - By: Jason Vismantas

Earlier this week, the Sports Business Journal shed light on the NBA’s plan to borrow a much needed $175 million. While this doesn’t seem like much, it comes as a supplement to an already existing $1.7 billion credit facility in place. Under the original loan, the NBA used its media contracts as collateral to secure the $1.7 billion, $1 billion of which was funded by JP Morgan and 12 other banks (no doubt banks receiving TARP money) through short term loans. Interestingly, the remaining $700 million of the original deal was privately funded by sources like pension funds and insurers, which will be the sources of the new $175 million.

Although this new deal was thought of as well executed on behalf of the NBA, the need for this new money has made some troubling issues apparent.

First, not only have the NBA and its teams gone through a good portion of the $1.7 billion already, but the new money will be primarily used to cover teams’ operating losses, something the NBA nor its lenders ever envisioned. Even more alarming, 15 teams, half the league, have indicated that they would like to receive a portion of the new funds. And, while some teams like the Orlando Magic have been open about sharing their economic woes and need for the new money, sources close to the NBA say that New Orleans, Sacramento, Memphis and New Jersey are teams that are in far more serious, but relatively unknown, financial trouble - even going as far as saying that the New Jersey Nets franchise is near broke. This knowledge begs the questions of whether the $1.7 billion had run out long ago and whether the new $175 million will even help.

In the grand scheme of things though, the most alarming part of all of this, especially for non-sports fans, is the eagerness that both JP Morgan and Bank of America exhibited in securing the financing. While professional sports have been relatively safe investments for institutional lenders over the last couple decades, it’s looking more and more like that will not be the case in the future. Shouldn’t these banks and even private institutions be taking on less risk now rather than more? Whatever the answer may be, the landscape of professional sports financing and operation is changing dramatically.
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GM Cuts off Saab, Says Opel needs $2.3 billion

The New York Times reports that General Motors subsidiary Saab filed for bankruptcy protection in Sweden in this morning. The Swedish car manufacturer is hoping to restructure itself as an independent entity.

Earlier this week General Motors told the treasury department that it had hoped to offload Saab by 2010 as part of G.M.'s restructuring plan.

Saab is G.M.’s worst-selling brand in the United States, selling 21,383 vehicles in 2008, down 34.7 percent from 2007. Its best selling vehicle is the 9-3, of which G.M. sold just over 10,000 cars last year.

By filing for bankruptcy protection Saab is hoping the Swedish government can generate enough financing for Saab so that it can restructure itself into a viable independent entity within three months. Saab, as well as all Swedish auto mobile manufacturers have access to loan guarantees stemming from a support package the Swedish government passed last December.

Meanwhile G.M.'s German subsidiary Opel announced that it would need an additional $2.3 billion from the German government as Opel attempts to restructure itself. Opel is G.M.'s second largest brand behind Chevrolet.

The question now becomes will Saab's filing for bankruptcy and Opel's bid to seek an additional $2.3 million effect the Treasury Department's decision to grant G.M. an additional $9.1 billion in government loans. Read More......

Thursday, February 19, 2009

Is Senator Phil Gramm to Blame for the Financial Crisis?

Time Magazine's website posted an interactive article where readers can vote on which of 25 people are the most to blame for the Financial Crisis. Senator Phil Gramm is one of the choices and is currently in the lead for the most blameworthy.

The article nominates him because he co-authored the Gramm-Leach-Blilely Act which repealed the Glass-Steagall Act. The latter Act "separated commercial banks from Wall Street" and intended to make commercial banks more careful with it's depositor's money. Further, the Time's article cites Gramm for legislating against letting the Commodity Futures Trading Commission "regulate over-the-counter derivatives like credit-default swaps" which brought down AIG.

But is this criticism fair? Congress passed this legislation nearly 10 years ago. It allowed American banks to compete with foreign banks that did not have Glass-Steagall walls. And it worked. Can we pin the Financial Crisis on him because he moved for deregulation? Should he have foreseen this perfect storm? Could he have even anticipated it? Or is he just a fall guy?

The Financial Crisis might not have happened if Glass-Steagall was still around, but what would have happened if it remained in place? To my knowledge no one has introduced legislation to bring back Glass-Steagall. As for credit default swaps, should the CTFC regulate them now or has the market learned its lesson?

Going forward, pinning the blame on someone does not solve any problems. More regulation may be necessary, but I am concerned that there will be too much of it.
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UBS to Reveal Secret Account Information to IRS, Pay $780 Million

UBS AG has reached an agreement of deferred prosecution with the United States Internal Revenue Service after allegedly conspiring to defraud the United States by helping between 17,000-19,000 Americans hide accounts.

The terms of the deal require UBS, Switzerland's largest bank, to provide the IRS with identities and information of accounts, including 250 identities disclosed immediately, as well as a $780 million dollar payment. UBS has 18 months to comply with these terms, help prosectuors, and reform business practices or they face indictment. If UBS complies, the charges will be dropped at the end of the 18-month period.

It is estimated that UBS has helped hide $20 billion and has aided in Americans evading $300 million per year in taxes from 2002-2007.

UBS has also agreed to charges from the Securities and Exchange Commission of acting as an unregistered broker-dealer and investment advisor for Americans.

For more details:
The NY Times
WSJ Law Blog
The Guardian
Business Mirror
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Wednesday, February 18, 2009

Major Changes Brewing for the Futures & Derivatives Markets

Jim Hamilton reports that the House Agricultural Committee has approved legislation that would dramatically alter the regulation of the futures and derivatives markets. The legislation includes numerous provisions, and a few are worth highlighting.

First, the bill would give the Commodity Futures Trading Commission (CFTC) authority to initiate and conduct criminal litigation for violations of the Commodity Exchange Act if the US Attorney General has declined to bring criminal proceedings. Currently the CFTC and SEC only have the authority to initiate civil litigation for violations of their respective Acts, and can only recommend criminal proceedings to the DOJ. Thus, this expansion of the CFTC’s authority would give the agency a much more powerful presence in the futures and derivative markets.

Second, the bill would limit speculative position limit exemptions to “bona-fide hedgers” (i.e. those futures market participants seeking to hedge their price exposure to commodities stemming from production or consumption of those commodities). An important effect—and the probable aim—of this change would be that commodity swap dealers would no longer be exempt from position limits, and commodity index funds and other funds that enter the futures markets through these dealers would in turn be subjected to position limits. The imposition of these limits on commodity funds could potentially reverse the influx of investors into futures that has occurred in the last few years which many believe has led to “excessive speculation”, increased volatility, and artificially high prices.

Third, the bill contains a number of provisions geared towards reining in the unregulated credit default swap market. These provisions give the CFTC the authority to require mandatory clearing of CDSs at CFTC regulated exchanges and to temporarily ban both regular and “naked” CDSs under certain circumstances. While these and other provisions in the bill are still in very early stages, what is clear is that Congress will be very aggressive in pursuing major regulatory changes in the futures and derivatives markets, and we are likely to see equally aggressive legislation for the capital and banking markets in the near future.
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Tuesday, February 17, 2009

Wal-Mart's Historic Class-Action Suit Revisited

The WSJ Law Blog just posted some interesting news about Wal-Mart. In the financial sector, the WSJ just reported that Wal-Mart's fourth-quarter net income fell 7.4 percent. Still, the bigger news may be that the Ninth Circuit recently agreed to reconsider whether the sexual-discrimination lawsuit against Wal-Mart should proceed as a class-action.

In the 2007 ruling, a 2-1 panel majority held that more than 1.5 million female employees could join the suit against Wal-Mart. Although this class size was "historic," the majority found that "the issues were not unusual."

However, this ruling - along with the concerns of the panel's dissent - will be revisited. Indeed, the dissent made a compelling argument that a class-action suit would deprive Wal-Mart of due process of law because the requirements for class certification - including commonality and typicality - were not satisfied. Specifically, the dissent questioned whether there was evidence of common, company-wide sexual discrimination and claimed that the "only common question Plaintiffs identify with . . . is whether Wal-Mart’s promotion criteria are 'excessively subjective."' Also, the dissent argued that typicality was not satisfied because the Plaintiff's class representatives worked in a range of position levels and had differing discrimination claims.

The dissent's argument merits serious consideration, and a denial of class-action would be a huge win for Wal-Mart. Indeed, with over 2 million women who are currently joined in the suit, Wal-Mart's potential loss is immense. Accordingly, if the suit proceeds as a class-action, Wal-Mart may have no other choice but to settle.
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Monday, February 16, 2009

The Sirius Drama Continues

Mel Karmazin, the CEO of Sirius XM Satellite Radio Inc., is in the midst of thwarting a takeover. He warned on Friday that Sirius XM may have to file for bankruptcy as early as tomorrow because the company is unable to pay off the $175 million of debt due to Charles Ergen, the satellite billionaire. However, the WSJ reports that Karmazin and Ergen are longtime adversaries and it's unclear whether the Sirius chief executive would be willing to work for Mr. Ergen. Furthermore, a group of Sirius XM creditors say it is prepared to seek the ouster of Karmazin and other senior executives if the company files for bankruptcy instead of cutting a deal with Mr. Ergen that would allow it to remain solvent.

"Creditors will act quickly and definitively if they perceive that management is acting in their own interest and not in the best interest of the estate," said Edward Weisfelner, a partner with Brown Rudnick LLP, the law firm representing the creditor group. "The board of directors should carefully consider the ramifications."
The company has been in talks with both Mr. Ergen, CEO of EchoStar, and John Malone, the cable television pioneer who controls DirectTV Group Inc., about a deal to resolve its crisis. According to the WSJ, both parties have made offers that would allow Sirius XM to meet its immediate credit obligations in return for a significant stake or control.

Sirius's management has told investors in recent days that bankruptcy, which would enable the company to restructure under current management, may be its preferred course. It has yet to explain why filing for bankruptcy may be the more attractive option. Sirius is carrying a total debt load of about $3.25 billion.

With such substantial debt, the offers on the table may only provide Sirius XM with a short-term remedy whereas a bankruptcy filing would provide the company with longer-term protection. Once in bankruptcy, Sirius could cancel costly contracts and would also be protected from its creditors. Nevertheless, a filing would wipe out all shareholders.

The Delaware Suprme Court in Cheff v. Mathes states that the business judgment rule protects a board’s decision to thwart a takeover if the decision has a legitimate business purpose. More specifically, the directors must show that they had a reasonable belief, based on good faith and a reasonable investigation, that the takeover poses a danger to corporate policy and that they are acting in the stockholder’s best interests, not solely to keep their office.

If Karmazin and his board do, in fact, file for bankruptcy protection, investors will likely be outraged and Karmazin will probably be flooded with potential suits.
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Thursday, February 12, 2009

What Did Geithner Do Wrong?

Andy Kessler at Seeking Alpha explains why, in his opinion, the stock market seems to have rejected Tresury Secretary Geithner's plan to save the US banking system. Read More......

Wednesday, February 11, 2009

"America Doesn't Trust You Anymore"

Ouch. NY Times Dealbook is live-blogging the House Financial Services Committee hearing today.

The heads of eight of the country's largest banks have to answer the question on everyone's minds: "What are you doing with the money?"

The CEOs taking part in the hearing are: Kenneth D. Lewis of Bank of America, Robert P. Kelly of Bank of New York Mellon, Vikram Pandit of Citigroup, Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley, Ronald E. Logue of State Street, and John G. Stumpf of Wells Fargo.
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Tuesday, February 10, 2009

Sirius XM is Preparing to File for Bankruptcy

The New York Times is reporting that Sirius XM Satellite Radio is working with restructuring expert Joseph A. Bondi of Alvarez & Marsal to prepare for a possible bankruptcy filing in an effort to force the satellite company EchoStar, which owns a substantial amount of the company's debt, to make a formal offer for the company.

Charles Ergen, who controls a satellite-television empire including the Dish Network Corporation and EchoStar, recently acquired the majority of a $300 million tranche of Sirius debt that matures next Tuesday.

Since the news about the debt purchase has emerged, questions have surfaced over whether Mr. Ergen will make a bid to purchase Sirius. The threat of a possible bankruptcy filing could force Mr. Ergen to make a formal offer for the company now if he doesn’t want to go through an auction in bankruptcy court.

It could also compel Mr. Ergen to agree to convert his debt into an ownership stake in Sirius at a higher price than he originally considered.

With more than $5 billion in assets, Sirius would be second-largest company to file for Chapter 11 bankruptcy protection so far this year, according to the research firm Capital IQ’s database. The Smurfit-Stone Container Corporation, which had more than $7 billion in assets when it filed in late January, was the biggest so far.
As a subscriber and avid fan of the Howard Stern Show, I can only hope that, if EchoStar does acquire Sirius XM, Mr. Ergen will not make substantial changes to the business model. As one of the largest subsription services in the world, I do believe that Sirius XM will turn around with time.
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Sunday, February 1, 2009

The End of the Billable Hour?

Not yet, but perhaps sooner than we think.
This article from the NY Times Dealbook weighs in on the recent debate over some very old questions: What is our time as lawyers worth? How do we want to quantify the work that we do? And finally, how deeply entrenched are we in the sometimes inefficient and inaccurate measure of billable hours?

Also note the quote from Harvard law professor David B. Wilkins, who gave a fascinating lecture at Chicago-Kent last September on the future of the attorney-client relationship.
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Bell Boyd to Merge with K&L Gates

Chicago-based Bell, Boyd & Lloyd LLP has concluded merger talks with Pittsburgh-based global firm K&L Gates, forming a combined powerhouse of over 1,900 attorneys in 31 offices across the U.S., Europe, and Asia.

Crain's Chicago Business reports that talks between the two firms began in mid-2008, with K&L Gates interested in expanding to the Chicago and San Diego markets primarily through Bell Boyd's investment management and intellectual property practices. A spokesman for K&L Gates noted that the merger was attainable for both firms in the current economic downturn because they both operate on a no-bank-debt policy, which will allow the newly-combined firm to "grow in a downturn like other firms can't." The combined firm will operate as K&L Gates LLP beginning March 1, 2009.

I think it's safe to assume that Bell Boyd attorneys will be wearing Steelers jerseys for tonight's big game.
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