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RICO, Goldman Sachs and TARP

Here's a very interesting take on the RICO implications of some maybe not so coincidental TARP decision making...

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Is DIP Financing Starting to Pick Up?

Bankruptcy filings have increased during this financial crisis, but debtors in possession have had trouble finding financing. That may be until now. Last week the Wall Street Journal's website reported that a few firms had choices in selecting lenders for their bankruptcies.

As Jonathan Spagat reported last week in General Growth Files for Bankruptcy the REIT filed for bankruptcy, but it had its choice in selecting lenders. In fact "a number of lenders expressed interest in providing the loan."

The WSJ Online article goes on to say that two other firms had lending choices over the past two months. Potential lenders for Aventine Renewable Energy Holdings, Inc. even had lenders go to court and fight for the opportunity to lend. Chemtura Corp, a chemical company, had two lenders to decide from. The company eventually picked Citigroup, Inc.

Increases in DIP lending may be good news for the economy and lawyers. It may indicate that banks are starting to lend again and lawyers may become busy with bankruptcy cases.

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Helio Castroneves Acquitted of Tax Evasion

Helio Castroneves was acquitted Friday of all five tax evasion charges stemming from his alleged formation of foreign shell corporations to hide certain racing revenue. ESPN reported that the case really ended up coming down to testimony from Castroneves's father regarding the original formation of the foreign corporations. He claimed his son never had any control or ownership interest in the corporations and that Helio had no control over their initial formation. The jury obviously believed Helio and his father regarding the tax evasion but was still hung on one conspiracy charge. The Government likely will not pursue the conspiracy issue any further though. Helio could have faced up to six years in prison had he been convicted.

Both Helio's sister, who is his business manager, and Alan Miller, Helio's attorney responsible for his financial planning and structuring, were acquitted of their tax evasion charges as well.
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Assessing TARP Strategy report from COP

Elizabeth Warren, the chair of the Congressional Oversight Panel (created to oversee the expenditure of TARP funds, and to “review the current state of financial markets and the regulatory system”) was on The Daily Show with John Stewart this week to talk about TARP and the recent report on TARP strategy released by the Panel.

On April 7, six months after the passage of the Emergency Economic Stability Act, the Congressional Oversight Panel released a report titled “Assessing TARP Strategy.” The report, relying on historical responses to past banking crises, reviews methods for evaluating the programs created to assuage the current financial crisis. The Panel identified 4 elements that were critical to historical banking crises programming: Transparency, Assertiveness, Accountability, and Clarity.

The first half of Stewart’s interview with Warren illustrated that some of these elements don’t seem to be a part of the current programs. Warren stumbled her way through questions about how much money has been spent, and what exactly that investment was worth – rather, what it wasn’t worth. She did manage, though, to point out that this general uncertainty was due in large part to Paulson’s “don’t ask, don’t tell,” policy of distribution in relation to the first $350 billion of expenditures. Warren said the Panel is calling for more transparency, more accountability, and more clarity; they want a better articulation of policy and an explanation of what exactly is going on in the current expenditure programs.

Warren also took the opportunity to advocate a need for smart regulation to bring about economic stability and prosperity. She noted that before the great depression our economic history followed a boom and bust cycle every 10-15 years. After the implementation of regulations like the FDIC, SEC, and Glass-Steagall, though, we had a long period with no financial crisis. But those regulations began to unravel, according to Warren, and we ended up where we are today. (Bonus: check out this post on Geithner’s regulatory plan).

So check out the the interview (part 1, part 2), and the report and let me know what you think... Read More......

Credit Default Swaps Making Corporate Reorganization Impossible?

The Financial Times reports that credit default swaps may be undermining companies’ attempts to reorganize in bankruptcy. When a debtor company attempts to reorganize, the success of the reorganization often depends on creditors agreeing to reduce, extend the repayment period of, or otherwise modify the outstanding debt owed to them by the reorganizing debtor. A creditor would be willing to do this because the modified debt would lead to a larger repayment than the amount the creditor would receive in the event of a liquidation of the debtor company.

Thus, corporate reorganizations are made possible because lenders have an interest in keeping their debtors from being liquidated. However, when lenders take out credit-default swaps on debtor companies as insurance on their loans, the lenders stands to receive full or partial payment of the debt from the CDS dealer if the debtor defaults. This payout from CDS increases the total return to the lender in a debtor’s liquidation; thus, lenders holding CDS-backed debt are less willing to accept reduced and/or extended payments from debtors, and corporate reorganizations become more difficult, if not impossible, to structure.

Should the bankruptcy law be modified to somehow fix this severing of a lender's and debtor's interests? Could a bankruptcy court revive a CDS-backed lender's incentive to compromise by modifying CDS contracts or by increasing the benefits of a reorganization? Or could the CDS dealer who inherits the lender's anti-liquidation interest somehow be brought into the equation? Read More......

Links Roundup

• Former NY Gov. Eliot Spitzer weighs in on the 7th Circuit Jones v. Harris case. That case was first mentioned on this blog in early March. Chicago-Kent Professor William Birdthistle, who authored a brief of amici curiae with several other law professors for the Jones v Harris case, is quoted in the Wall Street Journal commenting on a similar case from the 8th Circuit, Gallus et al. v Ameriprise Financial Inc., which makes reference to both the Posner and Easterbrook opinions in Jones.
• “Accountability Lies with All of Us” - Tom Wilson, CEO of Allstate, wrote this Op-Ed in yesterday’s NY Times, advocating that “we must all accept responsibility for our current situation, and work together to broaden the scope of federal regulation to protect both consumers and financial markets.”
• Hot on the heels of Northwestern’s offer to graduating students to extend their University-sponsored health care coverage, UCLA has announced that it is establishing a new LLM program for the 2009-2010 school year – the “Transition to Practice” program, which will “focus on enhancing the practical skills and development of the new lawyer.” Ironically, we have heard this idea somewhere before … for further debate on whether an apprenticeship should simply be part of the J.D. curriculum, you can click here, here, or here.
• OMG, GGP – As Jon mentioned below, General Growth Properties filed for bankruptcy this morning. They are represented in bankruptcy by Marcia Goldstein of Weil Gotshal and James Sprayregen of Kirkland & Ellis. See extended coverage from Crain’s Chicago Business and the Trib.

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HUGE Opportunity for Corporate and IP Law Students!

Quaver Battery Management System, a student group in the Stuart School of Business, is offering law students the opportunity to draft their incorporation documents, two contracts, and three provisional patents. This is a truly unique opportunity for students to get direct transactional experience with a dynamic start-up. The docs are time sensitive so please respond ASAP if you are interested! More information below ...

Quaver Battery Management System is a student group in the Stuart School of Business. The focus is on coming up with solutions to implementing the electric car infrastructure and creating viable market entry points for this new and exciting industry. The team of ten and growing students in the Stuart School competed in Pittsburgh this Spring at the Carnegie Mellon McGinnis Venture Competition in the field of Sustainable Technology. The team has a diverse background in engineering, management and the automotive industry, and are currently represented in the Finance, Environmental Management and MBA programs.

Currently the team is being considered to present to the Department of Energy, and has also met with the city and a number of potential clients/ investors. After over 6 months of work, we are close to closing our first deal and need help with incorporation, two contracts, and three provisional patents. If you are interested please contact the team leader, John Brophy, at brophyjohnbrophy@gmail.com or at 773-517-5897. All of these are time sensitive so if you have time as soon as Friday to have a first meeting please let me know. Thanks!
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General Growth Files for Bankruptcy

Proclaimed as one of the biggest real estate collapses in history, Chicago's own General Growth Properties filed for bankruptcy this morning. More information can be found here. Read More......

NBA Might Need New Collective Bargaining Agreement

The Sports Business Journal reported this week that despite a collective bargaining agreement between NBA players and owners that runs through the end of the 2010-2011 season, a new agreement will likely have to be agreed upon.

Because of the poor economic climate and the expected low business numbers league-wide, a new agreement seems forthcoming. But, collective bargaining agreements, like most normal union labor contracts, rarely are easy to negotiate or agree upon for that matter. On the contrary, they are often difficult to hammer out, and in this economic climate there is little chance players, looking for as many incentives as possible, and owners, looking to save as much as possible, will see eye to eye on anything.
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Investors Push Towards Madoff Bankruptcy

Five of Bernard Madoff’s investors filed a petition to force Madoff into an involuntary Chapter 7 bankruptcy on Monday. The petition comes after U.S. District Judge Louis Stanton of the Southern District Court of New York ruled on Friday that bankruptcy would be the best way for investors to reclaim their lost assets and lifted a stay obtained by the Securities and Exchange Commission (SEC) to block any litigation against Madoff. Although the SEC and Department of Justice fought the lifting of the stay claiming that an involuntary bankruptcy would only delay recovery and add to administrative costs, Judge Stanton stated that those concerns were “speculative” and “outweighed by the benefits to Mr. Madoff's victims of a bankruptcy trustee's orderly and equitable administration of his individual estate." The number of investors included as creditors under the petition will undoubtedly increase as five is merely the minimum number of creditors required to file an involuntary bankruptcy under the U.S. Bankruptcy Code. Read More......

Bankruptcy Law Ineffective?

A recent article on MSNBC suggests that a federal law, which was enacted in 2005 to make it more difficult for Americans to file for bankruptcy, is failing.

The article is referring to the Bankruptcy Abuse and Consumer Protection Act of 2005, which aimed to prevent Americans from abusing the bankruptcy system. Essentially, this Act imposes additional requirements on Americans who wish to be eligible for bankruptcy filings. For example, the Act requires applications to pass a "mean" income test in certain situations, complete credit counseling, and provide tax returns and proof of income.

In an attempt to show that this Act is ineffective, the article presents a prediction that bankruptcies through the next year could level off at 1.6 million - the same number which prompted the creation of the new bankruptcy law. Similarly, the article says that the law has "failed" to steer people away from Chapter 7, as these filings currently account for 69% of all bankruptcy filings - a number that is only slightly slower from the proportion of Chapter 7 filings in 2004, which leveled off at 71%.

However, these statistics do not show that the 2005 Act is "failing." In 2009, Americans face one of the greatest economic crises in US history. Thus, one would expect the amount of 2009 filings to be much greater that that of previous years. The fact that the amount of 2009 bankruptcy filings is still less than that of 2004 - even if only slightly less - indicates that the Act is effective.
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Insurance & Asset Protection

We learn in Business Organizations and other law school electives that corporations and LLCs protect their owners' assets. But how can the corporation or LLC protect its assets? David F. Rolewick of Rolewick & Gutzke, P.C. writes in the ISBA's Section on Corporations, Securities, and Business Law Forum "that insurance is first line of defense."

Insurance can protect against many potential liabilities and may come in the form of general liability, directors' and officers' liability, as well as umbrella insurance. Mr. Rolewick even provides a chart of different types of available insurance at the end of his article. He goes on to say that insurance policies may pay to defend litigation even if the litigation is over an issue excluded from the policy. However, he notes that the insurance company may reserve its right to "enforce the exclusion in a separate action." Still, having the litigation expenses covered may be invaluable because Mr. Rolewick points out that defending litigation may be a client's biggest exposure.

In conclusion, when setting up a LLC or a corporation to protect a client's asset, a practitioner may be wise to have the client consider insurance to protect the new entity's assets as well.
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News Roundup

Here are links to some interesting recent stories:

Today, Barclay's sold subsidiary iShares to private equity group CVC Capital. The price tag was somewhere between $4.2 and $4.41 billion, depending on if you are Financial Times or The Wall Street Journal.

Top Obama Economic Adviser Lawrence Summers sees an end to our current economic free fall. Summers did not, however, provide insight about when a rebound would happen and how strong it would be.

As the stress tests on banks wrap up, Reuters reports that no banks will close as a result of the tests.

According to the Housing and Urban Development Secretary, banks receiving TARP assistance will be required to participate in the government’s mortgage modification initiatives. You can check out that story here.

And finally, Wells Fargo had a good day. The bank rallied global stocks today when it announced expectations of $3billion in net income for the first quarter. The AP suggests that it may just be an anomaly.

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Short Selling Under Attack Again?

The SEC seems to be moving ahead with plans to place restrictions on short selling. Short selling occurs when Party A borrows a share of a stock from Party B for a fee and sells the borrowed stock to Party C. At some date in the future, Party A must buy a share of the borrowed stock on the market and give it to Party B. If the price of the stock went down between the time of the sale to Party C and the time of Party A’s purchase of the stock on the market, Party A makes a profit. Some people believe that short selling is bad for the market because short sellers only profit when stock prices go down, and, thus, they have an incentive to spread false rumors about the companies whose stock they short to drive down the stock’s price. Also, in times of high market volatility, increased short selling in a stock could cause a sell-off panic. To combat these problems, the Commission is seeking comment on a proposed circuit-breaker rule and two proposed versions of the uptick rule. A circuit breaker rule would freeze short selling of a specific stock if its price falls a certain amount in a single trading session and the uptick rule would only allow a short sale after a stock’s price has moved up at least one tick. Although short sellers face much opposition, the SEC is sure to receive many comments against these proposals because many commentors believe that short selling is essential for price discovery. For an in-depth discussion of the proposals, see Jim Hamilton’s and Floyd Norris's blogs. Read More......