The $50 Billion Scam

The Wall Street Journal is reporting on the uncovering of a $50 billion dollar Ponzi scheme disguised as a hedge fund managed by renowned investment manager Bernard Madoff.

A Ponzi scheme (which is not the same as a Pyramid scheme) creates a false source of profits for investors by giving the principal investments of new investors to older investors as "profits". Madoff's hedge fund claimed to make a ten to twelve percent profit on an annual basis for more than a decade, but recently Madoff admitted to his sons that the profits were not real. The size and duration of this fraud is unprecedented, and the SEC and private investment fund regulation are likely to face even more scrutiny as a result.
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New York Times: The Day the S.E.C. Changed the Game

An audio recording from 2004 shows levity, even laughter, as the S.E.C. made a little-noticed, but fateful change to rules governing the five largest U.S. investment banks Read More......

Delaware's Dominance Doomed?

The WSJ Law Blog has posted a story about the emergence of a new shareholder-friendly corporate governance law in North Dakota.  Delaware and it's corporation-friendly laws are home to a large majority of US corporations.  The reason for this is that DE has intentionally crafted its laws to welcome corporate officers and directors to a corporate-friendly environment where they are free to act reasonably without too much fear of litigation by shareholders.  

North Dakota's governance laws enable shareholders to exercise a little more control over their corporations' directors and officers.  The shareholder advisory vote and ability to consider executive pay are both aspects of the ND law that you will not find in Delaware.  Although these laws were enacted a year ago, there are only two publicly-traded companies that are incorporated in North Dakota.  It is unlikely for corporations to flock to ND; most boards and officers likely prefer the friendly confines of Delaware corporate law.

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Chicago Tribune May File For Bankruptcy

Uh oh, here comes more bad news. The New York Times is reporting that our very own Chicago Tribune is suffering from serious financial distress and has hired investment bank Lazard and law firm Sidley Austin in an effort to avoid a potential bankruptcy filing. Just yesterday, the AP reported that the Tribune will sell off one of its biggest assets, the Chicago Cubs, no later than spring training.

But those who aren't experts in Bankruptcy should know that Chicago's most notable newspaper is not going to be history, per se. The Tribune is using this time to try and secure a line of credit to cover their debt. And if it turns out that filing for Chapter 11 is the right path to take, it still is very likely that the Tribune will stay with us. Filing for Chapter 11 will probably grant complete or partial relief from most of the company's debt and contracts, allowing a debtor to stay in control in order to remodel the financial and organizational structure so as to permit the rehabilitation and continuation of a business.

Look at United Airlines. UAL filed for bankruptcy in December 2002, weakened by low-fare competition and a drop-off in air travel following the September 11, 2001, terror attacks on the United States. After one year in bankruptcy, the airline ended up saving $7 billion by eliminating 25,000 jobs, replacing traditional pensions with 401(k) plans, reducing cost structure and cutting pay.

Now, do not think that I am an advocate for bankruptcy. It is likely that a lot of the company's assets will be stripped, which will include jobs and pension plans. A company should do everything in its power to prevent filing. But, if it turns out that filing is the only option, the Tribune will still likely survive.

If you find this to be interesting, make sure to investigate Professor Mason's Bankruptcy course, which will be offered on Tuesday and Thursday nights this spring.
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First Set of New Regulations

We knew that massive regulation reform was coming, and finally, the SEC has approved a new set of rules for credit rating agencies.  This may be the first regulation-product of the financial crisis.   The SEC set rules to increase the transparancy of the credit rating agencies (the major ones are Fitch, Moody's, and Standard & Poor's), enabling investors to inspect the processes and procedures used by these agencies when rating securities.  The financial crisis has been partially caused by the overly-favorable ratings that were given to some types of collateralized securities.  Investors relied on these inaccurate ratings, and put their money into what they thought were less-risky investments.  When the market for these securities collapsed, many people were quick to blame credit rating agencies for failing to recognize the riskiness of these securities.  The new rules approved by the SEC place certain restrictions on what types of securities may be rated, and the ability of the agencies to receive gifts from those that are rated.  

It is likely that this is only the first of many new regulations to come in the near future.  More regulations are expected not only for credit rating agencies, but for securities, financial reporting, and lending institutions (among others).  

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Cashing in on Classes Actions

The Wall Street Journal Law Blog reports that prosecutors in Philadelphia recently unsealed an indictment against a group of people who concocted an elaborate scheme to game a number of major corporate class-action lawsuits:

According to the indictment, starting in 2001, a group of individuals created fake companies that submitted claims for a share of class-action settlements, including a $1 billion antitrust settlement involving the NASDAQ Stock Exchange and a $3 billion securities settlement with Cendant Corporation.

The defendants allegedly went to great lengths to perpetrate the alleged fraud. One conspirator traveled to Singapore as the vice president of a fake company in order to mail documents that would help make the fake company, “Keycorp,” look legitimate.

Apparently the scheme was a success (if you don't count that pesky federal indictment):

On behalf of a fictitious Australian company, [the group's attorney] in 2004 allegedly submitted a claim in the Cendant case and landed an $8 million check. She later secured a $5 million share of the Cendant settlement on behalf of a fake Chinese company.

If this group was able to obtain multi-million dollar settlements before being caught, who knows if smaller fraudulent settlements are ever uncovered? Read More......