West Virginia Business Litigation : West Virginia Business Litigation Lawyer & Attorney : Law Office of Jeffrey V. Mehalic : Charleston, Huntington, Parkersburg

On Thursday, I had the pleasure of  attending a lecture by H. Rodgin Cohen, chairman of Sullivan & Cromwell LLP, as part of the University of Charleston Speakers Series.  Cohen, a native of Charleston, is regarded as one of the, if not the, best banking and financial institutions lawyer in the country.

By way of background, Cohen is the subject of this month's cover story in The American Lawyer, which identifies him as "The Man To Call."  The magazine also named him as its Dealmaker of the Year for 2008.  Cohen also gave this interview a few days ago to Dan Freed of TheStreet.com.  Lastly, in advance of his lecture, (Charleston, West Virginia) Daily Mail Business Editor George Hohmann interviewed Cohen for this article.

Cohen divided his speech, entitled "The Financial Crisis - Causes, Cures and Prevention" into five sections: an overview of the crisis, its causes, the response, potential cures, and the prevention of future crises. 

Here are a few of the causes he identified, which he described as a "search for solutions rather than villains":

• Gorging on leverage almost unchecked;
• A sharp decline in credit standards and a virtual abdication of the credit review function;
• A change in the basic business model from originate-to-hold to originate-to-sell;
• Diversification of risk without transparency;
• Human failure, greed, and corruption; and
• The failure to recognize the enormous impact of the sharp decline in housing prices, which he described as the factor that had the greatest impact:

In discussing the government's response, Cohen said that it was inappropriate to conclude that the programs have been unsuccessful because the situation would have been a lot worse without them.  But he agreed that the response appeared to be reactive rather than proactive.

He noted another flaw in the government's response in that the Federal Reserve followed the classic approach of providing additional liquidity to the market without recognizing that this was not a classic situation.

Cohen proposed several potential cures, including a willingness to recognize that $700 billion (for the bailout last fall) is not sufficient and to act accordingly.  He predicted that the markets and the American people would accept, with transparency, another Troubled Assets Relief Program of $300-500 billion.  He also thinks that an enhanced mortgage foreclosure mitigation program is essential.

Cohen was critical of what he called "AIG Hysteria Week," when the House of Representatives passed legislation last month that imposed a 90% tax on certain AIG employees' bonuses, and showed a willingness to act "contrary to the rule of law" and to enact "indiscriminate and devastating legislation."

In terms of preventing future crises, Cohen noted a corollary to Gresham's law that no regulation or bad regulation drives out good regulation.

As a fundamental solution, Cohen proposes the creation of a super-regulator or super-regulatory body that would serve as a systemic risk regulator.  He said the critical questions for such a body are what should a super-regulator do, who should the super-regulator be, and who should be subject to a super-regulator.  From his perspective, the obvious choice is the Federal Reserve, which is the only entity that is set up to take on such such broad duties.

Cohen criticized corporate governance, which he said failed at risk management, and proposed three reforms: every financial institution should have a separate risk management committee; risk management at a financial institution should be a separate staff function with a direct reporting line to the risk management committee; and a board of directors must understand that when a unit is experiencing growth that is not shared by the rest of the corporation, that is a red flag. 

He also pointed out that compensation should be the responsibility of a corporation's board of directors, not legislators or regulators.  Cohen admitted that it was difficult to understand why a successful CEO who makes whatever amount of money is objectionable when compared to the salary of a utility outfielder in major league baseball.  (In discussing proposals in Congress to limit a CEO's compensation to the president's annual salary of $400,000, Cohen shared what Babe Ruth said in 1930 when asked how he felt about making $80,000 a year when the President of the United States made $75,000: "I know, but I had a better year than Hoover.")

Cohen declined to explain why he withdrew his name`from consideration as deputy Treasury Secretary, the No. 2 position in the department, except to say that his wife was delighted and his dog was even happier.  (There has been speculation that Cohen's representation of many banks and financial institutions would have been problematic for his confirmation.)

A couple of other observations: 

Cohen noted that nationalization of certain banks is a possibility, but is a last resort because "government is not a good owner," and said that key metrics for him in gauging the nation's recovery from the crisis are a firming-up of housing prices and the level of foreclosures.

I'm not aware that the text of the speech is available, but if it is, I'll upload it.  Cohen's remarks are certainly worth reading and studying.

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The furor over the AIG retention payments (a/k/a bonuses) has died down somewhat, perhaps because most of the executives involved have agreed to refund the bonuses, and perhaps because President Obama was less than enthusiastic in his support for the legislation passed by the House of Representatives that would impose a 90% tax on the bonuses.

But for your information, here are AIG’s 2008 Employee Retention Plan, a confirmation and acknowledgement, and a schedule to the master agreement, which are also located in this press release on the House Committee on Financial Services' website.   My thanks to Bob Ambrogi on Twitter (@bobambrogi) for the link.  Incidentally, Bob discusses the AIG contracts this week on his Lawyer2Lawyer podcast, "AIG Mess: Executive Contracts."

And from earlier this week, here is "Dear AIG, I Quit!", an op-ed in The New York Times by Jake DeSantis, which is the text of his resignation letter to Edward Liddy, AIG’s CEO.  DeSantis, now the former executive vice-president of AIG Financial Products, criticizes Liddy for his testimony last week regarding the bonuses:

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

DeSantis continues with this, which makes one think that the bonuses haven't been or won't be returned as willingly as media reports have indicated:

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised.  None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored.  They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

 It looks like Mr. Liddy has his work cut out for him.

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The political issue dominating news coverage is the payment of $165 million in bonuses to AIG employees, some of whom no longer work for company. 

Apparently, because the bonuses have been distributed, AIG cannot withhold the money and force its disgruntled employees to sue to obtain the bonuses.  So now, talk has turned to the government recovering the bonuses by taxing the recipients in an amount close to or equal to the amount of the bonuses. 

Such a remedy requires Congressional action, but if you've watched any cable network for more than 30 seconds during the past day, you’ll learn that there’s no shortage on Capitol Hill of eagerness to enact such legislation.  (Although as I write this, I'm hearing that Republicans in the House will oppose such a provision.)

That leads to the question of whether such legislation is constitutional.  Here is The Wall Street Journal Law Blog’s interview yesterday with constitutional law scholar and Harvard Law Professor Laurence Tribe, who addresses the government’s possible grounds for recovering the bonuses.

Today's Journal's Deal Journal has an interview with UVA Law Professor George Geis, who teaches contracts and corporate finance, about whether and how the government can recover the bonuses.

Earlier in the week, The New York Times' Room for Debate blog presented this collection of opinions from several experts on how to get the money back.

And in yesterday’s Times’ Deal Book blog, the Deal Professor, Steven M. Davidoff, analyzes AIG’s bonus contract and questions who negotiated the contract for AIG and why, considering that the bonuses weren’t tied to the employees’ performance or their group’s performance – as we have all learned to our amazement.

Finally, for a contrary point of view, Andrew Ross Sorkin, who writes the Times´Deal Book blog, argues that the bonuses should be paid because not to do so is worse than the alternative. 

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    Last month, I wrote about the class action filed by employees of U.S. Sugar, who claim that their shares of company stock have been devalued as a result of mismanagement and self-dealing by the company’s officers.  In 1983, the employees participated in an ESOP (employee stock ownership plan) which traded their participation in a pension plan for ownership of the company’s stock, which is not publicly traded.  Thus, the employees have to depend on what the company is willing to pay to redeem their shares, which, according to allegations in the lawsuit, has been far less than what the shares are actually worth. 

    Then, last week, in an unexpected development, Florida Governor Charlie Crist announced that, as part of the restoration of the Everglades, Florida is willing to pay U.S. Sugar $1.75 billion for its 187,000 acres in four counties in southern Florida.  The company would lease the property back from Florida for six years, then go out of business.  Here are the statements issued by U.S. Sugar and by Governor Crist’s office, and an Associated Press story in today’s New York Times, which reports that the proposed purchase is moving forward.  

    This post by Suzanne Wynn in her Pension Protection Act Blog notes that the ESOP participants (U.S. Sugar's employees), as the owners of the largest block of stock, are the largest group affected by the purchase. 

    Although a lot has been written already about Florida’s proposal (and that’s all it is at this point), I have not seen any discussion of how a purchase price for the employees’ shares of stock would be formulated.  This deal may represent an opportunity for U.S. Sugar’s employees (and remaining shareholders) to obtain some value for their stock, but it does not seem to affect the issues in the litigation.

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    When I last wrote about West Virginia University’s lawsuit against Rich Rodriguez, its former head football coach, WVU had filed an amended complaint in order to assert a claim for breach of contract based on Rodriguez’s failure to make the first one-third payment of his $4 million buyout by January 18.  Since then, there have been some significant developments in the lawsuit. For simplicity, I will review them in chronological order.

    On January 29, Rodriguez filed a letter of credit for $1.5 million with the Court, presumably to show his good faith in dealing with WVU and also to attempt to satisfy WVU's claim for less than $4 million.  WVU has been adamant that it will not settle for less than the full amount of the buyout, and as the case has developed, nothing has happened to weaken WVU’s position.

    Also on January 29, WVU moved for leave to conduct jurisdictional discovery on the issue of Rodriguez’s residency, in order to defeat the removal of the action to federal court based on Rodriguez’s position that he and his wife established their residency in Michigan prior to WVU filing suit against him in West Virginia state court on December 27, 2007.  WVU had moved to remand the action on January 17 on the grounds that first, it was not a citizen of West Virginia for purposes of diversity jurisdiction and that second, Rodriguez was still a citizen of West Virginia when WVU filed suit.  Here are WVU's motion and memorandum in support.

    On February 1, Rodriguez answered the amended complaint and asserted a counterclaim against WVU and filed a third-party complaint against the West Virginia University Foundation, the fund-raising arm of WVU.  Rodriguez attached as an exhibit another letter of resignation to Ed Pastilong, WVU’s athletic director, dated January 10, 2008, in which he elaborated on his reasons for leaving WVU so abruptly:

On [sic] my resignation letter dated December 18, 2007, I did not list some of the reasons for my resignation.  It was not until I read that lawsuit against me by the West Virginia University Board of Governors did [sic] I realize that I needed to put in writing my reasons that I felt that West Virginia University has material [sic] and substantial [sic] breaches [sic] in [sic] our Agreement.

On February 4, Rodriguez filed his response to the motion to remand, and on February 8, WVU filed its reply.

    United States District Judge John Preston Bailey didn’t waste any time in ruling on the motion to remand, and entered an order on February 11 that granted the motion and denied as moot WVU’s motion to conduct discovery.

    Much to Rodriguez’s chagrin, I imagine, Judge Bailey did not reach the issue of whether Rodriguez had established residency in Michigan by the time he was sued, but focused on WVU's status.  In finding that WVU was an arm or alter ego of the State of West Virginia, which defeated diversity jurisdiction, Judge Bailey acknowledged that “’almost universally’ courts have found that public state universities are ‘arms of the state.’”  Thus, Rodriguez's removal of the suit was improper as the Court did not have jurisdiction.  Judge Bailey denied WVU's motion for attorney's fees and costs against Rodriguez, however, because he found that Rodriguez had a colorable basis for removal and did not remove the action in bad faith. 

    The action is back in the Circuit Court of Monongalia County in Morgantown before Judge Robert B. Stone.  West Virginia University Board of Governors v. Rodriguez, Civil Action No. 07-C-851.

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    Last month, United States District Judge Joseph R. Goodwin found that the West Virginia Lottery Commission’s prohibition of certain words that video lottery operators could use in advertising their machines was an impermissible infringement on the operators' commercial free speech.  Words such as “casino,” “jackpot,” and “Vegas” have been banned from advertising since 2004, when the Limited Video Lottery Act was passed. 

    In its order, which granted the WV Association of Club Owners and Fraternal Services, Inc.’s motion for a preliminary injunction against John Musgrave, the directory of the West Virginia Lottery, the court found that “[t]he advertising ban infringes upon the limited video lottery retailers’ right to speak and impedes the public’s ability to engage in informed political discourse."

    Since the court issued its ruling, there has been an interesting and unexpected development.   The West Virginia Amusement & Limited Video Lottery Association, which was not involved in the litigation, and whose membership consists of 18 of the 37 companies authorized to lease machines, has informed retailers with video lottery machines supplied by its members that if they attempt to advertise as permitted by the court’s ruling, they will lose all but one of their machines.  The contracts between the companies leasing the machines and the retailers provide that a retailer must be allowed to have at least one machine. 

    The organization’s rationale apparently is that increased advertising that employs the words that the Act originally banned would generate a backlash against the machines and affect their popularity and hence their profitability.  Judge Goodwin anticipated this possible outcome when he wrote, "Lifting the LVLA's ban on commercial speech will bring limited video lottery into the light, thereby providing important information to those who want to play, and those who want to protest."

    AP reporter Lawrence Messina wrote an article about the controversy, and also has an entry on his blog , Lincoln Walks At Midnight, which reviews the coverage of the issue.

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    A few days ago, I wrote about a recent United States District Court decision awarding benefits to the widow of a man who had accidentally overdosed on prescription medications.  I noted that based on ERISA pre-emption, almost all such cases have to be brought in federal court, where the claims and damages available to plaintiffs are very limited.

    Today, in the Boston ERISA Law Blog, Stephen Rosenberg pokes a little fun at The Wall Street Journal Law Blog’s fascination this week with the doctrine of pre-emption, and accurately describes ERISA pre-emption (which the WSJ Law Blog has omitted from its discussion) as “the most important and interesting application of preemption ….”

    Rosenberg also points out that efforts by states to require employers to provide health care coverage to their employees demonstrate that ERISA pre-emption “is in fact the one area of preemption that consistently affects broad numbers of everyday, real life people ….”   He is referring to Maryland’s Fair Share Act, which was held by the Fourth Circuit Court of Appeals in Retail Industry Leaders' Association v. Fielder, 475 F.3d 180 (4th Cir. 2007),  to be pre-empted by ERISA, and to efforts by California to provide universal health coverage.  Rosenberg's post from August 27, entitled "California, Health Insurance and ERISA Preemption," includes a link to a paper on the topic by University of Maryland Professor Sharon Reece and a post by the Workplace Prof Blog.

    Rosenberg seems to doubt the success of such efforts (and he appears to be right, according to The Wall Street Journal article referenced above), but Brian King at the ERISA Law Blog has a contrary view, in this post from April 27. 

    My own view is that unless Congress amends ERISA’s pre-emption language (highly unlikely, at least in the short term) or the United States Supreme Court holds that ERISA’s scope of pre-emption is too broad (even more unlikely, given the enormous body of federal law, including, significantly, decisions from the Supreme Court, which has repeatedly endorsed that scope as demonstrating Congressional intent), legislation like California’s will be pre-empted. 

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    Remember this?  Time magazine selected Cynthia Cooper, Sherron Watkins, and Coleen Rowley as its Persons of the Year in 2002 for their courage and determination in coming forward and reporting financial and ethical improprieties at their respective employers, WorldCom, Enron, and the FBI. 

    Things certainly have changed.  An Associated Press story published in today's Sunday Gazette-Mail (Charleston, WV) describes what happened to employees of military contractors in Iraq who have reported fraud and corruption committed by their employers: "They have been fired or demoted, shunned by colleagues, and denied government support in whistleblower lawsuits against contracting firms."

    What  may be most distressing about their treatment is the lack of support from the government.  The article reports that the government has not joined a single qui tam suit alleging Iraq reconstruction abuse, estimated in the tens of millions, even though at least a dozen such lawsuits have been filed since 2004.  The government can join the case, as the Department of Justice has done in cases involving Medicare and Medicaid fraud and domestic contractor overbilling.  But cases against Iraq reconstruction contractors seem to be off limits.  And if the government doesn't join the case, the perception, right or wrong, is that the case doesn't have much merit.

    Qui tam lawsuits, which are brought under the Federal False Claims Act, 31 U.S.C. § 3729 et seq., seek to recover on behalf of the government and the plaintiff and provide for treble damages.  Take a look at The Whistleblower Law Blog written by Brian F. LaBovick, which has a lot of information on this area of law.
       

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    The New York Times reports that the Department of the Interior tomorrow will issue a regulation drafted by its Office of Surface Mining, which will allow the coal mining method of mountaintop removal to continue and expand.  in the article, Joe Lovett, executive director of the Appalachian Center for the Economy and the Environment, calls the regulation the administration’s “parting gift to the coal industry.” 

    Mountaintop removal has generated an enormous amount of litigation, and Lovett holds open the possibility of challenging this new regulation in court.

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    A reference to West Virginia in connection with today’s recall of Mattel toys got my attention. By way of background, the U.S. Consumer Product Safety Commission today ordered the recall of more than 20 million toys manufactured by Mattel, Inc. because of concerns about the amount of lead and other toxins in the toys.  Earlier this month, the CPSC ordered the recall of 1.5 million toys manufactured by Mattel’s Fisher-Price division.  Mattel has already taken out full-page ads in several newspapers in which its CEO reiterates its concern for and commitment to children’s safety.

        The reference to West Virginia came in The Wall Street Journal's Law Blog's interview of Victor Schwartz regarding the prospect for litigation created by the recall.  Schwartz, is a partner at Shook, Hardy & Bacon, but is perhaps better known as the spokesperson for the American Tort Reform Association (the organization that listed West Virginia as its number one “Judicial Hellhole” in 2006).

        Schwartz opined that medical monitoring for the children who played with the toys probably would not be effective. He pointed out that “medical monitoring has been rejected by most courts,” but that in those states where it existed, namely West Virginia and Missouri, he suggested offering to set up a fund to help the child’s family with medical expenses, but not to offer cash, since "most people just take cash and run out and buy a pick-up truck.”

Continue Reading...

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    When West Virginia Governor Joe Manchin underwent a knee replacement last year, he complained afterward that he could not make sense of the medical bills he received, and questioned why a patient couldn't receive one bill that listed all of the providers' charges.

    According to the Charleston Gazette, based on his own experience, Manchin directed the West Virginia Health Care Authority to create a Website that would let consumers know the cost of various procedures.  The result is www.comparecarewv.gov, which permits searches by procedure or by hospital.  For each procedure, the site gives the average facility charge, the average professional charge, and the average total charge (the total of the facility and professional charges).  The type of procedure may affect the number of facilities available.  The site's obvious benefit is that the additional information enables consumers to make more informed choices about their care and treatment, and to weigh factors such as cost and distance.

    And one other feature in particular of the Health Care Authority's own Website, www.hcawv.org, merits a mention.  There is a link to a document repository called Your On-Line Document Archive (Y.O.D.A.), which provides access to many of the agency's filings, such as SEC reports, financial statements, and Medicaid and Medicare cost reports, which can be downloaded as PDFs (or in Excel format, for some of the spreadsheets.)   For example, here is Charleston Area Medical Center's 2006 Financial Disclosure, which details charges, fees and salaries of more than $55,000.

   

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