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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    In an effort to provide businesses with a more efficient way to resolve their legal disputes, West Virginia House of Delegates Speaker Rick Thompson has asked that the Legislature study during the coming months the creation of a chancery court, with jurisdiction limited to business litigation, such as those in Delaware, Mississippi, Tennessee, and New Jersey.

    In an article by Justin D. Anderson in yesterday’s (Charleston) Daily Mail, Thompson explained that such a court would show businesses that West Virginia is serious about their needs.  He pointed out that three of the four states with chancery courts were in the top 20 in Forbes’ 2007 list of “The Best States for Business.”   Delaware was number 11, Tennessee was number 13, New Jersey was number 19, and the fourth state, Mississippi, was number 43.  West Virginia was number 50, which may explain Thompson’s interest.

    Thompson, who is also chairman of the House Rules Committee, introduced a resolution that would create the interim study in advance of legislation to be introduced next year.  Alternatively, he proposed the use of special masters specializing in business law, who could advise circuit court judges in cases involving business litigation.  The creation of a new court would require a constitutional revision, and thus a statewide election, while the Legislature could authorize the use of business law special masters.

    Anderson's article also noted the Delaware chancery court's well-known role in "setting the parameters of corporate law," as shown, for example, by the 2005 litigation brought by shareholders of the Walt Disney Company as a result of Michael Ovitz's $130 million severance package.  For further reference, there are several excellent blogs that concentrate on Delaware business litigation, including Francis G.X. Pileggi's Delaware Corporate and Commercial Litigation Blog and Morris James LLP's Delaware Business Litigation Report.   

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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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    In January, a jury in Roane County, West Virginia determined that natural gas producers had failed to honor their leases with gas well owners, and awarded a class of more than 10,000 natural gas well owners a total of $404 million in damages.  The plaintiffs contended that Columbia Natural Resources, LLC, formerly owned by NiSource, Inc., and now owned by Chesapeake Energy Company, systematically and deliberately underpaid them in violation of their leases by withholding the production costs from the royalties paid to the plaintiffs.  The jury's verdict included compensatory damages of $134 million and punitive damages of $270 million.

    Roane County Circuit Judge Thomas C. Evans, III entered an order affirming the verdict on June 27, 2007.  Estate of Garrison G. Tawney, et al. v. Columbia Natural Resources, LLC, et al., Civil Action No. 03-C-10E (Circuit Court of Roane County, West Virginia).  Once the court enters the final order, the defendants have four months to file their petition for appeal with the Supreme Court of Appeals of West Virginia.

    In response to the outcry against the verdict by natural gas producers, West Virginia Governor Joe Manchin proposed a bill for the Legislature’s consideration during its three day special session, which ended yesterday, which, among other things, would have given the producers an implied covenant in all oil and natural gas leases that allows companies to deduct reasonable post-production costs when calculating royalties to the landowners.  (The deduction of these costs formed the basis for the plaintiffs' claims in Tawney.)

    The Legislature chose not to take any action on the bill, on the grounds that it was too complicated to be considered in such a short session.  In all likelihood, the Governor will resubmit the bill when the Legislature’s regular 60 day session begins in January 2008.  Here is The Charleston (West Virginia) Gazette’s story this morning on the bill’s fate, as well as posts from Monday and yesterday by AP Larry Messina, who blogs at Lincoln Walks At Midnight.  But it’s clear that the opposition to the bill voiced by the landowners, who include individuals and businesses, also was a consideration in the Legislature’s decision not to consider the bill.

    What is not clear is whether the bill would apply to the jury’s verdict in Tawney.  Messina posted this compilation of stories earlier in the week, including another Gazette article that said that the bill would effectively overturn the verdict because the implied covenant would be retroactive and would apply to the defendants in the action.  But the bill specifically provided that its provisions would apply only in cases where there had been no jury verdict or final decision or judgment by a court of competent jurisdiction. 

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