Bill Bamber was Senior Managing Director at Bear Stearns in its final days. He is also the first person singular "I" in the memoir "Bear Trap: The Fall of Bear Stearns and the Panic of 2008," though Bamber received assistance in writing the book from Andrew Spencer, Director of the Literary Division for the Creative Management Group Agency.
Anyway, regarding the matter discussed in yesterday's entry in this blog, the contract snafu that allowed Bear Stearns to renegotiate the terms of the acquisition, quintupling its cost to JPM ... Bamber's book has this to say.
"The lawyer's name wasn't released, so only a few select individuals know his name. I myself am not part of that great and solemn fraternity who were privy to his name, but whoever he is, I would one day like to find him, buy him a beer and shaking his hand for making me smile when I thought I would never smile again. All because of a single solitary sentence....Those of us who were still sitting around on the trading floor at Bear Stearns, in stark contrast to the vein-popping fit of rage that was consuming Jamie, were in collective fits of laughter bordering on hysterics."
Showing posts with label Bear Stearns. Show all posts
Showing posts with label Bear Stearns. Show all posts
Monday, January 25, 2010
Sunday, January 24, 2010
The class-action lawyers don't get credit
A New York state court, in rejecting plaintiffs' attorneys' efforts to cadge themselves some fees out of JP Morgan Chase, have provided us all with an opportunity to walk down memory lane and review the shotgun marriage of JPM and Bear Stearns almost two years ago now.
On Sunday evening, March 16, 2008, in the face of a run on Bear Stearns, the board of that storied broker-dealer agreed under Federal Reserve pressure to a "stabilizing transaction" in which it would disappear as an independent entity. It was to be effectively acquired by JPM for $2 a share. When I first saw that figure, I thought it was a type. Surely what was meant was $20. It couldn't possibly be only $2, thought I (and several other observers, some considerably more canny than I). After all, the stock had closed at $30 a share at the end of business Friday. Surely, it couldn't have lost $28 of that value of the course of a not-quite-concluded weekend, could it?
But it wasn't a typo. The agreement was that Bear Stearns would sell itself for $2 a share. Naturally, what came as a shock to onlookers like myself came as a much uglier shock to folks who had a substantial chunk of their nest eggs in Bear Stearns stock. And plaintiffs' attorneys filed a lawsuit on their behalf almost immediately, In Re Bear Stearns, 21 Misc. 3d 447 (Sup Ct., New York County 2008), claiming that the directors had violated their fiduciary duty by low-balling this.
On Tuesday, (as the usual story goes) lawyers for JPM discovered flaws in the hastily-compiled documentation they had prepared for this deal. They discovered language that "inadvertently" would require JPM to be responsible as a backstop for Bears' deals even if the deal didn't close. In other words, even after signing of to the $2, Bears' execs and lawyers discovered that the wording left them with a neat blackmail weapon. They could breach the contract, file bankruptcy as an independent entity, and leave JPM stuck dealing with a variety of angry counter-parties.
It was in reaction to that threat, and a promise to change the disturbing language about backstopping deals, that JPM agreed reluctantly a week later to raise the $2 price to a munificent $10. So, everybody was playing hardball all around. You might ask: so what?
The amusing point here is that the class action lawyers sought to take credit for this twist in fate. They said: because we filed the lawsuit, the defendants decided they had to be better fiduciaries, so they pressed for the increase from $2 to $10. Accordingly, we provided great assistance to the class we represented, and we are entitled to layers' fees.
Well, the court had earlier decided against the plaintiffs on the merits: that the directors did the best they could be expected to in the crisis circumstances they faced. This brings us back to where we started. On Dec. 28, 2009, the court also ruled against the lawyers on the issue of fees. "Here, there is not an iota of evidence in the record to suggest that the shareholder suits filed by plaintiffs after the announcement of the Initial Merger Agreement, had any causal impact on the negotiations that eventually resulted in the Amended Merger Agreement."
A bit more on this tomorrow.
On Sunday evening, March 16, 2008, in the face of a run on Bear Stearns, the board of that storied broker-dealer agreed under Federal Reserve pressure to a "stabilizing transaction" in which it would disappear as an independent entity. It was to be effectively acquired by JPM for $2 a share. When I first saw that figure, I thought it was a type. Surely what was meant was $20. It couldn't possibly be only $2, thought I (and several other observers, some considerably more canny than I). After all, the stock had closed at $30 a share at the end of business Friday. Surely, it couldn't have lost $28 of that value of the course of a not-quite-concluded weekend, could it?
But it wasn't a typo. The agreement was that Bear Stearns would sell itself for $2 a share. Naturally, what came as a shock to onlookers like myself came as a much uglier shock to folks who had a substantial chunk of their nest eggs in Bear Stearns stock. And plaintiffs' attorneys filed a lawsuit on their behalf almost immediately, In Re Bear Stearns, 21 Misc. 3d 447 (Sup Ct., New York County 2008), claiming that the directors had violated their fiduciary duty by low-balling this.
On Tuesday, (as the usual story goes) lawyers for JPM discovered flaws in the hastily-compiled documentation they had prepared for this deal. They discovered language that "inadvertently" would require JPM to be responsible as a backstop for Bears' deals even if the deal didn't close. In other words, even after signing of to the $2, Bears' execs and lawyers discovered that the wording left them with a neat blackmail weapon. They could breach the contract, file bankruptcy as an independent entity, and leave JPM stuck dealing with a variety of angry counter-parties.
It was in reaction to that threat, and a promise to change the disturbing language about backstopping deals, that JPM agreed reluctantly a week later to raise the $2 price to a munificent $10. So, everybody was playing hardball all around. You might ask: so what?
The amusing point here is that the class action lawyers sought to take credit for this twist in fate. They said: because we filed the lawsuit, the defendants decided they had to be better fiduciaries, so they pressed for the increase from $2 to $10. Accordingly, we provided great assistance to the class we represented, and we are entitled to layers' fees.
Well, the court had earlier decided against the plaintiffs on the merits: that the directors did the best they could be expected to in the crisis circumstances they faced. This brings us back to where we started. On Dec. 28, 2009, the court also ruled against the lawyers on the issue of fees. "Here, there is not an iota of evidence in the record to suggest that the shareholder suits filed by plaintiffs after the announcement of the Initial Merger Agreement, had any causal impact on the negotiations that eventually resulted in the Amended Merger Agreement."
A bit more on this tomorrow.
Sunday, November 8, 2009
Bear Stearns Trial: Final Arguments
Defense lawyers made their final arguments Friday on behalf of both Matthew Tannin and Ralph Cioffi, the former Bear Stearns managers accused of securities fraud largely on the basis of the e-mails they sent one another.
Mr. Tannin, for example, emailed to Cioffi on the basis of a recent market research report, saying that if the report is "ANYWHERE CLOSE to accurate, I think we should close the funds now." But soon thereafter, he told investors he was "comfortable" with the funds' performance. According to the prosecution, this crosses the line between permissible puffing and criminal lying.
In final argument, Tannin's attorney, Susan Brune, said that in the context of the whole email the "anything else" comment ceases to seem incriminating. She asked the jury to "send Matt home to his family."
Was she crying when she said this? I wasn't there, but apparently somebody heard or thought that they heard a quaver in her voice. The rule for a professional advocate is: what works, within the law. And there is no question but that a quavering voice is within the law. we'll see how it works.
Mr. Tannin, for example, emailed to Cioffi on the basis of a recent market research report, saying that if the report is "ANYWHERE CLOSE to accurate, I think we should close the funds now." But soon thereafter, he told investors he was "comfortable" with the funds' performance. According to the prosecution, this crosses the line between permissible puffing and criminal lying.
In final argument, Tannin's attorney, Susan Brune, said that in the context of the whole email the "anything else" comment ceases to seem incriminating. She asked the jury to "send Matt home to his family."
Was she crying when she said this? I wasn't there, but apparently somebody heard or thought that they heard a quaver in her voice. The rule for a professional advocate is: what works, within the law. And there is no question but that a quavering voice is within the law. we'll see how it works.
Wednesday, October 14, 2009
Cioffi and Tannin on trial
The trial of Cioffi and Tannin on charges of securities fraud, while managing hedge funds operated under the brand of the late Bear Stearns broker-dealer, has begun.
As I have indicated before in this blog, I believe that this prosecution is misguided and hope for a defense victory. But the usual conflict is playing itself out here. I believe I owe this considerable attention, but I just do not have the time to pay it that attention right now. What to do? When all else fails ... link farm.
Here's an account that appeared in the New York Times more than a year ago, of the prominent role e-mails play in the prosecution's case.
The wonderful blog "Houston's Clear Thinkers" was on the case in those days (though its presiding genius, Tom Kirkendall, seems to have been distracted since): here's what you can find there.
For more recent news, here is a discussion of a crucial evidentiary hearing.
Bess Levin has used the case as a vehicle for some humor at the expense of the defendants' former bosses, Cayne and Schwartz at Dealbreaker.
And then there is jury selection, which hasn't gone all that smoothly.
And let us not forget the Wall Street Law Blog.
Gee, I hope some of these guys link to this blog some day. Is that so much to ask?
As I have indicated before in this blog, I believe that this prosecution is misguided and hope for a defense victory. But the usual conflict is playing itself out here. I believe I owe this considerable attention, but I just do not have the time to pay it that attention right now. What to do? When all else fails ... link farm.
Here's an account that appeared in the New York Times more than a year ago, of the prominent role e-mails play in the prosecution's case.
The wonderful blog "Houston's Clear Thinkers" was on the case in those days (though its presiding genius, Tom Kirkendall, seems to have been distracted since): here's what you can find there.
For more recent news, here is a discussion of a crucial evidentiary hearing.
Bess Levin has used the case as a vehicle for some humor at the expense of the defendants' former bosses, Cayne and Schwartz at Dealbreaker.
And then there is jury selection, which hasn't gone all that smoothly.
And let us not forget the Wall Street Law Blog.
Gee, I hope some of these guys link to this blog some day. Is that so much to ask?
Sunday, July 19, 2009
Insider Trading: Three Cases
1. SEC v. Mark Cuban
On Friday, July 17, 2009, Judge Sidney Fitzwater, of the US District Court, Northern District, Texas, in Dallas, ruled in Favor of Mark Cuban, dismissing a lawsuit that the SEC had brought against him. Fitzwater found that the SEC had failed to state a claim on which relief could be grantred.
It did so without prejudice, i.e. the SEC may replead.
The case involved Cuban's knowledge of a forthcoming PIPE -- a private investment in public equity. When all other things are equal, a PIPE will cause a reduction in a stock's price, simply because it increases the supply of that company's stock in the marketplace. Without some corresponding increase in the demand for it, the price should fall.
Cuban was an investor in the company in question but he was not an "insider" to it in the strictest sense -- he was not a board member, officer, etc. On the SEC's theory, he was a fiduciary, and the insider trading was thus a breach of a fiduciary responsibility, i.e. his agreement to keep confidential the information that an issuer's CEO provided to him about a forthcoming PIPE.
But the agreement to keep the information confidential that the SEC alleges does not amount, the court said, to an agreement to refrain from a sale of stock. A sale may hint, to those who learn of it, that the seller has just received some information, but it is hardly a clearcut case of communication. "The complaint asserts no facts that reasonably suggest that the CEO intended to obtaion from Cuban an agreement to refrain from trading on the information as opposed to an agreement merely to keep it confidential," the court said.
2. US v. Ralph Cioffi
Cioffi, who is a criminal defendant in the case arising from the failure of two Bear stearns affiliated hedge funds in 2007, has not been so fortunate as Cuban. His trial judge has rejected his motion to dismiss.
In New York, on Tuesday, July 14, Judge Frederic Block refused to dismiss the criminal case against him that arose because Cioffi transferred a portion of his own holdings out of one of these funds without telling investors. In contrast to Fitzwater, Block has not prepared a written opinion giving us the reasons for this decision. But hsi situation isinherently different from that of Cuban's, and as I've noted here before, I thought the motion to dismiss was a matter of slicing the Oscar Meyer pretty thin.
It is still a rum business -- prosecuting "insider trading," at all. But thinking within the box of the law as now exists, Cioffi's position is much worse than that of Cuban's so the difference results of their motions was to be expected.
3. SEC v. Anthony Perez et al. This is a new one. The SEC has charged 5 individuals with insider trading on the ground that they learned that Liberty Mutual was about to announce a bid for Safeway Corp., and acted naturally, buying Safeway themselves.
There are actually three separate complaints, because this information leaked out at least that many times. In two of the three complaints arising out of the safeway bid, a tippee as well as the tipper are named.
The first-named defendant of one of these three complaints, Perez, acquired this information through his work at Goldman Sachs. His tippee? His brother. Ach! the government is now criminalizing brotherly love!
It is also enabling Goldman conspiracy theories. Personally, I much prefer Cerberus conspiracy theories, but Cerberus seems to have had nothing to do with Safeway.
On Friday, July 17, 2009, Judge Sidney Fitzwater, of the US District Court, Northern District, Texas, in Dallas, ruled in Favor of Mark Cuban, dismissing a lawsuit that the SEC had brought against him. Fitzwater found that the SEC had failed to state a claim on which relief could be grantred.
It did so without prejudice, i.e. the SEC may replead.
The case involved Cuban's knowledge of a forthcoming PIPE -- a private investment in public equity. When all other things are equal, a PIPE will cause a reduction in a stock's price, simply because it increases the supply of that company's stock in the marketplace. Without some corresponding increase in the demand for it, the price should fall.
Cuban was an investor in the company in question but he was not an "insider" to it in the strictest sense -- he was not a board member, officer, etc. On the SEC's theory, he was a fiduciary, and the insider trading was thus a breach of a fiduciary responsibility, i.e. his agreement to keep confidential the information that an issuer's CEO provided to him about a forthcoming PIPE.
But the agreement to keep the information confidential that the SEC alleges does not amount, the court said, to an agreement to refrain from a sale of stock. A sale may hint, to those who learn of it, that the seller has just received some information, but it is hardly a clearcut case of communication. "The complaint asserts no facts that reasonably suggest that the CEO intended to obtaion from Cuban an agreement to refrain from trading on the information as opposed to an agreement merely to keep it confidential," the court said.
2. US v. Ralph Cioffi
Cioffi, who is a criminal defendant in the case arising from the failure of two Bear stearns affiliated hedge funds in 2007, has not been so fortunate as Cuban. His trial judge has rejected his motion to dismiss.
In New York, on Tuesday, July 14, Judge Frederic Block refused to dismiss the criminal case against him that arose because Cioffi transferred a portion of his own holdings out of one of these funds without telling investors. In contrast to Fitzwater, Block has not prepared a written opinion giving us the reasons for this decision. But hsi situation isinherently different from that of Cuban's, and as I've noted here before, I thought the motion to dismiss was a matter of slicing the Oscar Meyer pretty thin.
It is still a rum business -- prosecuting "insider trading," at all. But thinking within the box of the law as now exists, Cioffi's position is much worse than that of Cuban's so the difference results of their motions was to be expected.
3. SEC v. Anthony Perez et al. This is a new one. The SEC has charged 5 individuals with insider trading on the ground that they learned that Liberty Mutual was about to announce a bid for Safeway Corp., and acted naturally, buying Safeway themselves.
There are actually three separate complaints, because this information leaked out at least that many times. In two of the three complaints arising out of the safeway bid, a tippee as well as the tipper are named.
The first-named defendant of one of these three complaints, Perez, acquired this information through his work at Goldman Sachs. His tippee? His brother. Ach! the government is now criminalizing brotherly love!
It is also enabling Goldman conspiracy theories. Personally, I much prefer Cerberus conspiracy theories, but Cerberus seems to have had nothing to do with Safeway.
Wednesday, July 8, 2009
Insider Trading: Cioffi's Motion to Dismiss
A motion to dismiss is pending with regard to count four of the indictment of Ralph Cioffi (Eastern District, NY, case #08-cr-00415 FB).
Cioffi, as my readers may remember, is one of two men arrested last year in connection with the collapse in 2007 of two hedge funds within Bear Stearns that had made huge bets on subprime mortgages.
Both Cioffi and his alleged co-conspirator, Matthew Tannin, are charged with securities fraud, in that they continued to present their funds to the investing public as an "awesome opportunity" even while privately concerned about their sustainability.
Cioffi, but not Tannin, is also accused of insider trading (Count Four) in that he "sold shares he owned in the Enhanced Fund while in possession of material non-public information regarding the Funds' liquidity," etc.That is the count with which this motion to dismiss deals.
The motion to dismiss itself seeks to make a distinction between the hedge funds themselves as an entity and their investors. Inside trading, it contends, is not an offense against the public at large but against a particular entity with which the insider has a fiduciary relationship. If the hedge fund in question had been a public corporation, Cioffi would have had a fiduciary duty to its shareholders. But as it was a hedge fund, his duty runs to the fund as such, not to its investors, so the government's case is "flawed as a matter of law."
Filing #116 includes this motion (May 22) and its supporting memorandum.
Filing #133 gives the district attorney's reaction (July 7). The DA accepts the defense characterization of Cioffi's duty as running to the fund, and claims that this is the duty that was criminally violated. The violations vis-a-vis the other investors are derivative of that.
Although I oppose the whole idea of "insider trading" as a criminal offense, thinking "within the box" of established legal concepts, I have to say the defense counsel's point seems a bit weak to me here.
Cioffi, as my readers may remember, is one of two men arrested last year in connection with the collapse in 2007 of two hedge funds within Bear Stearns that had made huge bets on subprime mortgages.
Both Cioffi and his alleged co-conspirator, Matthew Tannin, are charged with securities fraud, in that they continued to present their funds to the investing public as an "awesome opportunity" even while privately concerned about their sustainability.
Cioffi, but not Tannin, is also accused of insider trading (Count Four) in that he "sold shares he owned in the Enhanced Fund while in possession of material non-public information regarding the Funds' liquidity," etc.That is the count with which this motion to dismiss deals.
The motion to dismiss itself seeks to make a distinction between the hedge funds themselves as an entity and their investors. Inside trading, it contends, is not an offense against the public at large but against a particular entity with which the insider has a fiduciary relationship. If the hedge fund in question had been a public corporation, Cioffi would have had a fiduciary duty to its shareholders. But as it was a hedge fund, his duty runs to the fund as such, not to its investors, so the government's case is "flawed as a matter of law."
Filing #116 includes this motion (May 22) and its supporting memorandum.
Filing #133 gives the district attorney's reaction (July 7). The DA accepts the defense characterization of Cioffi's duty as running to the fund, and claims that this is the duty that was criminally violated. The violations vis-a-vis the other investors are derivative of that.
Although I oppose the whole idea of "insider trading" as a criminal offense, thinking "within the box" of established legal concepts, I have to say the defense counsel's point seems a bit weak to me here.
Wednesday, March 18, 2009
The Bear Stearns Securities Fraud Case Revisited
Let us revisit the Cioffi and Tannin matter. These two men, former Bear Stearns executives, were arrested June 2008 in connection with the collapse of two hedge funds under Bear sponsorship the preceding summer.
Both defendants are charged with securities fraud in that they made false and misleading statements to the investors about the health of these funds beginning in March. On the prosecution theory, they both understood by March that the funds were "toast" but continued to put on a happy face to the outside world.
The trial date is September 28 of this year.
I bring it up because there has been some motion practice in recent days. For example, Matthew Tannin's attorneys at Brune & Richards have filed a motion for a bill of particulars.
The indictment, as they paraphrase it in the memorandum supporting this motion, quotes selectively from certain e-mails, "apparently in an attempt to give an example of the alleged misstatements and ommissions falling into the categories it identifies."
But the indictment doesn't contain the phrase "to wit". When a bill of indictment says, "John Smith committed offense X, to wit he met in a room on March 10th with five accomplices and...." the phrase "to wit" means that the meeting in that room and what transpired there constitutes the offense X.
The indictment doesn't contain that phrase. The specifics offered are only meant, it appears, as examples of the misstatements, not as a complete account.
Tannin's lawyers understandably don't want to go into trial against an open-ended indictment. They want the government to be specific about each and every act that on its theory constitutes part of the offense. It has been a long long time since I took a Crim Pro course, and I'll be curious to see how this pans out.
There's also the question of Brady material. This relates to a rule announced by SCOTUS in 1963, that the government must disclose all exculpatory material in its possession, including such material as may assist defense counsel in impeaching prosecution witnesses. Apparently as part of the discovery process thus far the government has produced notes of its interviews with Raymond McGarrigal, one of the portfolio managers of the funds, a man who worked side by side with the two defendants during the crucial period and thus at least potentially a crucial witness.
Most of the McGarrigal material provided to the defendats, though, is blacked out. "Redacted," in the fancier term. Defense counsel says there is enough there to indicate McGarrigal made a series of highly exculpatory statements, and it wants to know what they were.
I'm sure the government has offered some justification for the redacting. I haven't done enough searchuing through the PACER materials yet to discover what it is, though.
It sounds as if the judge is going to have to navigate a minefield even to get this case to trial.
Both defendants are charged with securities fraud in that they made false and misleading statements to the investors about the health of these funds beginning in March. On the prosecution theory, they both understood by March that the funds were "toast" but continued to put on a happy face to the outside world.
The trial date is September 28 of this year.
I bring it up because there has been some motion practice in recent days. For example, Matthew Tannin's attorneys at Brune & Richards have filed a motion for a bill of particulars.
The indictment, as they paraphrase it in the memorandum supporting this motion, quotes selectively from certain e-mails, "apparently in an attempt to give an example of the alleged misstatements and ommissions falling into the categories it identifies."
But the indictment doesn't contain the phrase "to wit". When a bill of indictment says, "John Smith committed offense X, to wit he met in a room on March 10th with five accomplices and...." the phrase "to wit" means that the meeting in that room and what transpired there constitutes the offense X.
The indictment doesn't contain that phrase. The specifics offered are only meant, it appears, as examples of the misstatements, not as a complete account.
Tannin's lawyers understandably don't want to go into trial against an open-ended indictment. They want the government to be specific about each and every act that on its theory constitutes part of the offense. It has been a long long time since I took a Crim Pro course, and I'll be curious to see how this pans out.
There's also the question of Brady material. This relates to a rule announced by SCOTUS in 1963, that the government must disclose all exculpatory material in its possession, including such material as may assist defense counsel in impeaching prosecution witnesses. Apparently as part of the discovery process thus far the government has produced notes of its interviews with Raymond McGarrigal, one of the portfolio managers of the funds, a man who worked side by side with the two defendants during the crucial period and thus at least potentially a crucial witness.
Most of the McGarrigal material provided to the defendats, though, is blacked out. "Redacted," in the fancier term. Defense counsel says there is enough there to indicate McGarrigal made a series of highly exculpatory statements, and it wants to know what they were.
I'm sure the government has offered some justification for the redacting. I haven't done enough searchuing through the PACER materials yet to discover what it is, though.
It sounds as if the judge is going to have to navigate a minefield even to get this case to trial.
Monday, January 12, 2009
Bankruptcy has macroeconomic consequences
Thank you, Mr. Icahn. But my gratitude has its limits.
The positive first. I've been seeking to make the point for some time now that bankruptcy laws have macroeconomic consequences, and that in particular the depth of this present bust has a lot to do with malfunctions in the corporate re-organization system. (Follow that link to an entry on my other blog where I made this point back in sunny July.)
Nobody has listened to me, and I've been hoping somnebody who can command a broader audience than lil' old Christopher Faille would come along and say the same thing.
Now Mr. Icahn has stepped forward as that somebody. See his op-ed piece in Friday's Wall Street Journal.
That's all for the positive side, though. On the negative side, Icahn's agenda for bankruptcy reform seems to me wrong. The spotlight is good (thanks again) the proposal is bad. Icahn wants to abolish the rule that gives incumbent management (the debtor in possession) an exclusive opportunity to prepare a re-organization plan for the first 18 months after a filing.
He asks: "Why should the same management that got the company in trouble have the right to lock up its assets for an extended period of time?"
The simple answer to that question is that the management of a corporation has to make the decision to file for bankruptcy in the first place. Legislators have decided it is better to give them some incentive to do so than to have them continue to preside over an empty shell of a company until creditors force bankruptcy on them. The 18 month period that riles Icahn is part of a package aimed at inducing voluntary filings while there is still enough fo a company left for the filing to be in the public interest.
Maybe the legislature has made the wrong call there, but it isn't an inherently irrational call.
The problem with bankruptcy law, Mr. Icahn, isn't with the managers. It is with the overly aggressive liquidation trustees who bring "avoidance" actions and their kin at the real or imagined drop of a hat.
As trustees have become more aggressive in pressing such actions, financial entities all along the spectrum have become more sensitive about ending up as defendants therein. Regardless of the eventual outcome, just being a party to such a dispute is a catastrophe. What does one do to stay clear of that? In the absense of a time machine, the only way to avoid "avoidance" lawsuits is to refuise to be the counter-party of any institution that seems weak, or is even rumored to be considering a bankruptcy filing.
The trustees, in other words, have collectively created a hairtrigger mentality. If a hedge fund manager hears a rumor that his prime broker may be in trouble, he may not be able to afford to wait for evidence that the rumor is true. He has an incentive to sever his ties with that prime broker (read: Bear Stearns) on the rumor.
As Judge Posner wrote in the matter of Maxwell v. KPMG, "While the management of a going concern has many other duties besides bringing lawsuits, the trustee of a defunct business has little to do besides filing claims that if resisted he may decide to sue to enforce."
Bankruptcy reform has to focus on the task of reining-in such trustees.
The positive first. I've been seeking to make the point for some time now that bankruptcy laws have macroeconomic consequences, and that in particular the depth of this present bust has a lot to do with malfunctions in the corporate re-organization system. (Follow that link to an entry on my other blog where I made this point back in sunny July.)
Nobody has listened to me, and I've been hoping somnebody who can command a broader audience than lil' old Christopher Faille would come along and say the same thing.
Now Mr. Icahn has stepped forward as that somebody. See his op-ed piece in Friday's Wall Street Journal.
That's all for the positive side, though. On the negative side, Icahn's agenda for bankruptcy reform seems to me wrong. The spotlight is good (thanks again) the proposal is bad. Icahn wants to abolish the rule that gives incumbent management (the debtor in possession) an exclusive opportunity to prepare a re-organization plan for the first 18 months after a filing.
He asks: "Why should the same management that got the company in trouble have the right to lock up its assets for an extended period of time?"
The simple answer to that question is that the management of a corporation has to make the decision to file for bankruptcy in the first place. Legislators have decided it is better to give them some incentive to do so than to have them continue to preside over an empty shell of a company until creditors force bankruptcy on them. The 18 month period that riles Icahn is part of a package aimed at inducing voluntary filings while there is still enough fo a company left for the filing to be in the public interest.
Maybe the legislature has made the wrong call there, but it isn't an inherently irrational call.
The problem with bankruptcy law, Mr. Icahn, isn't with the managers. It is with the overly aggressive liquidation trustees who bring "avoidance" actions and their kin at the real or imagined drop of a hat.
As trustees have become more aggressive in pressing such actions, financial entities all along the spectrum have become more sensitive about ending up as defendants therein. Regardless of the eventual outcome, just being a party to such a dispute is a catastrophe. What does one do to stay clear of that? In the absense of a time machine, the only way to avoid "avoidance" lawsuits is to refuise to be the counter-party of any institution that seems weak, or is even rumored to be considering a bankruptcy filing.
The trustees, in other words, have collectively created a hairtrigger mentality. If a hedge fund manager hears a rumor that his prime broker may be in trouble, he may not be able to afford to wait for evidence that the rumor is true. He has an incentive to sever his ties with that prime broker (read: Bear Stearns) on the rumor.
As Judge Posner wrote in the matter of Maxwell v. KPMG, "While the management of a going concern has many other duties besides bringing lawsuits, the trustee of a defunct business has little to do besides filing claims that if resisted he may decide to sue to enforce."
Bankruptcy reform has to focus on the task of reining-in such trustees.
Wednesday, December 10, 2008
Cioffi and Tannin trial date
I see from the wire services that the US district court, eastern district of New York, has set a trial date for two securities-fraud defendants who once worked for Bear Stearns: Ralph Cioffi and Matthew Tannin.
Jury selection begins September 28, 2009.
Cioffi and Tannin ran two hedge funds within Bear Stearns that made big bets on subprime mortgages. The quick collapse of these funds in the summer of 2007 was one of the first claps of thunder in the storm that continues to this day.
So are Cioffi and Tannin mere scapegoats? They were wrong about the subprime market and those who invested in their ability to be right consequently lost a lot of money. But their investors were grownups (and well heeled grown-ups too -- nobody got evicted from his/her garrett because Tannin and Cioffi lost the rent money).
Both men have pleaded not guilty.
One question you might ask yourself: why is this case going to trial in the eastern district of New York? That district consists of Long Island, Staten Island, the Queens, and Brooklyn. Didn't Tannin and Cioffi work in Manhattan? Manhattan, along ith the Bronx, constitutes the SOUTHERN DISTRICT of New York. Yes, they did.
And there have been times when the US Attorney for the southern district was the big cheese in such matters, the sheriff of Wall Street (that's how Rudi Giuliani first became a national figure after all, back in the 1980s).
Some commentators, like Peter Lattman have read the ED attorney's involvement as an incident in an ongoing rivalry between SDNY and EDNY.
Furthermore, the bill of indictment says little more about the reason for the involvement of the U.S. Attorney for the eastern district than this, beyond, "Some of the fund's investors resided within the eastern district of New York." There's surely more to it than that.
I'm hoping for an embarrassment for the prosecution. I hope Cioffi and Tannn's attorneys can make the ED guys wish they had left Wall Street alone. Leave it to the SD forever after, I imagine them telling one another when this is all done.
I'm sure I'll have more to say about this at some point in the nine months between now and trial.
Jury selection begins September 28, 2009.
Cioffi and Tannin ran two hedge funds within Bear Stearns that made big bets on subprime mortgages. The quick collapse of these funds in the summer of 2007 was one of the first claps of thunder in the storm that continues to this day.
So are Cioffi and Tannin mere scapegoats? They were wrong about the subprime market and those who invested in their ability to be right consequently lost a lot of money. But their investors were grownups (and well heeled grown-ups too -- nobody got evicted from his/her garrett because Tannin and Cioffi lost the rent money).
Both men have pleaded not guilty.
One question you might ask yourself: why is this case going to trial in the eastern district of New York? That district consists of Long Island, Staten Island, the Queens, and Brooklyn. Didn't Tannin and Cioffi work in Manhattan? Manhattan, along ith the Bronx, constitutes the SOUTHERN DISTRICT of New York. Yes, they did.
And there have been times when the US Attorney for the southern district was the big cheese in such matters, the sheriff of Wall Street (that's how Rudi Giuliani first became a national figure after all, back in the 1980s).
Some commentators, like Peter Lattman have read the ED attorney's involvement as an incident in an ongoing rivalry between SDNY and EDNY.
Furthermore, the bill of indictment says little more about the reason for the involvement of the U.S. Attorney for the eastern district than this, beyond, "Some of the fund's investors resided within the eastern district of New York." There's surely more to it than that.
I'm hoping for an embarrassment for the prosecution. I hope Cioffi and Tannn's attorneys can make the ED guys wish they had left Wall Street alone. Leave it to the SD forever after, I imagine them telling one another when this is all done.
I'm sure I'll have more to say about this at some point in the nine months between now and trial.
Wednesday, August 13, 2008
Three Books, briefly
1. I wrote last week of a forthcoming book about the demise of Bear Stearns, BEAR TRAP, and about my efforts to obtain a review copy.
I'd like to report now that I have seen a copy, and that the book is something of a disappointment.
The opening paragraphs, in which the authors compare themselves to Shakespeare and Dreiser, should have been a tip-off. If you have a good story to tell, you can launch right into it and let it tell itself.
2. A more interesting read by far, Joe Nocera's GOOD GUYS & BAD GUYS. The bulk of this book is a "best of" collection of articles and columns going back to the 1980s. The new material generally updates or seeks to draw connections amongst the collected material.
Some oil-industry history: In 1982, when T. Boone Pickens, founder of Mesa Petroleum, offered to buy a much larger company, Cities Service Company, which was more generally known by the name Citgo, the target company responded by offering to buy Mesa. High drama played out in the suites of southern Manhattan for weeks as the two fish struggled to see who would swallow whom.
Neither offer ever actually closed, but the upshot of it was that Pickens made his name as a wheeler-dealer on a very big scale, and Citgo was put "in play" in the markets. By the end of that decade, it had been sold (through steps I won't relate here) to the nation of Venezuela.
Anyway, Joe Nocera got a journalistic coup out of this intense bidding war. He was there, in the hotel suite with Pickens and his brains trust, through the thick of it, and it became the October 1982 cover story for Texas Monthly. That chapter makes a very compelling read and a great jumpstart to this book.
3. Or consider Roger Lowenstein's latest, While America Aged, about (as the lengthy subtitle aptly says), "how pension debts ruined General Motors, stopped the NYC subways, Bankruptcy San Diego, and Loom as the Next Financial Crisis."
The "devil's pack" that too many managements have struck with too many unions over the years in the US is: labor peace in return for unfunded pension promises. The managers who strike this deal may be either private, quasi-public, or fully public. The bargain is the same. It is the sort of bargain that a credit-card addict makes with himself. "I'll save my cash and soothe my spending impulses at the same time by using the plastic."
One neat detail from the San Diego case study: In October 2001, that city's chief of human relations, Cathy Lexin, expressed her growing unease about the pension's earnings numbers vis-à-vis its liabilities in a very eloquent way in an email she sent to the assistant city auditor. The subject line of the email read: EEEK.
I'd like to report now that I have seen a copy, and that the book is something of a disappointment.
The opening paragraphs, in which the authors compare themselves to Shakespeare and Dreiser, should have been a tip-off. If you have a good story to tell, you can launch right into it and let it tell itself.
2. A more interesting read by far, Joe Nocera's GOOD GUYS & BAD GUYS. The bulk of this book is a "best of" collection of articles and columns going back to the 1980s. The new material generally updates or seeks to draw connections amongst the collected material.
Some oil-industry history: In 1982, when T. Boone Pickens, founder of Mesa Petroleum, offered to buy a much larger company, Cities Service Company, which was more generally known by the name Citgo, the target company responded by offering to buy Mesa. High drama played out in the suites of southern Manhattan for weeks as the two fish struggled to see who would swallow whom.
Neither offer ever actually closed, but the upshot of it was that Pickens made his name as a wheeler-dealer on a very big scale, and Citgo was put "in play" in the markets. By the end of that decade, it had been sold (through steps I won't relate here) to the nation of Venezuela.
Anyway, Joe Nocera got a journalistic coup out of this intense bidding war. He was there, in the hotel suite with Pickens and his brains trust, through the thick of it, and it became the October 1982 cover story for Texas Monthly. That chapter makes a very compelling read and a great jumpstart to this book.
3. Or consider Roger Lowenstein's latest, While America Aged, about (as the lengthy subtitle aptly says), "how pension debts ruined General Motors, stopped the NYC subways, Bankruptcy San Diego, and Loom as the Next Financial Crisis."
The "devil's pack" that too many managements have struck with too many unions over the years in the US is: labor peace in return for unfunded pension promises. The managers who strike this deal may be either private, quasi-public, or fully public. The bargain is the same. It is the sort of bargain that a credit-card addict makes with himself. "I'll save my cash and soothe my spending impulses at the same time by using the plastic."
One neat detail from the San Diego case study: In October 2001, that city's chief of human relations, Cathy Lexin, expressed her growing unease about the pension's earnings numbers vis-à-vis its liabilities in a very eloquent way in an email she sent to the assistant city auditor. The subject line of the email read: EEEK.
Wednesday, August 6, 2008
The Big Bad Bear Book
The collapse of Bear Stearns in March of this year has produced innumerable journalistic takes and re-takes.
Now it has entered a new stage, getting its very own book, BEAR TRAP: THE FALL OF BEAR STEARNS AND THE PANIC OF 2008, by an individual still known only as Anonymous.
The publisher, BrickTower, says that Anonymous will reveal his/her name when the formal publication date rolls around, at the start of the fourth week of September.
The anonymity and the accompanying guessing game is a standard bit of publisher's hype of course. It is designed to assure us that the book is the work of a real insider, the Mark Felt of the Bear Stearns meltdown.
But of course it seems unlikely anyone at BrickTower had to meet Anonymous in a parking garage.
At any rate, I've contacted BrickTower and requested a review copy. The name of the publisher is itself news to me, certainly it isn't like Wiley, a go-to name for biz books. Still, if a copy arrives, I'll happily tell you all about it.
Now it has entered a new stage, getting its very own book, BEAR TRAP: THE FALL OF BEAR STEARNS AND THE PANIC OF 2008, by an individual still known only as Anonymous.
The publisher, BrickTower, says that Anonymous will reveal his/her name when the formal publication date rolls around, at the start of the fourth week of September.
The anonymity and the accompanying guessing game is a standard bit of publisher's hype of course. It is designed to assure us that the book is the work of a real insider, the Mark Felt of the Bear Stearns meltdown.
But of course it seems unlikely anyone at BrickTower had to meet Anonymous in a parking garage.
At any rate, I've contacted BrickTower and requested a review copy. The name of the publisher is itself news to me, certainly it isn't like Wiley, a go-to name for biz books. Still, if a copy arrives, I'll happily tell you all about it.
Sunday, March 30, 2008
KPMG Out As Bear Liquidator
There's a Cayman Islands subplot to the ongoing drama of Bear Stearns.
The Grand Court there recently replaced KPMG Inc. as the liquidator of two now-infamous Bear Stearns hedge funds with lots of nasty subprime exposure.
The two funds have not-so-snappy names. One is the Bear Stearns High-Grade Structured Credit (Overseas) Ltd. The other is the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd.
Mother Bear in New York last summer opted for the voluntary liquidation of these two funds in the Caymans, under whose laws the funds were organized.
Last month, a high muckedy-muck there ordered new liquidators: Geoffrey Varga and William Cleghorn of Kinetic Partners LLP, an international auditing and compliance consultancy founded in the spring of 2005. An auditing-world greybeard is out, a spring chicken is in.
According to an announcement from Kinetic Partners, a majority of investors sought the replacement of the KPMG liquidators.
"Investors also wanted a full and detailed investigation into the causes of the Feeder Funds' downfall to be undertaken, anticipating that the results would likely lead to the prosecution of claims for recovery against any of the Feeder Funds' direct and/or indirect control parties or service providers who appear to have any degree of responsibility for the Funds' losses," according to a statement from Kinetic Partners.
What's this all about? The judge seemed to go out of his way to et KPMG itself off any hypothetical 'hook.' He said (I'm quoting from a newsletter published by KYC News): "No suggestion whatsoever of impropriety or incompetence on the part of the Joint Voluntary Liquidators is intended. On the contrary, all parties have been keen to acknowledge the high reputation of KPMG...."
So KPMG presumably isn't one of those "control parties or service providers" against whom, the investors believe, liability might be found? It appears not.
The judge also seemed to think, though, that some of the lawyers associated with these funds had acted in a suspicious manner, and presumably bringing Kinetic into the picture will jumpstart an investigation of their behavior.
There are a million stories in this dying Bear.
The Grand Court there recently replaced KPMG Inc. as the liquidator of two now-infamous Bear Stearns hedge funds with lots of nasty subprime exposure.
The two funds have not-so-snappy names. One is the Bear Stearns High-Grade Structured Credit (Overseas) Ltd. The other is the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd.
Mother Bear in New York last summer opted for the voluntary liquidation of these two funds in the Caymans, under whose laws the funds were organized.
Last month, a high muckedy-muck there ordered new liquidators: Geoffrey Varga and William Cleghorn of Kinetic Partners LLP, an international auditing and compliance consultancy founded in the spring of 2005. An auditing-world greybeard is out, a spring chicken is in.
According to an announcement from Kinetic Partners, a majority of investors sought the replacement of the KPMG liquidators.
"Investors also wanted a full and detailed investigation into the causes of the Feeder Funds' downfall to be undertaken, anticipating that the results would likely lead to the prosecution of claims for recovery against any of the Feeder Funds' direct and/or indirect control parties or service providers who appear to have any degree of responsibility for the Funds' losses," according to a statement from Kinetic Partners.
What's this all about? The judge seemed to go out of his way to et KPMG itself off any hypothetical 'hook.' He said (I'm quoting from a newsletter published by KYC News): "No suggestion whatsoever of impropriety or incompetence on the part of the Joint Voluntary Liquidators is intended. On the contrary, all parties have been keen to acknowledge the high reputation of KPMG...."
So KPMG presumably isn't one of those "control parties or service providers" against whom, the investors believe, liability might be found? It appears not.
The judge also seemed to think, though, that some of the lawyers associated with these funds had acted in a suspicious manner, and presumably bringing Kinetic into the picture will jumpstart an investigation of their behavior.
There are a million stories in this dying Bear.
Sunday, March 23, 2008
Section 6.10
Those wonks who've been following the news about the disintegration of Bear Stearns in recent days will know at once to what the above subject line refers.
Section 6.10 is the "deal protection" clause of the merger agreement between Bear and itsacquirer, JP Morgan.
The agreement as a whole in all its 47 pages of glory is readily available. Here's one of the clicks that will get you there.
6.10 provides that if the shareholders of Bear Stearns vote against this chintzy two-dollar deal, "each of the parties shall in good faith use its reasonable best efforts to negotiate a restructuring of the transaction provided for herein ... and to resubmit the transaction to Company's shareholders for approval, with the timing of such resubmission to be determined at the reasonable request of Parent."
"Company" is Bear and "Parent" is JPMorgan.
What this seems to mean is that the shareholders can't say "no." At least not on the first try. They can at worst say, "maybe not, restructure it a bit and try us again."
But how many times would they have to say that before it amounted to a "no"? This seems a bit like the infamous closed loop on the shampoo bottle's instructions, said to keep many a blonde busy for days. "Apply, lather, rinse, repeat."
The Deleware courts have imposed certain restructions on the enforceability of such "deal protection devices," such that this language may be subject to challenge by those shareholders.
For more on the legal issues involved, you might want to click here.
Section 6.10 is the "deal protection" clause of the merger agreement between Bear and itsacquirer, JP Morgan.
The agreement as a whole in all its 47 pages of glory is readily available. Here's one of the clicks that will get you there.
6.10 provides that if the shareholders of Bear Stearns vote against this chintzy two-dollar deal, "each of the parties shall in good faith use its reasonable best efforts to negotiate a restructuring of the transaction provided for herein ... and to resubmit the transaction to Company's shareholders for approval, with the timing of such resubmission to be determined at the reasonable request of Parent."
"Company" is Bear and "Parent" is JPMorgan.
What this seems to mean is that the shareholders can't say "no." At least not on the first try. They can at worst say, "maybe not, restructure it a bit and try us again."
But how many times would they have to say that before it amounted to a "no"? This seems a bit like the infamous closed loop on the shampoo bottle's instructions, said to keep many a blonde busy for days. "Apply, lather, rinse, repeat."
The Deleware courts have imposed certain restructions on the enforceability of such "deal protection devices," such that this language may be subject to challenge by those shareholders.
For more on the legal issues involved, you might want to click here.
Monday, March 17, 2008
Bear Stearns
Will the shareholders go along?
Bear Stearns, JPMorgan, and various central banking and Treasury Dept. greybeards seem to have had a busy weekend, arranging the deal whereby JPM will buy Bear.
So desperate to sell itself was BS, in fact, that JPM got a fire sale price. That raises a question in my mind: will the deal hold?
In many respects, this is analogous to the deal in November 2001 whereby Dynegy agreed to buy what was left of rapidly-imploding Enron Corp. But there was a lot of room for slippage between contract and closing. And this one never came off.
And Enron had to enter bankruptcy, resulting in eventual liquidation, anyway.
In the case of Bear Stearns, the unravelling if it comes would take a somewhat different form than it took than. It may take the form of shareholder rebellion.
"Even the headquarters building and the land on which it stands would seem to be worth more than JPM is offering for the whole company." Expect to hear some form of THAT sentence more and more often in the days to come, until you'll think Wall Street has been taken over by Henry George's disciples.
Bear Stearns, JPMorgan, and various central banking and Treasury Dept. greybeards seem to have had a busy weekend, arranging the deal whereby JPM will buy Bear.
So desperate to sell itself was BS, in fact, that JPM got a fire sale price. That raises a question in my mind: will the deal hold?
In many respects, this is analogous to the deal in November 2001 whereby Dynegy agreed to buy what was left of rapidly-imploding Enron Corp. But there was a lot of room for slippage between contract and closing. And this one never came off.
And Enron had to enter bankruptcy, resulting in eventual liquidation, anyway.
In the case of Bear Stearns, the unravelling if it comes would take a somewhat different form than it took than. It may take the form of shareholder rebellion.
"Even the headquarters building and the land on which it stands would seem to be worth more than JPM is offering for the whole company." Expect to hear some form of THAT sentence more and more often in the days to come, until you'll think Wall Street has been taken over by Henry George's disciples.
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