I'm not sure whether this case is important in the big scheme of things, so I'll try to think it through here. If any one out there has commentary, I'd be happy to hear it.
Joyce v. Morgan Stanley is a decision of the 7th circuit court of appeals, issued August 19, that arose out of a merger of two telecomm firms in 1999.
The decision itself is available through the website of Wachtell Lipton.
Morgan Stanley was the financial adviser to one of the firms involved in the merger, the target company. Stockholders in the corporation it was advising brought this lawsuit, alleging that MS didn't warn them how to minimize their exposure to a decline in the value of the counterparty's stock's price.
On the plaintiff's theory, MS had a fiduciary responsibility to the shareholders in the target corp., and it breached that because of a prior conflict-generating relationship with the acquirer.
At first blush, then, the shareholders' claim is of the sort usually characterized as a "shareholders derivative" lawsuit. The district court certainly thought so. It dismissed the case on the ground that the plaintiffs had failed to follow the proper procedures for bringing a derivative claim. Thus, they were dismissed at the district court level for lack of standing.
The appellate court made things more complicated. It said this ISN'T a derivative lawsuit, because it wasn't a decline in share price per se that constitutes the harm alleged by a failure to hedge against such a decline. So the district court was wrong to use the standing argument.
But, the appellate court continued, Morgan Stanley didn't have any duty to warn the shareholders that they should hedge, so the question of whether it had any "conflict" with that alleged duty doesn't arise, and the district court was right to dismiss the case anyway.
As I indicated above, I'm not sure whether this is important. In fact my head hurts just thinking about it.
Showing posts with label Morgan Stanley. Show all posts
Showing posts with label Morgan Stanley. Show all posts
Sunday, August 31, 2008
Saturday, June 28, 2008
FERC decision
This looks important at first glance though I'm not sure what to make of it exactly. It has little to do with proxy fights or the other usual subjects of this blog, but hey -- it's my blog -- and I'll allow myself some topic drift.
The subject today then, electricity generation, contracted-for rates, and regulatory interference therewith.
I looked into this a bit last fall, when the International Swaps & Derivatives Association filed an amicus brief on the case. ISDA was unhappy about the circuit court's opinion because it had essentially told the Federal Energy Regulatory Commission to reconsider its approval of certain rate-setting contracts.
As necessary backgroud: the Federal Power Act requires that FERC ensure that all rates, terms, and conditions for the sale of power be "just and reasonable." In 1956the US Supreme Court created what is known as the "Mobile-Sierra doctrine," which makes it very difficult for FERC to intercede and invalidate a market contract between two commercial entities: between, say, the owner of a power plant and the owner of the transmission wires. There must be an "unequivocal public necessity" to justify such abrogation.
In effect, this limits FERC's unilateral rate setting ability to the retail market, where commercial entities deal not with each other but with unsophisticated normal folk.
Yet FERC has played a larger role than you might think, because the practice has developed (and the courts have blessed it) among some commercial parties of contracting out of Mobile-Sierra, creating agreements that specifically allow the FERC to change rates. In such a case, the transmission and the generation company are essentially stipulating that the FERC shall be their mediator if either side comes to believe that the contracted-for rate has become unfair by virtue of subsequent developments.
Nowadays power contracts are often themselves traded by financial institutions in much the same way that stocks and bonds are traded. This was one of Enron's innovations, and a practice that has survived that company's demise. Thus, the appellant in the case the Supreme Court decided Thursday is the Morgan Stanley Capital Group.
FERC had refused to modify the long-term contracts that parties entered into in 2000-2001, a period of tremendous price spikes and blackouts on the west coast. The 9th circuit had remanded, indicated that it did think there ought to be modification, because the unlawful activities of various parties in the spot market may have also affected the forward contract market.
This is what ticked off ISDA, leading to the amicus brief that first drew my attention to the matter. ISDA's amicus brief maintained, in the spirit of Mobile-Sierra, that contract rates negotiated at arms length are presumptively fair and reasonable, and that "buyers should not be permitted to escape contractual commitments because the contract was negotiated during a period of market dysfunction."
Now SCOTUS has spoken. But, as it sometimes does, SCOTUS has spoken with a stutter. It has said on the one hand that the 9th circuit was right to remand the case to FERC, but that it did so on the wrong rationale. If I understand it, the decision re-affirms Mobile-Sierra, but nonetheless says that this might (for all it can tell on the record) be one of those "unequivocal public necessities" that justify abrogation of contracts. Accordingly, it has remanded the case to FERC to build a better record. I think.
I don't know whether ISDA is happy with this outcome or not. I could ask them but, hey, that's too much work. My guess is that their chief interest isn't in who wins or how long it takes, but in re-affirming the principles, and that accordingly they are content with this decision. The folks over at Morgan Stanley may not be thrilled, though. This means further rounds of hearings and at least some continued uncertainty about their contracts. They're interested in the outcome more than the "principle of the thing"!
The subject today then, electricity generation, contracted-for rates, and regulatory interference therewith.
I looked into this a bit last fall, when the International Swaps & Derivatives Association filed an amicus brief on the case. ISDA was unhappy about the circuit court's opinion because it had essentially told the Federal Energy Regulatory Commission to reconsider its approval of certain rate-setting contracts.
As necessary backgroud: the Federal Power Act requires that FERC ensure that all rates, terms, and conditions for the sale of power be "just and reasonable." In 1956the US Supreme Court created what is known as the "Mobile-Sierra doctrine," which makes it very difficult for FERC to intercede and invalidate a market contract between two commercial entities: between, say, the owner of a power plant and the owner of the transmission wires. There must be an "unequivocal public necessity" to justify such abrogation.
In effect, this limits FERC's unilateral rate setting ability to the retail market, where commercial entities deal not with each other but with unsophisticated normal folk.
Yet FERC has played a larger role than you might think, because the practice has developed (and the courts have blessed it) among some commercial parties of contracting out of Mobile-Sierra, creating agreements that specifically allow the FERC to change rates. In such a case, the transmission and the generation company are essentially stipulating that the FERC shall be their mediator if either side comes to believe that the contracted-for rate has become unfair by virtue of subsequent developments.
Nowadays power contracts are often themselves traded by financial institutions in much the same way that stocks and bonds are traded. This was one of Enron's innovations, and a practice that has survived that company's demise. Thus, the appellant in the case the Supreme Court decided Thursday is the Morgan Stanley Capital Group.
FERC had refused to modify the long-term contracts that parties entered into in 2000-2001, a period of tremendous price spikes and blackouts on the west coast. The 9th circuit had remanded, indicated that it did think there ought to be modification, because the unlawful activities of various parties in the spot market may have also affected the forward contract market.
This is what ticked off ISDA, leading to the amicus brief that first drew my attention to the matter. ISDA's amicus brief maintained, in the spirit of Mobile-Sierra, that contract rates negotiated at arms length are presumptively fair and reasonable, and that "buyers should not be permitted to escape contractual commitments because the contract was negotiated during a period of market dysfunction."
Now SCOTUS has spoken. But, as it sometimes does, SCOTUS has spoken with a stutter. It has said on the one hand that the 9th circuit was right to remand the case to FERC, but that it did so on the wrong rationale. If I understand it, the decision re-affirms Mobile-Sierra, but nonetheless says that this might (for all it can tell on the record) be one of those "unequivocal public necessities" that justify abrogation of contracts. Accordingly, it has remanded the case to FERC to build a better record. I think.
I don't know whether ISDA is happy with this outcome or not. I could ask them but, hey, that's too much work. My guess is that their chief interest isn't in who wins or how long it takes, but in re-affirming the principles, and that accordingly they are content with this decision. The folks over at Morgan Stanley may not be thrilled, though. This means further rounds of hearings and at least some continued uncertainty about their contracts. They're interested in the outcome more than the "principle of the thing"!
Wednesday, December 12, 2007
Pandit in Charge at Citi
Vikram S. Pandit is the new CEO at Citigroup.
Whether or not that turns out to be a great thing for City, I offer no opinion. But Pandit has had a fascinating career. He left Morgan Stanley as the Purcell period there was coming to its crashing end two years ago.
A recent book on the Purcell era, BLUE BLOOD & MUTINY, by Patricia Beard, refers in passing to Mr. Pandit's "gravitas, stature, brilliance, and mannerly demeanor."
Sounds like VP has a fan.
At any rate, upon leaving MS, Pandit became one of the founders of multistrategy hedge fund Old Lane Partners.
Citigroup bought Old Lane, for about $800 million, this April, and Pandit was part of the deal. He became the chief executive of Citigroup Alternative Investments.
Now he moves up from CAI to heading Citigroup as a whole -- a very big step up.
Good luck to him. Its possible he's entering at a trough in Citigroup's fortunes and he'll look like a genius as things turn around. Or its possible he really is a genius, and will be instrumental in turning things around. Other possibilities come to mind, too ... but they're less pleasant to contemplate than those two.
Whether or not that turns out to be a great thing for City, I offer no opinion. But Pandit has had a fascinating career. He left Morgan Stanley as the Purcell period there was coming to its crashing end two years ago.
A recent book on the Purcell era, BLUE BLOOD & MUTINY, by Patricia Beard, refers in passing to Mr. Pandit's "gravitas, stature, brilliance, and mannerly demeanor."
Sounds like VP has a fan.
At any rate, upon leaving MS, Pandit became one of the founders of multistrategy hedge fund Old Lane Partners.
Citigroup bought Old Lane, for about $800 million, this April, and Pandit was part of the deal. He became the chief executive of Citigroup Alternative Investments.
Now he moves up from CAI to heading Citigroup as a whole -- a very big step up.
Good luck to him. Its possible he's entering at a trough in Citigroup's fortunes and he'll look like a genius as things turn around. Or its possible he really is a genius, and will be instrumental in turning things around. Other possibilities come to mind, too ... but they're less pleasant to contemplate than those two.
Subscribe to:
Posts (Atom)
