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Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

One frequently cited problem of 401(k) plans is that the volatility of the market puts workers at risk of losing their retirement savings at a moment's notice. In order to hedge against this problem, lawmakers tend to argue that safer alternatives, such as defined-benefit plans or 401(k) plans with limited exposure, should be the industry norm. In terms of both approaches, the argument is that the little to no market exposure will ensure worker returns upon retirement. An oft-overlooked consideration, however, is whether the extent of these returns is sufficient to ensure a stable retirement. Generally, safe investments mean lower yields, which in turn must outpace inflation to allow workers to reap even minimal rewards.

In order to offset this problem, another alternative is to utilize 401(k) plans that take on greater risk, but are able to hedge against this risk by diversifying portfolios to allow for investments with longer time-horizons to counter the effects of short-term volatility and provide returns much greater than the rate of inflation. Scott Higbee, a partner at the global private markets firm Partners Group, argues in today's Wall Street Journal for just such an approach:

Meanwhile, more than 50 million Americans rely on 401(k) plans for their retirement that typically are self-managed and restricted to a combination of traditional assets of stocks, bonds and cash. These defined-contribution plans generally don't provide investors with the opportunity to add a range of alternative assets to the mix. Given the current dismal yields on mainstream fixed-income securities, they should.

Some self-directed retirement savings vehicles such as IRAs allow investors typically with a net worth in excess of $2 million (excluding their primary residence) to invest in alternative assets such as private equity and real estate. But most 401(k) participants don't meet these thresholds and most plans are not designed with portability and liquidity in mind.

By opening up the alternative asset option for all investors, the government would allow 401(k) workers a better chance at securing a stable retirement, while minimizing the concomitant risk of such an approach. If this shift in policy were accompanied by a shift in the regulatory scheme to allow fund trustees a certain degree of immunity from alternative-asset related litigation, while preventing these trustees from aggregating risk in a small number of assets, the incentive to diversify into alternative-assets would certainly be extant. If this scheme proved successful, it could provide an impetus for the reconsideration of the defined-benefit system as well, which would save the government billions in public worker costs. Within the confines of a wise regulatory framework, this is an experiment that seems worth any potential costs.

I long ago predicted that the expansion of the 9/11 Victim Compensation Fund would lead to fraud and giveaways at the expense of taxpayers, and, unfortunately, I'm being proven right. Despite the complete lack of scientific evidence that the WTC site dust causes cancer, NIOSH director is letting politics trump science and opening the fund to claims from 50 different types of cancer. Oddly, the same Lancet studies that earlier showed no statistically significant evidence (no non-smoking firefighters have come down with lung cancer out of the 9000 firefighters who worked at Ground Zero) are being used to justify this raid on the federal fisc. The New York Times highlights the case of Ernest K. Matthews, who blames his lung cancer on cleaning Merrill Lynch elevators instead of on his smoking, and will be making a claim at taxpayers' expense. Similarly, Patricia Workman implausibly claims her 2001-03 exposure to Ground Zero caused her 2007 myeloma and skin cancer. The brief exposures of Ground Zero workers to common toxic substances are being used to rationalize the payments, though "Dr. Neugut, who is a principal investigator with the Long Island Breast Cancer Study Project, which was set up to look at environmental causes of breast cancer on Long Island, added that most studies of cancer risks 'are based on workers exposed for eight or nine hours a day to mammoth amounts of these things for 30 years. Even then it is hard to demonstrate a clear excess in cancer risk.'" This junk science should be a bigger scandal.

Kenneth R. Feinberg, partner and founder of Feinberg Rozen and administrator of the government's two outside-the-courts victims' compensation funds for September 11 and the BP Deepwater spill discusses mass injuries and alternative dispute resolution in the American legal system. Manhattan Institute's Center for Legal Policy also hosted an event featuring Mr. Feinberg which allowed for a more extended and comprehensive discussion of ADR and modern mass litigation.

In a new podcast, Steven Malanga, Manhattan Institute senior fellow and City Journal's senior editor, discusses his recent City Journal article "The Court That Broke Jersey" which argues among other things that "the state's activist judiciary has forced taxpayers to finance unprecedented educational and housing regimes."

Kenneth R. Feinberg, partner and founder of Feinberg Rozen and administrator of the government's two outside-the-courts victims' compensation funds for September 11 and the BP Deepwater spill discusses mass injuries and alternative dispute resolution in the American legal system. Mr. Feinberg explores the question of whether administrative claims resolution can complement, or perhaps substitute for, much modern mass litigation. Michael B. Mukasey, the 81st Attorney General of the United States, introduced Mr. Feinberg speaking at an event hosted by the Center for Legal Policy at the Manhattan Institute for Policy Research.

Updating my earlier post on the controversy over the damages cap in the Chatsworth train accident case, it's worth noting this letter from Antoine Frerot, the chairman and CEO of Veolia. I was apparently too generous to Andrew Cohen in assuming he was correct that it was indisputably engineer error that caused the accident: there was evidence that the signal the passenger train ran was green, rather than red—a possible consequence of Metrolink's failure to implement Positive Train Control safety technology. If so, this would have been the fault of the governmental Southern California Regional Rail Authority, which had induced Veolia to run Metrolink by promising to indemnify them for accidents—a contractual promise they ended up breaching.

Veolia's ban on cell-phone use by engineers exceeds federal safety regulations; the Federal Railroad Administration considered and rejected such a ban. (The engineer himself had been hired by Amtrak, not Veolia, who was required to retain Amtrak employees when assuming its share of Metrolink operations.)

Needless to say, all of this information further undermines Cohen's claims that the damage caps in the Amtrak Reform and Accountability Act that President Clinton signed in 1997 (much less tort reform) was bad public policy or an injustice. Even assuming that there would be a passenger railroad industry without the caps, in the absence of the caps, Veolia would have continued to contest liability, and would have refused to settle the case—and may well have won, leaving Chatsworth victims to collect even less money from the underinsured and underfunded SCRRA. (Indeed, per-passenger recovery in earlier Metrolink accidents was substantially lower.)

Daniel Fisher catches the New York Times failing to fully assign blame to very wealthy lawyers such as Mikal Watts for their role in preventing Louisiana residents from receiving compensation from BP. [Forbes via @overlawyered Twitter feed]

Today the Center for Class Action Fairness filed an objection to the $3.4 billion taxpayer-funded Cobell Indian trust settlement on behalf of Sisseton-Wahpeton Ovate tribe member and class member Kimberly Craven.

Congress recently held hearings in response to the class attorneys' fee request of $223 million, which was over twice the $99.9 million they promised Congress they would limit their request to. [BLT]

The fee request includes one $925/hour attorney who claims to have billed over 28,000 hours in seven years, including a 28.5-hour day. The class representatives have also requested an unprecedented $13 million payment for themselves, raising conflict-of-interest questions that could preclude settlement approval.

Ms. Craven's objection, among other issues, challenges the "upside-down" allocation methodology, where class members who have suffered the most mismanagement of their trust accounts will receive less money than equally situated class members whose trust accounts were administered appropriately.

The settlement and objection present interesting legal issues of whether Congress can constitutionally abrogate class action certification requirements and whether a mandatory class action for injunctive relief can involuntarily waive class members' rights to relief already won in court in exchange for one-size-fits-all cash payments.

The case is Cobell v. Salazar, No. 1:96-cv-1285 (TFH) (D.D.C.).

The Center for Class Action Fairness is not affiliated with the Manhattan Institute.

Pigford fraud?

A report by Gary Hewson, Peter Schweiser, and Andrew Breitbart alleges widespread fraud in the billion-dollar Pigford settlement paid for by taxpayers.

Similarly, on a much smaller scale, Ed Whelan notes an example where the Internal Revenue Service conceded a $250,000 attorneys' fee award to Gay & Lesbian Advocates & Defenders—in a case where federal law would normally preclude fee-shifting.

Is the Obama administration using settlements in litigation to feed taxpayer money to preferred interest groups by failing to zealously represent taxpayer interests?

"U.S. Says Holocaust Fund Was Defrauded"

Virtually every mass tort and mass-tort administered compensation fund is the victim of systematic fraud and attempted fraud promoted by attorneys—and apparently a German fund for Holocaust survivors is no different. Or different only in that federal prosecutors are taking action. Still no prosecutions, or even sanctions, for lawyers in the silicosis mass tort fraud.

According to press releases from Senator Kirsten Gillibrand, the 9/11 Health Bill will bypass Senate committee hearings and be place on a "fast track":

In late September, the U.S. House of Representatives, with the bipartisan support of 17 Republican Representatives - voted to pass the James Zadroga 9/11 Health and Compensation Act. The bill was immediately sent to the U.S. Senate, where, at Senator Gillibrand's request, the Senate Majority Leader Harry Reid invoked Senate Rule 14 Process, which will fast track the bill to floor consideration, bypassing the much longer and uncertain committee consideration process that the vast majority of bills undergo.

Through the fast track process, the legislation will be added to the Senate's vote schedule shortly after the next legislative session resumes, on November 15th. Negotiations on the legislation will begin immediately, making it available for a floor vote at the start of the next Senate work period. While this process does not guarantee passage, it does remove obstacles including the committee process, which could stall the bill for months or it kill it before it is brought to the floor.

This is a well-meaning but bad idea, for reasons I explained in my March 31, 2009 testimony and answers to Rep. Sheila Jackson-Lee. Though I made several suggestions on how the bill could be improved to avoid what will be inevitable multi-billion-dollar fraud on the taxpayers, they were all ignored in the House. The bill also hurts America's ability to respond to future terrorist attacks by taxing innocent third-party volunteers' liability insurance for the benefit of trial lawyers—thus guaranteeing that any liability insurer worth its salt will refuse to insure contractors and subcontractors who volunteer to help in the aftermath of the next terrorist attack.

As if to demonstrate how the bill will be a huge source of fraud, the bill is named after James Zadroga, who died from injecting prescription drugs, but has somehow become a symbol of Ground Zero workers' health problems. Earlier.







Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.