"Dodd-Frank didn't solve the problems that led to the crisis, it exacerbated existing problems and created a new set of problems." ~Hester Peirce
January 2013 Archives
A recent enforcement action by the Securities and Exchange Commission (SEC) signals that troubles caused by over-reliance on government-sanctioned credit rating agencies, a problem that played a role in the last financial crisis, are not over. For decades, the SEC officially recognized a small group of credit rating agencies and government agencies fostered market participants' reliance on their ratings by incorporating them into their rules. As a result, the three largest credit rating agencies, which enjoyed the SEC's blessing, became very entrenched.
Earlier this month, Manhattan Institute's Paul Howard, director of the Center for Medical Progress, and Jim Copland, director of the Center for Legal Policy, joined forces to author an article on the federal government's criminal prosecution of truthful speech about off-label pharmaceuticals.
The FDA announced that it won't appeal the Second Circuit's decision in U.S. v. Caronia which overturned, on First Amendment grounds, the federal prosecution of a drug company sales representative who had disseminated information about an off-label use of a drug. This may indicate that the FDA is rethinking its off-label speech regulations, which have become overly broad and unnecessarily opaque, effectively criminalizing truthful science-based speech by some parties, but not others. Well, one would hope.
As Ted Frank pointed out earlier, today's decision by the D.C. Circuit Court of Appeals in Noel Canning v. National Labor Relations Board has far-reaching implications. The court, in the process of vacating a decision of the NLRB, found that the recess appointments of three of the NLRB's members were invalid. The NLRB's chairman issued a statement explaining that the order applies only to the particular case and expressing an intent to move forward with the NLRB's other matters. Despite his pledge to continue business as usual, the case has important implications for the full range of actions by the NLRB and the Consumer Financial Protection Bureau. Richard Cordray, the CFPB's director was recess appointed on the same day--January 4, 2012--and in the same manner as the three NLRB appointees. The Senate did not consent to Mr. Cordray's appointment and, in fact, many Senators voiced strong concern that, once in the job, the director would be unaccountable to anyone. Particularly because Dodd-Frank placed an extraordinary amount of power in the CFPB director, today's decision also calls into question the validity of the CFPB's actions. Neither the NLRB nor the CFPB should assume it is business as usual.
In a landmark constitutional decision likely to go to the Supreme Court, the D.C. Circuit in Canning v. NLRB declared President Obama's recess appointments to the National Labor Relations Board unconstitutional. Point of Law hosted a discussion on the issue last year. Howard Bashman has a link roundup, and will likely have continuing updates at his blog.
Daniel Fisher continues his investigative reporting into the Citigroup class counsel contract-attorney scandal, where class counsel claimed in a fee request that temporary attorneys they were paying $32/hour for were really $550/hour attorneys associated with their firm. Earlier: January 7 and January 2. Fisher notes:
Kirby McInerney flatly denied Frank's allegation that the temp attorneys were doing "purely clerical 'objective coding' work that need not be performed by an attorney." None of the lawyers did such coding, the firm said, because the documents were already coded when they arrived. Instead, attorneys "were entrusted with the same high-level, high-complexity, high-importance work performed by Kirby McInerney personnel at both partner and associate levels."
Examined more closely, however, much of that work appears to be not much better. The lawyers scanned documents for key words and phrases that might indicate Citi executives knew about the deteriorating condition of the bank's CDO portfolio and hid that from shareholders. They were aided by a "coding sheet" and a "drop-down" list of CDOs lawyers wanted them to look for.
Kirby McInerney's description of the work also disgrees with the impressions of at least one attorney on the case who spoke to me on condition of anonymity.
"It is technically legal work," this person told me, such as identifying documents that might demonstrate scienter, or guilty knowledge. "Can a paralegal do it? Yes. Do they do it? Yes."
More importantly, even if they hire J.D.s to do this work on the defense side, law firms generally can't get away with marking up their work to $500 an hour.
One press-coverage mystery: this was one of the most widely read stories on the ABA Journal this month. Why isn't Above the Law taking advantage of the comment bait and doing its own investigation?
From the American Bar Journal comes the news that a class action suit has been launched against Lance Armstrong. The class is apparently composed of purchasers of his autobiography, It's Not About My Bike: My Journey Back To Life. The class members are apparently seeking refunds and "litigation costs," though it's hard to know what costs there are since lawyers are doubtless operating on a contingent basis.
What's the tort here: will we see the new tort of "false self-aggrandizing"? Of "lying in a book?" Of "selling fiction as fact?" True, if I market myself as a surgeon and you hire me to remove your appendix, you can sue me if it turns out that I'm a quack and the surgery goes amiss. But there a patient was cut into and the result was adverse. Here there was no reliance cost here except for the cost of purchase of an allegedly lying book.
Can you imagine the number of class action suits against disgraced or retired politicians, by purchasers of their memoirs or political puff pieces, that might follow if this class action survives summary judgment?
Governors in Louisiana and Kansas are considering ending the state income tax. I'm a Pigouvian, so I approve: one wants taxes to have as few negative distortions as possible, and that means taxing undesirable or unavoidable activity, not productive activity.
Unfortunately, Virginia's governor is proposing to go in the opposite direction, proposing to replace its 17.5-cent/gallon gasoline tax with a 16% increase in the sales tax. That's exactly backwards. While consumption taxes are generally preferable to income taxes, it's far better to focus those taxes on activities with negative externalities—like driving. Virginia roads, especially in the Washington, DC, suburbs, are already among the most congested in the nation. (New subway lines will not do much to fix the problem, because the Metro is already at capacity in the number of trains that can cross the tunnel and bridge across the Potomac River; moreover, Metro refuses to adequately shift load through more aggressive peak-load pricing, meaning many people refuse to take the Orange Line during rush hour because they cannot be assured of even getting on.) The only time in my eleven-plus years in Northern Virginia that I have not seen the roads completely mobbed well before and after normal rush hour was in the immediate aftermath of Hurricane Katrina, when gas prices briefly spiked to nearly $5/gallon. People respond to incentives, and if gasoline prices go up, they will shift to carpooling and shorter drives at the margin. Reducing gasoline taxes will increase congestion, and spur more spending on road-building, a double-whammy, and that's not even counting the externalities of carbon emissions, which at a minimum lead to unpleasant smog.
Virginia plans to collect about $1 billion in gasoline taxes and $11 billion in income taxes. Why not make the ratio 1:1 instead of 1:11? Cutting the income tax rate in half, as Maryland raises its own rate and nearby DC has among the highest rates in the nation, would spur even more wealthy people to move to Virginia from Maryland and DC (and increase Virginia property values) meaning that the revenue loss would not be anywhere near 50%; raising the gasoline tax to collect $6 billion (even as it would need to be increased by more than 6-fold to compensate for lower gas purchases) would reduce road congestion, increase Metro usage (and thus Metro revenues), and thus decrease highway expenses. Win-win-win.
Though extensive due process protections apply to the investigation of crimes, and to criminal trials, perhaps the most important part of the criminal process -- the decision whether to charge a defendant, and with what -- is almost entirely discretionary. Given the plethora of criminal laws and regulations in today's society, this due process gap allows prosecutors to charge almost anyone they take a deep interest in. This Essay discusses the problem in the context of recent prosecutorial controversies involving the cases of Aaron Swartz and David Gregory, and offers some suggested remedies, along with a call for further discussion.
In an op-ed in today's Washington Examiner, Paul Enzinna follows up on his recently published report on the Foreign Corrupt Practices Act (mentioned in the WSJ, Law.com, Main Justice, FCPAprofessor.com).
In today's globalized economy, more and more U.S. businesses operate overseas. As such, they fall under the strictures of the U.S. Foreign Corrupt Practices Act, or FCPA, which forbids payments to "foreign officials" -- the idea being to prevent bribes.
U.S. companies should not be permitted to bribe foreign officials, but U.S. prosecutors have pursued ever more expansive theories to bring conduct within the statute's ambit, while resolving most cases with settlements that preclude judicial review. The result is an uncertain landscape for U.S. businesses.
I recently noted that, and tried to explain the reasons why, Toyota has set aside a humongous amount of money to settle a likely meritless class action case involving alleged unintended acceleration.
But there are over 320 individual cases that had been filed, reunited before U.S. District Judge James Selna of the Central District of California in Santa Ana. Now comes news that Toyota has also reached a settlement in the first of these trials, which had been seen as a bellweather. In Val Alfen v. Toyota, it was alleged that a 66-year old man, Van Alfen, was driving his Toyota Camry on I-80 near Wendover, Utah in November 2010, when his car suddenly accelerated, went through a stop sign and an intersection at the bottom of an exit ramp, then hit a wall, killing Van Alfen and his son's fiancée and injuring Van Alfen's wife and son. Police reported that tire skid marks showed Van Alfen had braked, and the Utah Highway Patrol concluded that the gas pedal must have stuck. Of course this was before government agencies established that Toyota gas pedals never stuck. More likely is the possibility that Mr. Van Alfen was depressing both the accelerator and the brake at the same time.
Why did Toyota settle a case it had a great chance of winning? I don't know for sure, but I note that Toyota's attorneys made one egregious error: they examined Van Alfen's vehicle without giving advance notice to plaintiffs. Judge Seina concluded in June 2012 that this constituted egregious discovery abuse. As punishment, the judge indicated that he would instruct the jury that it could infer that any evidence Toyota gathered from its inspection would have been detrimental to its defense.
Yesterday (the timing clearly indicates this was a quid pro quo of the settlement), Law.com reports, (subscription needed) the judge rescinded his discovery abuse ruling in these terms:
"[T]here will be no reference, either direct or indirect, to the court's order by any party, counsel or witness in this proceeding or any other proceeding, and the parties agree there will be no mention of the June 11, 2012, order to any participant in the November 19, 2010, inspection at any time in any setting, be it trial, deposition or otherwise."
The express terms of the judge's new edict prohibit anyone, in any case, from ever alluding to Toyota's discovery abuse. That alone is worth the price of the Van Alfen settlement, since Toyota has in every case a strong substantive argument that it surely does not wish to see sullied by procedural misconduct.
But is the judge's ruling constitutional? Isn't his past ruling a public decision, citable by any interested citizen? Individual parties can, as was obviously done here, waive their right to a ruling, but what about those whose trials have not yet taken place? It's not clear to me that a judge can, as it were, erase a final ruling in this way. The Law.com report shows that other Legal Ethics professors share my misgivings.
Litigation over the legal effect of the judge's ruling, I predict, will be the next big chapter in this saga.
- Wednesday, I argued the case of Kazman v. Frontier Oil in Houston, which raises the issue of whether Texas law permits the "deal tax": the extortionate lawsuits over merger disclosures that get settled for pricy attorneys' fees and nothing of value to the shareholders that the attorneys are supposed to be representing. Thanks to client CEI attorney Sam Kazman, and to D. Wade Carvell, who was both extraordinarily generous and effective with his pro bono time on the case. [CEI press release; Kazman podcast; earlier on POL; more on POL]
- West Virginia medical monitoring settlement: $6.62 million for attorneys, up to $6.58 million in funding for medical examinations for class, but the money is likely to go to charity, and there will be no free exams after 2014. I'm quoted, after the West Virginia Record called me up for my analysis.
- Legal Newsline covers the Southwest Airlines drink voucher class action settlement. [Legal Newsline; earlier on POL]
The European Parliament voted today to approve new credit rating agency rules. The package includes a number of measures to reduce reliance on credit ratings, address conflicts of interest, and make it easier to sue credit rating agencies. Another rule relates specifically to sovereign debt ratings. According to a European Parliament news release, credit rating agencies will only be permitted to publish unsolicited sovereign ratings "at least two but no more than three times a year, on dates published by the rating agency at the end of the previous year." In other contexts, unsolicited ratings are encouraged as a way to improve the information available to investors.
Sovereign fear seems to be driving this move. Seeking to manage credit ratings in this way looks like an effort to cultivate the belief that the risk associated with sovereign debt is unrelated to how sovereigns behave. Governments have created their own difficulties by mandating reliance on credit ratings and, through an elaborate inspection regime for credit rating agencies, implicitly signing off on the quality of credit ratings. Government endorsement of credit rating agencies should be ended, and credit rating agencies, along with everyone else, should be able to offer freely their opinions about the likelihood of a sovereign debt default.
The 35-year-old Foreign Corrupt Practices Act (FCPA) is well-intentioned legislation designed to root out bribery abroad by U.S. businesses, but in recent years, the Department of Justice (DOJ) has stretched the statute in an effort to become the world's policeman. A new Manhattan Institute report released today and authored by Paul Enzinna, chronicles how FCPA enforcement has exploded over the past decade thanks to expansive interpretations by the DOJ that are both unjustified by the statute and lacking in judicial oversight. The report makes a strong case for legislative reform in clarifying the statute's reach.
The DOJ has aggressively expanded the FCPA by:
(1) Interpreting the statute's jurisdiction to include foreign companies for foreign activities linked to the U.S. only by use of dollars in foreign transactions or the routing of foreign web-based communications through U.S.-based e-mail servers;
(2) Interpreting "foreign official" to include individuals employed by market enterprises with state ownership, including doctors and other health providers in countries with national medical systems;, and
(3) Interpreting the statute's prohibition on payments "to obtain or retain business" to include picayune payments which the plain language of the statute clearly exempts.
The broad sweep of liability under the DOJ's interpretation of the FCPA, along with the high costs associated with potential criminal conviction (including pressure on stock prices and impairment to obtaining credit) have ensnared many U.S. and foreign businesses and led them to enter into "deferred-prosecution agreements" (DPAs) or "non-prosecution agreements" (NPAs) with the DOJ--including hundreds of millions of dollars in fines and significant changes to business practice--rather than fight controversial FCPA cases in court. NPAs typically are not filed with a court., and DPAs may be, but generally receive little judicial oversight.
In an interesting case that enacts a proposal put forth last year by my research assistant, Mr. Wesley Weeks, the Alabama Supreme Court has just held that a name-brand manufacturer is liable for failure to warn if a patient consumes a GENERIC drug with the same inadequate warning as had appeared on the name brand product.
The case, Weeks v. Wyeth (the plaintiff has no relation that I know of with my research assistant!), involves the drug Reglan. Mr. Weeks claimed that he had developed tardive dyskinesia (involuntary, repetitive body movements such as grimacing, tongue protrusion, lip smacking, puckering of the lips and rapid eye blinking) after taking generic versions of Reglan to treat his acid reflux. Mr. Weeks sued Actavis and Teva, the generic companies that made the drugs he took, as well as Wyeth, which developed the drug and marketed the brand exclusively during its patent protected period, for failing to adequately warn about Reglan's risks.
The generic manufacturers, however, have successfully sought protection following a 2011 Supreme Court decision in Pliva v. Mensing. In Pliva the Court accepted the FDA's interpretation of the Food and Drug Act, as amended in 1984 [the "Hatch-Waxman Amendments"] to encourage generic manufacturing, as prohibiting generic manufacturers from altering approved warnings on the brand name drugs they were copying. Since the generic manufacturers could not decide the warnings, the court reasoned in Pliva, they could not be held liable if the warning proved insufficient.
Only a few courts have concluded that, as a result, the brand-name manufacturer is liable in such cases. Most jurisdictions hold that product liability of any kind requires that the defendant's product have injured the plaintiff. Here the product was made by firms other than the defendant firm. But Alabama law has always and not unreasonably held that false information given to a third party can result in liability. [For example, if your doctor tells you that drug X will not make you sleepy, and you take X and drive, falling asleep at the wheel and hitting the victim, the victim has a tort suit against the doctor.] This reasoning was applied by analogy to hold Wyeth liable for the predictable results of an allegedly inadequate warning given with Reglan, even though the plaintiff did not consume that drug.
The defense bar will react to this case with dismay, but in my opinion the real culprit is not the Alabama Supreme Court, but the FDA and the USSC. To quote my research assistant:"[T]he FDA has interpreted the  Hatch-Waxman Amendments as requiring generic drugs to have identical warning labels as their brandname counterparts; FDA approval can be withdrawn if this continuing "sameness" requirement is not met. This means that unlike brand-name drugs, generic drug manufacturers cannot unilaterally change their warning labels. The FDA has used a similar interpretation to decide that generic manufacturers may not use "Dear Doctor Letters." [page 1263 of the Wesley Weeks article].
No statutory text required this interpretation by the FDA. The interpretation has tied the hands of generic manufacturers, redounding to their own benefit under Pliva. Following this case, risks of making the branded drug in the first place are now exponentially increased, as manufacturers and their insurers must calculate expected risks far into the future, when the branded drug is perhaps no longer even being marketed. Yes, it's only one state, but the reasoning is perfectly logical and I think there is a distinct potential for expansion to other states.
Either the Pliva case or the FDA interpretation of the Hatch-Waxman Amendments, or both, have got to go. To get the whole lowdown and read about excellent proposals for change read my research assistant's law review article, hotlinked in the first paragraph of this comment.
The suicide of Aaron Swartz on the second anniversary of his arrest has drawn attention to the problem of overcriminalization. Jonathan Blanks and Scott Greenfield have good summaries noting that Swartz is hardly unique that are worth reading in addition to the more personal Larry Lessig post you have probably already seen.
Update: see also Orin Kerr for a perspective on the underlying law, Walter Olson with a roundup, and my 2008 American Spectator article on prosecutorial overreaching. Kerr's legal analysis I don't think fairly takes into account the "hacker ethos" of MIT that encourages the sort of rebellious computer activity Swartz engaged in, as bad as it can be made to look on paper. Computer culture can look more sinister than it is to the humorless outside of it; I once saw a lawyer identify Overlawyered's 404 page joke as evidence of a conspiracy either out of ignorance or cynical disingenuousness. But try explaining 404 pages to a judge (or, worse, to a $500/hour attorney).
And if you're an attorney who uses PACER, you can bring the world a little bit closer to Swartz's ideal (and save you or your clients a bit of money) by installing RECAP on your Firefox browser. Right now PACER, which recently raised its rates 25%, generates a $100 million surplus selling Americans electronic access to publicly available litigation documents.
Southwest gives away "premium drink" (i.e., "beer") coupons worth $5 to customers who buy a Business Select ticket. Of course, not everyone drinks, and half of the coupons are thrown away. After giving out 11 million or so of these coupons, Southwest changed its policy and held that the premium drink vouchers were only good on the day of the flight for which they were sold. A class action was born, alleging bait and switch. There's a lot of publicity over the settlement; Southwest Airlines is giving away new coupons, i.e., free beer. Press coverage accepts the claim of class counsel that the coupons, which will expire in a year, and are only good in flight, are worth "perhaps more than $29 million"; papers in support of the settlement go even further and ascribe a value of up to $58 million. Thus, the attorneys will ask for $7 million. [preliminary approval order; Chi Trib; L&S; h/t LAN3]
Thing is, we know from decades of history of coupon settlements that less than $1 million of these coupons are going to get used; heck less than $1 million are likely to be claimed. The settlement is worth "perhaps more than $29 million" only in the sense that "perhaps" the atoms in the chair you are sitting on will all simultaneously shift one foot to the left. Customers are getting notified by email, but the vouchers aren't being sent to them by email. That's because Southwest wants to limit its liability, but the attorneys want to maximize their payout; they both have the incentive to exaggerate the true value of the settlement. If they told the court the settlement was worth less than $1 million to the class, the court might ask questions why a disproportionate share is reserved for the attorneys; if they asked the court to follow the strictures of the Class Action Fairness Act, which requires attorney awards to be tied to the value of redeemed coupons, the attorneys would have no chance at $7 million.
One hopes a class member sees through this misleading unfairness, and finds pro bono counsel willing to object.
The class consists of "All Southwest customers who purchased an Eligible Drink Voucher through the purchase of a Business Select ticket or otherwise, during the time period before August 1, 2010, but who did not redeem the Eligible Drink Voucher. The Class does not include Southwest customers who obtained drink vouchers or drink coupons through the Southwest Rapid Rewards program, unless those customers separately purchased, but did not redeem, Eligible Drink Vouchers through the purchase of a Business Select ticket or otherwise."
The case is In re Southwest Airlines Voucher Litigation, No. 11-cv-8176 (N.D. Ill.).
As Hester Peirce notes, AIG has rejected a shareholder demand to sue the government over the bailout that transferred ownership of AIG to taxpayers. But as John Carney notes (h/t Bainbridge), the shareholder, Hank Greenberg, no fan of frivolous litigation, may have a point:
A judge on the Federal Claims court ruled last summer that if what Greenberg argues is true, the government may really have acted illegally.
Greenberg's legal team, led by David Boies, argues that the government pushed away sovereign wealth-funds and other foreign investors who might have been willing to invest in the company before it was bailed out. This, they argue, prevented AIG from being able to raise capital and contributed to its downgrading by ratings agencies, which in turn put the company into even more dire straits. This forced AIG to accept the unfair terms the government offered in its loan agreement, the lawyers say.
Greenberg's lawyers also raise questions about the events around one of the oddest episodes of the AIG-Treasury relationship. You might recall that in the summer of 2009, the government converted its preferred shares into 79.9 percent of the common stock of AIG, something that it was entitled to do under the terms of the government's loan. This was accomplished by means of a reverse 20:1 stock split.
You might not recall precisely why the stock split occurred. At the time, then-chief executive Ed Liddy said it was necessary to prevent the stock from being delisted on the New York Stock Exchange. That might be true. But it is also true that the split was a necessary part of the conversion from preferred shares because AIG's charter didn't authorize enough common stock to allow the government to take 79.9 percent of the common stock. So when the government converted to common, it was issued unauthorized common stock.
When common shareholders were asked to authorize the additional common stock--which would have badly diluted their interest in the company--they voted no. Because the government's stake was in unauthorized shares, it didn't get a vote.
So another vote was held about the reverse split of all issued stock--including the government's unauthorized shares. This time, the government got to vote its 79.9 percent stake on this question because its unauthorized shares were also affected. And so the measure prevailed. After the split, the total number of shares outstanding no longer exceeded the number authorized in AIG's charter, so the government's shares were now officially authorized.
That's more than a little bit confusing, I'll admit. And it does sound more than a bit questionable, even to someone as jaded about shareholder rights as I am. But Greenberg's lawyers say it's even worse. They say that this procedure was engineered to circumvent a Delaware court order meant to protect the rights of the common shareholders when the government took over the company.
Now, of course, being allowed to proceed on a complaint means only that there is a legal cause of action if the facts alleged in the complaint are true; Greenberg still has to prove his case, and the allegations may not be true. But if they are, it wouldn't be the first time government officials shortchanged AIG shareholders and Hank Greenberg at the expense of the rule of law. Others have suggested that that earlier Spitzer action resulted in incompetent AIG management that led to its future financial problems. (Related: Manne; Ribstein in 2006; Ribstein in 2005.)
(By the way, the late Larry Ribstein's Ideoblog posts seem to have disappeared from the web. Perhaps Truth on the Market could find a way to archive them so that they remain Google-searchable? I hate to lose the wisdom of any posts I don't know to look for on archive.org.)
In the movie "Hot Coffee," Susan Saladoff complains that grievously injured medical malpractice victims who cannot recover their full measure of economic damages result in a subsidy from taxpayers (who end up picking up the bill) to defendants. One can question whether the defendants in the case she singled out were guilty of anything more than being blamed for a bad medical result, and one can complain that she conflates the issue of amorphous noneconomic damages with the particular potential injustice of capped economic damages, but she is right that caps for economic damages are a bad idea.
But it's not the case that trial lawyers really care so much about the impact on taxpayers. North Carolina law permits the state to recoup Medicaid expenses from the assets of patients helped, but has an exception for noneconomic damages recovered. So cases don't go to trial; instead the parties, with a nudge and a wink, carve the third-party taxpayer out of the recovery by characterizing the full settlement as non-economic damages.
To what extent can medical malpractice settlements evade the Medicaid clawbacks through the legal fiction that the settlement reflects solely pain & suffering damages? So asks the case of Delia v. E.M.A., argued earlier this week. [McClatchey]
The Obama administration has sided with trial lawyers over taxpayers, flipping what the prior federal position was. Counterintuitively, so did a brief for the Federation of Defense and Corporate Counsel. Game theory tells us why: the Medicaid clawback makes going to trial less valuable for plaintiffs, and creates settlement pressure to avoid the clawback, and defendants can split the benefit of freezing out taxpayers with the plaintiffs.
Note that such elastic settlements are only possible in a jurisdiction with uncapped noneconomic damages.
At argument, the Supreme Court seemed skeptical of North Carolina's position, though that likely reflected the arbitrary particularities of the North Carolina statute, which irrebuttably defines the amount of any settlement—or jury verdict—attributable to medical expenses or noneconomic damages. On the other hand, the Court also expressed skepticism of the respondents' position that the state had to make an individualized assessment of every case.
"A West Virginia jury found two members of a Pittsburgh law firm liable of civil racketeering for conspiring with a radiologist to fabricate evidence in asbestos lawsuits against railroad operator CSX." [Fisher @ Forbes; earlier on POL]
The verdict of $429,000, subject to possible trebling and attorneys' fees, is, of course, just a drop in the bucket of asbestos fraud, which has essentially gone unprosecuted criminally as it has sapped billions of dollars belonging to actual asbestos victims and to productive sectors of society. Congratulations to POL reader Marc Williams for his role in the victory. Lester Brickman, of course, has written widely on the problem of mass tort screening fraud.
The board of directors of American International Group decided today that AIG would not take part in ongoing shareholder lawsuits against the government for its September 2008 bailout of the company. AIG explained that the board was legally obligated to consider whether to participate in the legal actions. The company was correct about this point; the board has a fiduciary obligation to look out for the best interests of the company, even if doing so means looking ungrateful for its taxpayer bailout. The second point AIG made in its statement, however, is not correct when viewed in proper context.
Manhattan Institute's Paul Howard, director of the Center for Medical Progress, and Jim Copland, director of the Center for Legal Policy, joined forces to author an article on the federal government's criminal prosecution of truthful speech about off-label pharmaceuticals.
The piece can be found in today's Investor's Business Daily:
Every day, millions of Americans benefit from drugs their physicians prescribed for uses and indications beyond those listed on the drug's FDA-approved label.
Some of these off-label uses include treatment for diseases or symptoms, or patient population (like children), not formally reviewed by the Food and Drug Administration. Off-label drug prescribing has been a boon to public health and continues to grow.
A 2006 study in the Archives of Internal Medicine estimates that 21% of commonly used drugs are prescribed for off-label uses.
Doctors find off-label drugs particularly valuable in life-threatening emergencies: 36% of all drugs used in intensive care units are for off-label indications, according to a 2011 study in the Journal of Critical Care. Off-label prescriptions of anti-psychotic drugs alone amounted to an estimated $6 billion in 2008.
Yet Americans may be missing out on new applications for drugs because the law makes it difficult for pharmaceutical companies to share this information with physicians.
An under-studied phenomenon: to what extent is higher CEO pay a result of the increased frequency with which prosecutors destroy the lives of CEOs by criminalizing unsuccessful business decisions or arbitrarily retroactively selectively criminalizing common business practices (compare Broadcom and Apple on question of options backdating)? Economic theory would predict that increased chances of having your wealth stripped and being sent to prison for years would require higher compensation ex ante. After Larry Ribstein's death, I'm not aware of anyone considering this at all. Today's DOJ has been surprisingly restrained in not prosecuting executives for foolish investments in the real estate bubble, and are largely being criticized, rather than praised, for their forebearance. Which academic is on the criminalization-of-risk beat these days?
In a recent report, the Government Accountability Office noted some troubling trends in Dodd-Frank implementation. First, regulators are not consistently employing "key elements" of regulatory analysis. Because most of the federal financial regulators are independent regulatory agencies, they are not legally required to follow those standards, but as a matter of good government, they ought to follow them. Second, most financial regulators "continue to lack formal policies and procedures to guide interagency coordination," which GAO had recommended in a prior report. Coordination of the intertwined and overlapping Dodd-Frank rulemakings is vital to minimize problems for investors, consumers, and the economy as a whole.
The careless manner in which Dodd-Frank is being implemented matches the careless manner in which the statute was created. The statute was cobbled together before legislators had a clear understanding of the problems they were trying to solve. Much-trumpeted hopes about the law's efficacy masked the law's deep problems. In a book released today, I and my co-authors take a closer look at Dodd-Frank and suggest that the law is not a set of promising solutions, but a source of dangerous new problems.
Daniel Fisher has put some shoe-leather into the case of the trial lawyers claiming that their contract attorneys doing low-level document review have lodestar rates of $350 to $550/hour (and thus should be billed to the class at $1000/hour for their "success" in negotiating a nuisance settlement with Citigroup): January 2 and January 4, resulting in piggyback coverage from the ABA Journal (and see their comments) and Bloomberg.
As a JD Underground thread points out, I was insufficiently cynical in claiming these attorneys were being paid $40-45/hour; Fisher's research suggests they were being paid $32/hour.
I should note that this is not a question of whether class counsel can ever ask for a 30x markup. I am not asking for any change in the law here: the law of lodestar is that the lodestar rate corresponds to the market rate paid by paying clients for an attorney doing the level of work being done. It's just that paying clients in this decade don't ever actually pay $350-$550/hour for first-tier document review.
The parties backed down on the question of whether notice was adequate and agreed to re-notice the class, with a March 8 deadline for objections and April 8 for the fairness hearing.
Two substantive petitions for rehearing were filed last Thursday in the Sirius XM case disposed of by Second Circuit summary order. One, filed by the Center for Class Action Fairness on behalf of its client, focuses on Judge Baer's racially discriminatory class certification order and the standing of class members to challenge it; the other, filed by another objector represented by attorney Steve Miller, focuses on the panel's failure to reconcile its affirmance of the $0 settlement with the precedents of other courts and the Class Action Fairness Act. Amicus petitions, if any, are due Thursday.
If every district court judge were as conscientious as Judge Alsup, there would be no need for the Center for Class Action Fairness. A class action alleged that the Asus design had resulted in interference with GPS and WiFi. Asus offers a "dongle" for free to customers dissatisfied with the issue, so when the class settled for "$17 plus a free dongle" for class members who made claims, with no liability to the defendant for class members who did not make claims, the district court was not impressed. [Fraser v. Asus Computer (N.D. Cal. Dec. 21, 2012); h/t A.S.]
The biggest credit rating agencies lost credibility in recent years after doling out top ratings to securities backed by mortgage pools that later proved to be very troubled. Dodd-Frank responded by changing the regulatory framework for credit rating agencies. Most importantly, it ordered the elimination of government mandates to rely on ratings produced by the handful of government-sanctioned credit rating agencies. This change reminds investors that they--not the government--are responsible for deciding whether credit rating agencies are doing a good job.
Unfortunately, other parts of Dodd-Frank could have the opposite effect--further lulling investors into complacency. One of the most troubling provisions was the subject of a recently released Securities and Exchange Commission staff study. The study considered the merits of establishing a quasi-governmental board charged with selecting a credit rating agency to rate each asset-backed security and with grading credit rating agencies' performance.
To its credit, the SEC staff highlighted many of the potential problems with such an approach, including the possibility that it "could lead investors to believe that these ratings are government-sanctioned and encourage them to forego additional due diligence." The staff also noted the difficulties the board would face in objectively assessing the accuracy of ratings. These and the staff's numerous other concerns should be sufficient to overcome Dodd-Frank's urging that the SEC establish a new bureaucracy to manage the credit rating process.
Georgetown University law professor, Nicholas Q. Rosenkranz, discusses the topic of his forthcoming book, the subjects and objects of the Constitution and their role in constitutional interpretation, with Center for Legal Policy director, Jim Copland.
"The constitution can only be violated by government actors taking certain actions... Identifying the actor we're talking about is fundamental and will structure all the analysis that follows."
Citibank recently settled a PSLRA case alleging $6.3 billion in damages for $590 million, nine cents on the dollar. The opt-out deadline was December 5; the objection deadline December 21; the settlement administrator got around to mailing out the notice to class members like me December 6; I received the mailing December 12, and confirmed my class membership December 14. I've filed an objection to the late notice, but of larger concern to the class is the fact that the attorneys are asking for over $100 million, some $30 to $75 million more than what they're legally entitled to. The fairness hearing is January 15, but I have an argument in Houston January 16. With the compressed schedule, I could use some help.
- The easy thing I'm looking for is a declaration. The law of lodestar is that attorneys are entitled to request market rates for attorney work. But in this case, the class counsel is asserting that the market rate for the temporary attorneys they paid $30 to $45/hour for is between $350 to $550/hour—subject to a 1.8 multiplier on top of the gigantic markup for "overhead." Of course, I know darn well from experience and conversations with defense and in-house counsel that no paying client agrees to pay more than $50/hour (give or take) in gigantic litigation for first-pass document review of 40 million documents; and I submitted a declaration to that effect. But if you're a defense or in-house counsel with experience with billing willing to submit a declaration about the going rate for large-scale document review, the additional evidence can't hurt. Because my objection is only to the fee request, and not to the fairness of the settlement, this wouldn't present the normal conflict issues my other objections would.
- Similarly, I could really use some pro bono or contingent help from skilled experienced counsel located in the Southern District of New York and able to devote some real resources to this case in January. The court received my request for ECF access on December 21; as of the morning of January 2, there has been no action on it. I am concerned that I am not being taken seriously as a pro se. Again, because my objection is only to the fee request, and not to the fairness of the settlement, this wouldn't present the normal conflict issues my other objections would; and with tens of millions at stake, this is plausible for contingency-fee work.
If you might be willing to help, please contact me at the email address on the brief. The case is In re Citigroup Securities Lit., No. 07-cv-9901-SHS (S.D.N.Y.); list of parties and attorneys; settlement website.
There are a lot of important issues in this case that the Center for Class Action Fairness hasn't previously addressed.
- The question of compensation for first-tier document review has been poorly handled by the courts, in part because no one has ever submitted the right evidence to challenge it. No paying client would agree to $550/hour attorneys doing first-pass document review; the law firm here claimed that the style consultants moonlighting as temp attorneys working for a third party and getting paid less than a tenth of that were firm attorneys. (That's before the question of whether the document review is intentionally conducted in an inefficient manner to inflate the hours, which won't be challenged since the scanty billing records are going to be inscrutable in the week that class members have to look at the Rule 23(h) fee petition.) This issue has been covered by Lester Brickman and, sadly, no one else.
- The PSLRA freezes discovery until the motion to dismiss is resolved; if the plaintiffs survive the motion to dismiss, 82% of securities cases settle. Given that nearly all the investment is after it becomes very likely that the attorney is going to be paid, why is a 1.8 multiplier necessary to attract competent legal counsel?
- Lester Brickman has also written about the "bless these fees" experts who rubber-stamp every fee request. The experts here were no different: they cherry-picked empirical evidence; one used boilerplate to assert that the "risk" meriting a multiplier and accounting for the small size of the settlement included the threat that Citigroup would go bankrupt because of the litigation; they bald-facedly called a $0.09/dollar nuisance settlement a "success." A really shameful performance. I hope to be able to depose them.
- The PSLRA requires the fees and expenses to be a reasonable percentage of the amount the class actually receives. Few fee petitions follow the law; neither this one, nor either of the expert reports even mentioned it. Of course, the amount the class will actually receive is not disclosed in the notice or in any of the papers.
- Brokers regularly take two months to provide lists of names to settlement administrators. It's happened in every securities case I've been involved in. Settlement administrators know this, dawdle in requesting the names, and then point fingers when the notice is late. How is it possibly acceptable to send reasonably foreseeable late notice instead of establishing a schedule that accounts for the inevitable two-month delays? Again, no one has ever made the right argument challenging this problem.
(As always, my class-action objecting is not on behalf of the Manhattan Institute.)
"If you want to send a message, use Western Union." As with the recently dismissed Common Cause suit against the filibuster, however, we often see activists trying to craft legislative policy with the courts. Thankfully, courts are more reluctant to play philosopher-king than fifty years ago, and in some cases, defendants are fighting back.
- ASPCA and several other organizations brought a trumped-up suit in 2000 against Ringling Brothers in an attempt to bar its use of elephants. The lead-witness plaintiff's sole source of income, however, was $190,000 paid by the animal-rights organizations for bringing the suit; the federal court found his after-the-fact allegations of emotional distress from witnessing elephant mistreatment were not credible. The parent company, Feld Entertainment countersued for the malicious litigation, and ASPCA recently settled—for a jaw-dropping $9.3 million. The RICO countersuit remains pending against several other defendants; CNN quotes the Humane Society as denying the allegations against it. [Ringling Bros. litigation website; ASPCA press release; Daily Caller; WSJ via Adler @ Volokh; Overlawyered on the case for years; Steele]
- CEI files an anti-SLAPP motion against Michael Mann after he sues them for libel for criticizing him. [CEI; earlier on POL (see which for disclaimers)]
- Per @andrewgrossman, "Lawsuits seek to generate 'awareness' of global warming, cost states a bundle." [Greenwire]
- Speaking of a waste of taxpayer dollars, Walter Olson has the tale of the taxpayer-funded University of Maryland law clinic trying to destroy state jobs with an expensive meritless environmental suit against a local family farm. The clinic lost and is hoping to appeal. [Olson @ Balt. Sun; Overlawyered link roundup]
Compare and contrast: the case of Ed Blum, who has been bringing successful cases to the Supreme Court to enforce the Constitution's requirement of race-neutrality. [Biskupic @ Reuters]
As I've previously said, there's a lot of opportunity for the motivated conservative legal entrepreneur.