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Andrew M. Grossman Archives

Somebody tell the Obama Administration!

Elizabeth Warren, bankruptcy policy guru and head of Congress's TARP Oversight Panel, and Jay Westbrook, also a bankruptcy bigwig, rebut the conventional wisdom that Chapter 11 reorganization cases drag out forever, cost too much, and rarely succeed. Quite the opposite: fully 70 percent of companies that are able to advance a reorg plan succeed in implementing it. And more than half the losers, who fail to reach that point, are booted out of court within 6 months.

The data are clear: bankruptcy need not and does not mean failure.

Is Chapter 11 perfect? Far from it. But nor is it the morass that proponents of alternatives--particularly proponents of government intervention in the private sector--claim. Of course, all bets are off when the government commandeers a bankruptcy proceeding to achieve its own political ends.

Update: And I would be remiss not to mention Kenneth Ayotte and David Skeel's excellent working paper, "Bankruptcy or Bailouts," which uses AIG and Lehman Bros. as examples to demonstrate that " Although bankruptcy is not always the optimal response to financial distress, it is more effective than is generally realized."

No, Ours Is Better

General Electric must reimburse a competitor $8.3 million for ads it has already run and $3 million for future ads after a GE subsidiary claimed that its x-ray contrast agent was better than the competitor's--a misconstruction of a clinical study, said the court. But which is actually better? The experts were divided, and "the weight of clinical evidence," said the court, did not point either way.

So concludes a new article by David Hyman and several collaborators. The Texas cap reduced allowed non-economic damages in tried cases by an estimated 73 percent, allowed verdicts by 38 percent, and payouts by 27 percent. As expected, settlement payouts declined, by 18 percent.

The question is coming up more and more frequently, reports the Journal's Law Blog.

It's not so far-fetched. Increasingly, federal prosecutors are effectively deputizing company counsel, eager to avoid the catastrophe of a corporate indictment, to investigate employees' possible wrongdoing. So whether a Miranda-style warning is required now depends solely on who's doing the questioning.

The National Law Journal reports that, in the down economy, workplace defamation lawsuits are on the rise. "A bad reference, statements made in employee performance reviews, internal documents, termination meetings and conversations among managers and supervisors" are all potential grounds for defamation claims.

One former Staples manager, fired for violating the company's travel and expense policy, sued after the company circulated an email message explaining (truthfully) why he had been let go. Reversing summary judgment for the employer, the First Circuit ruled the suit could proceed.

When firing an employee, "There is no risk-free way to go," said one prominent employment attorney. Escorting a terminated employee out of the building, or locking her out of computer systems, could lead to a defamation suit. But go easy, and the result could be the loss of proprietary information or vandalism accompanied by negligence claims.

Fox is planning a recession-savvy reality TV show, "Someone's Gotta Go," in which struggling small businesses let their employees vote a co-worker out of the office.

But as the National Law Journal reports, wrongful termination suits are all but guaranteed:

Public relations fears aside, employers are exposing themselves to liability, such as discrimination and retaliation lawsuits, [employment-law attorney] Rice said. For example, what happens if the employees vote off an employee who is black, a woman or elderly, and the person claims discrimination? Just because they're on TV doesn't mean they waive their rights to sue for discrimination, he said.

"If someone ends up getting the ax, and you're a member of a protected group, you'd have to deal with the fallout from that," Rice said. "And since no one knows in advance who is going to get the ax, there's not much you can do in advance to waive these things. Employment rights can't be waived in advance."

Of course, actual discrimination is still an essential element of an employment discrimination lawsuit--nominally, anyway.

At first, it seemed like federal prosecutors in southern Florida had their case against Dr. Ali Shaygan for illegally prescribing prescription painkiller in the bag. One of Shaygan's patients had died of an overdose, two undercover agents obtained numerous scripts from the doctor, and other patients were willing to testify.

Then the case began to unravel. The dead patient had a lot more coursing through his veins than just Shaygan's prescriptions. The more they investigated, the more it seemed like Shaygan's habits--things like meeting with patients at home or sometimes at coffee shops and squeezing patients into his schedule at the last minute--did not necessarily point to any wrongdoing. Shaygan's patients described him as attentive and detail-oriented--a high-quality doctor who cared about them and their health. And the defense was poking holes in the credibility of the lead DEA agent on the case.

Washoe County (NV) School District claims it would have responded to former student Jana Elhifny's complaints if she had been able to tell school officials anything about her tormentor--gender, size, tone of voice--before she dropped out to return to Egypt and marry. But the school settled her claim--and that of Elhifny's non-muslim friend who felt "ostracized" for supporting Elhifny--for $400,000 to put an end to the "lengthy and expensive litigation."

Sentencing guru Douglas Berman, observing the fallout of the botched Stevens prosecution, says it's culture:

I cannot help but also wonder and worry if we are now only seeing the tip of the prosecutorial misconduct iceberg. I want like to believe that ugly stories of federal prosecutorial misconduct are aberrations, but maybe I need to become even more cynical about whether the supposed "good guys" in the criminal justice system really are putting a commitment to justice ahead of a commitment to winning at all costs.

The recent trend in high-profile white-collar cases is not encouraging: Martha Stewart, Jeff Skilling and Ken Lay, Joe Nacchio, etc.

Prosecutors face enormous pressure to rack up scalps, and overbroad and vague criminal statutes--the go-to offenses that get pulled out in every weak case like mail and wire fraud--take away the easiest out: that no plausible crime was committed.

The result is too many weak cases premised on shaky legal theories and tenuous facts. Should it come as a surprise, then, when exculpatory evidence is lost or disclosures to the defense never get made?

SEC Rules for Venture Capital?

Treasury Secretary Tim Geithner says that large venture capital firms present significant "systemic risk" to the economy and so should be forced into the SEC's registration regime and all the muck that comes with it--including massive civil litigation risk.

But as James Freeman points out in today's Journal, VC couldn't possibly pose any "threat to financial stability"--the entire industry amounts to about $30 billion per year, nearly all of that in equity from wealthy investors, with a small amount in secured debt.

The real danger is not that VC investment could lead to financial meltdown, but that tight regulation and legal risk (imagine if early-stage startups faced 10b-5-style liability) would choke off the supply of capital to high-tech entrepreneurs.

A cynic might wonder whether that is the intended result. If VC collapses, the case for "strategic" government investments in young sectors--that is, industrial policy--looks all the more attractive.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.