Tuesday, October 19, 2010

Who did us more harm... the 9/11 terrorists... or the Wall Street tycoons?

"It seems to me that such swine were and are my enemies even more plainly than the Communists, not only because they devoted themselves to robbing me, but also and more importantly because their intolerable hoggishness raised the boobery in revolt, and the ensuing revolt threatened to ruin me even more certainly." --- Journalist H.L. Mencken in 1941, referring to the big businessmen of his day... the days of the Great Deprression.... quoted from:

His words ring equally true today... our days of the Great Recession and the boobs of the Tea Party.

I just read "The Blundering Herd," the story of Merrill Lynch's crash-and-burn, in the November issue of VANITY FAIR. As the sub-prime meltdown loomed, the firm's CEO played golf... by himself! Despite all the harm done, he still walked away into retirement with $161 million, according to the article.

Fortunately, terrorists are not the only culprits put on trial. Consider for example,
Derivative Action, 07 Civ. 9696 and Lambrecht v. O'Neal, 09 Civ. 8259, currently pending in federal court in Manhattan. In a March 9, 2010, opinion issued by the federal judge in the case ---692 F. Supp.2d 370--- His Honor writes:

JED S. RAKOFF, District Judge.

In this massive litigation, arising from the huge losses experienced by Merrill Lynch & Co. (“Merrill”) in the period prior to its acquisition by Bank of America (“BofA”), two of the lawsuits-a consolidated action known as the Derivative Action, 07 Civ. 9696, and a later-filed action, Lambrecht v. O'Neal, originally filed as 08 Civ. 6582 but now refiled as 09 Civ. 8259-raise important and unresolved issues of Delaware corporate law as to which this Court seeks the guidance of the Delaware Supreme Court. In both actions, the plaintiffs were originally shareholders of Merrill at the time of Merrill's allegedly profligate investments of which they complain, and the purpose of the derivative actions was to force Merrill to sue various officers and directors allegedly responsible for wasting corporate assets and other wrongdoing. However, after BofA acquired Merrill in a stock-for-stock swap, the defendants moved to dismiss both actions on the ground that the plaintiffs, who were now BofA shareholders, lacked standing to pursue actions against Merrill, given the requirements of Delaware law that a plaintiff bringing a derivative action not only be a shareholder of the defendant company at the time of the transactions complained of, but also remain a shareholder of that company throughout the litigation. See *372 Lewis v. Anderson, 477 A.2d 1040, 1046 (Del.1984). The Court agreed and dismissed the actions, see In re Merrill Lynch & Co., Inc., Sec., Derivative & ERISA Litig., 597 F.Supp.2d 427 (S.D.N.Y.2009), but without prejudice to plaintiffs' repleading their actions as so-called “double derivative” actions, whereby they would seek to force the board of BofA, as 100% owner of the stock in BofA's Merrill subsidiary, to force the Merrill board to bring the action that the plaintiffs had originally sought to have Merrill bring.

Accordingly, on July 27, 2009, plaintiff in the Derivative Action filed a third amended complaint that repleaded her claim as a double derivative action, and, similarly, on September 29, 2009, plaintiff Lambrecht filed a new, double derivative action known as 09 Civ. 8259. Defendants, however, once again moved to dismiss for lack of standing, claiming that plaintiffs still lacked standing unless they could show (a) that they were shareholders of BofA, not just now but at the time of the underlying Merrill transactions complained of, and (b) that BofA itself was a shareholder of Merrill at the time of the underlying Merrill transactions complained of.FN1

FN1. Plaintiff Lambrecht concedes that she was not a shareholder of BofA prior to the merger of BofA and Merrill. The plaintiff in the Derivative Action alleges that she was a shareholder of BofA (as well as of Merrill) at the time of the underlying Merrill transactions complained of, but concedes that she presently has no proof that BofA was a shareholder of Merrill at that time, although she has received permission from this Court to conduct limited discovery on this issue.

To this Court, these new arguments by the defendants make no sense. What possible policy would be served by requiring that at the time of the underlying Merrill transactions complained of, the plaintiffs be shareholders in Bank of America, which at that time was a total stranger to the transactions? Likewise, what possible policy would be served by requiring that Bank of America, which did not acquire the ability to force Merrill to pursue its “chose in action” against its former officers and directors until the time of the merger, be a shareholder in Merrill at the time of the underlying transactions complained of? FN2 Yet there is at least one decision of the Delaware Chancery Court that seems to hold that just such requirements are part of Delaware law, namely, Saito v. McCall, No. Civ. A. 17132-NC, 2004 WL 3029876 (Del.Ch. Dec.20, 2004), where the Chancellor, with little discussion or explanation, held that “plaintiffs ... were not [the parent company's] shareholders before [the date of the merger], so they cannot bring a derivative suit, double or otherwise,” id. at *9, and that the “claim must also fail because plaintiffs have failed to allege that [the parent company] was a shareholder of [the subsidiary] at the time the alleged harm occurred,” id. at *9 n. 82.

FN2. To be sure, if Bank of America had been a shareholder of Merrill at the time of the underlying transactions, it could have theoretically brought its own derivative action against Merrill. But this is a totally different situation from one in which Bank of America, having acquired 100% of the shares of Merrill as a result of the merger, can force Merrill to realize the value of the chose in action that BofA acquired through the merger by forcing Merrill to sue its former officers and directors. Conversely, no one supposes that BofA acquired Merrill for the purpose of bringing strike suits, or that such a danger would ever be realistically presented by such mergers.

This Court is thus left with unsatisfactory guidance as to what Delaware law requires. Delaware's well-established requirement of continuous ownership to maintain a derivative suit seeks to avoid abuses, such as strike suits, associated with such actions. See, e.g., Lewis, 477 A.2d at 1046; see also 8 Del. C. § 327. However, this policy against interlopers *373 has no force in the double derivative context facing this Court. The plaintiffs' proffered interpretation of the requirements of the double derivative standing-that they be Merrill shareholders pre-merger and BofA shareholders post-merger-is seemingly sufficient to satisfy the rationale underlying the continuous ownership requirement, and, as noted, this Court perceives no additional purpose that is served, or protection afforded, by requiring plaintiffs to have been shareholders of BofA at the time of the alleged wrongdoing by Merrill, let alone by requiring that BofA have been a Merrill shareholder at that time. Such requirements would render double derivative lawsuits virtually impossible to bring except in bizarrely happenstance circumstances.

Nonetheless, this Court cannot ignore Saito, which appears to be the only Delaware state court decision directly confronting this issue. Therefore, pursuant to Rule 41 of the Delaware Supreme Court, the Court hereby certifies to the Delaware Supreme Court the question of whether a plaintiff seeking to bring a double derivative suit under Delaware law in the kind of circumstances here presented (i.e., where the plaintiff was a pre-merger shareholder in the acquired company at the time of the alleged wrongdoing at that company and, because of a stock-for-stock merger, thereafter becomes and remains a shareholder in the acquiring company) must also demonstrate to establish standing that, at the time of the alleged wrongdoing at the acquired company, (a) the plaintiff owned stock in the acquiring company, and (b) the acquiring company owned stock in the acquired company. In order to allow the Delaware Supreme Court time to address-or to indicate that it will address-this question, if it so chooses, but so as not to delay indefinitely these ongoing actions in federal court, the Court hereby stays all proceedings in these actions, unless otherwise explicitly ordered by the Court, until July 19, 2010.


In other words, the defendants, including the former CEO, are seeking to weasel out of the lawsuit on the basis of legal technicalities. Let's hope that they fail in this effort and ultimately get what they deserve. i.e., a massive judgment that claws back all the money they pocketed while we watched our pension assets go up in smoke.

I don't know how you feel. I myself think it is sufficiently unfair that these Wall Street bankers pocket obscene amounts of money when they perform well. That they ran off with hundreds of millions while their sacred trusts --- our pension funds --- tanked is a mortal sin deserving of eternal fire and brimstone.

But enough of this hand-wringing. While awaiting the courts' decisions, enjoy "Wall Street: Money Never Sleeps."

Here's my recent review of same:

Wall Street: Money Never Sleeps

By Jim Castagnera
Special to The History Place

Director Oliver Stone is Hollywood’s king of conspiracy theories. In JFK he posited a coup d’etat, engineered by the military-industrial establishment, which wanted a war in Vietnam. In W he has Dick Cheney tell Colin Powell, who wonders about America’s exit strategy prior to the 2003 Iraq invasion, “You just don’t get it, Colin. We’re never leaving.”

Resurrecting Gordon Gecko after 23 years, Stone writes his version of the history of the Great Recession of 2008: “The greatest transfer of wealth from main street to Wall Street in history.” The thing about Wall Street: Money Never Sleeps, as with JFK and W, is that Stone just might be right.

In engineering the greatest financial bailout of all time–some $800 billion of taxpayer’s money–President Obama played down Wall Street’s culpability for the debacle, which gobbled up half of Middle America’s pension assets. But I think all us common folk felt more than a little foolish, as executives at AIG and other bailout beneficiaries rewarded their own ineptitude with massive bonuses from the bailout bucks. Stone’s sequel to his 1987 saga of insider trading plays to our anger and frustration.

The principal villain in the sequel is played by Josh Brolin, who brilliantly portrayed Bush the Younger in W. In contrast to his Bretton James, Michael Douglas’s Gordon Gecko appears almost benign. The film opens with Gecko emerging from prison, having done eight years of hard time for the insider shenanigans for which he got busted in the finale of Stone’s 1987 film.

This time around, Shia LeBeouf is the young upstart, who falls under Gordon’s spell–but only after first falling for his daughter, Winnie, a campaigner for green energy. The story proceeds on two levels. The Great Recession from which we are still reeling drives the larger drama. Brolin’s Bretton leads an AIG-like financial juggernaut, too big to be allowed to fail. If the financial jargon and Byzantine plot lines are at times a bit hard to follow, well, wasn’t that just how the whole financial-market meltdown appeared to all us main-streeters?

The lesser drama involves Gecko’s efforts at reconciliation with his estranged daughter, played by Carey Mulligan. A little matter of a $100-million trust fund, salted away by Gordon for Winnie in Geneva, overshadows dad’s maudlin machinations to win back Winnie. Does he want her love or her money–or maybe both? LeBeouf’s Jake Moore won’t know for certain until the film’s final scene.

In between Gecko’s release from the slammer and his closing encounter with Winnie and Jake, Stone indulges in some mild acts of nostalgia. Charlie Sheen does a cameo, as the middle-aged rendition of the Gecko protégé who wore a wire and entrapped Gecko two decades ago in the climax of the original Wall Street. Other, minor characters from the first film also make brief appearances, as does Stone himself. Taking a page from Alfred Hitchcock’s repertoire, he pops briefly in and out of several scenes as an unnamed investor.

And, not to ignore the housing market’s collapse, Stone gives us Susan Sarandon, as Jake’s hopelessly leveraged, real estate developing mama. After mom taps out Jake’s last $30,000 and complains that “it’s not enough” to save her properties from foreclosure, her son tells her it’s time for her to go back to work. “You mean a real job?” she blurts incredulously. (A little later, we see her in a nurse’s uniform. Stone suggests she is a whole lot better back as the nurse she once was than as the realtor she had hoped to be.)

Wall Street: Money Never Sleeps is nowhere near Stone’s best film. No great performances stick in the mind while driving home from the theater. And for once, his conspiracy theory probably falls short of the conniving and manipulations that actually went into and came out of the meltdown.

On balance, though, Stone fans and students of economic history alike should find the film to be two hours and 13 minutes well spent. The recent revelation that Michael Douglas is battling what may be a fatal malignancy adds to the nostalgic aspects of the movie. It’s also a pretty good take on the history of our immediate past and a worthwhile sequel not only to its 1987 namesake, but also to the early years of Bush’s presidency at the start of this first, tumultuous decade of the 21st century ala W (which I reviewed for The History Place in October 2008, just as the Great Recession was getting up steam).

Rated PG-13 for brief strong language and thematic elements.

Jim Castagnera, a Philadelphia journalist and lawyer, is the author of "Al Qaeda Goes to College: Impact of the War on Terror on American Higher Education" (Praeger 2009) and Handbook for Student Law (Peter Lang 2010).

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