Archive for the ‘Litigation’ Category

There Will Be Damage

Thursday, June 17th, 2010

Twenty billion dollars. The amount BP agreed to put in escrow is more than 250 times the company’s maximum obligation under the Oil Pollution Act of 1990. It is a remarkable sum to get a corporation to disgorge before there has been any formal finding of guilt. But is it enough?

While it is commendable that the people of the Gulf Coast will be guaranteed compensation, there is a risk that BP’s voluntary participation in the fund will allow it to avoid what should be even higher liability costs. The Obama Administration insists that the $20 billion is not a cap, yet that is how it seems to be viewed by many in the financial markets, which reacted to the announcement with a degree of relief.

Obama is so eager for a win that he may have left money on the table. The fact that BP agreed to the $20 billion figure without much of a fight suggests that he could have gotten more. Another drawback: keeping the amount within BP’s comfort zone allowed the company to appear to be noble in cooperating, when it would have been preferable to see it squealing about an “unreasonable” demand. BP should be feeling more pain.

I also worry that BP’s acquiescence might cause the feds to go easier on the company in the criminal investigation of the gulf disaster. BP is already on probation in connection with criminal charges stemming from its previous recklessness in Alaska and at its Texas City refinery. Another conviction should get it debarred from receiving new drilling licenses or contracts from the federal government, and it would pave the way to huge payouts in the inevitable civil litigation.

The $20 billion deal is also less than fully satisfying because it applies to BP alone. The current mess in the gulf may be the doing of BP (and perhaps Transocean and Halliburton), but the Congressional testimony just given by top executives raises new concerns about other deepwater wells.

Corporate solidarity fell by the wayside as the big shots from Exxon Mobil, Chevron, Shell and ConocoPhillips distanced themselves from BP. Rex Tillerson of Exxon Mobil was especially blunt about BP’s screw-ups,  seeking perhaps to drive down the company’s stock price further and facilitate a rumored takeover bid.

Yet what was even more amazing was the admission by the executives that, four decades after the 1969 Santa Barbara accident that demonstrated the risks of offshore drilling, their companies are still not in a position to handle such occurrences. “We are not well-equipped to deal with them,” Tillerson said matter-of-factly. “There will be damage.” This came on top of revelations by the House Energy and Commerce Committee that the spill response plans of the oil majors were cookie-cutter documents with outdated and irrelevant information.

All this is a far cry from the rosy scenarios and confident assurances that the industry has been peddling to the public for decades and selling to gullible (or indifferent) federal regulators. Here was the chief executive of the world’s largest oil corporation in effect admitting that it is helpless when something big goes wrong at one of its wells beneath the sea.

As satisfying as is to beat up on BP for the current catastrophe, the culpability extends to the entire industry. None of the oil giants took safety seriously, and by all rights they should all be digging into their corporate pockets to clean up the mess and compensate the people of the Gulf Coast.

One hundred billion dollars: that has a better ring to it.

Would a Defunct BP Make Good On Its Liabilities?

Wednesday, June 9th, 2010

The BP deathwatch has begun. It’s not trial lawyers or environmental activists who pose an immediate threat to the continued existence of the oil giant, but rather the market. BP’s stock price is down about 50 percent since the beginning of the Gulf of Mexico disaster — a loss of more than $80 billion in capitalization — and there is rising speculation about a takeover by another petroleum behemoth such as Shell or Exxon Mobil.

The demise of a company with a track record as sullied as that of BP is no cause for mourning, but there is a serious risk that its dismantling would be done in a way that limits the resources available for cleanup and compensation in the gulf. Mainstream analysts such as those at Credit Suisse now estimate the company’s total liability at more than $35 billion. As the damaged underwater well continues to spew oil — and more indications of BP’s negligence come to light — the final dimensions of the financial blowout are likely to be much larger. BP’s current or future owners are not likely to part with that kind of money without a fight.

One maneuver they might consider is to break up the company. The New York Times is reporting that investment bankers are already working on scenarios in which BP would submit a prepackaged bankruptcy filing and split off a separate entity that would be saddled with the liabilities and given limited assets to make good on them.

Such attempts to shield assets from massive environmental liabilities are not unprecedented. In the 1980s Johns-Manville, the world’s leading producer of asbestos, restructured itself, changed its name, and then filed for bankruptcy in the face of more than 16,000 lawsuits brought by victims of asbestos disease. Mining company Asarco was accused of using a 2005 Chapter 11 filing to reduce its financial responsibility for cleaning up nearly 100 Superfund toxic waste sites.

There are also troublesome precedents that don’t involve bankruptcy filings. After taking over Union Carbide, the company responsible for the 1984 industrial accident in Bhopal, India that killed thousands, Dow Chemical disavowed any liability. After being hit with $5 billion in punitive damages in connection with the Exxon Valdez oil spill, Exxon resisted paying for more than a decade and was finally rewarded when the U.S. Supreme Court slashed the judgment.

What, then, needs to be done to prevent BP from evading its full obligations related to the present disaster? The ideal course of action would be for the federal government to seize enough of the company’s assets in the United States to cover its expected obligations. This is what the Seize BP movement is already demanding.

Such an aggressive action would probably run afoul of Supreme Court rulings such as the 1952 decision regarding President Truman’s seizure of steel mills during a strike by steelworkers. On the other hand, the government could use the fact that BP is on probation in connection with criminal charges relating to workplace safety and environmental violations in Texas and Alaska to justify a seizure. The likelihood that BP has violated laws in connection with the gulf disaster is quite high, meaning that it is technically in violation of its probation. A seizure of its property would be the equivalent of arresting an individual who violates probation.

Another alternative would be not to seize assets but to force the company to pledge enough of them to cover likely liabilities. If BP was later unable or unwilling to pay what the courts or government agencies mandate — a possibility that is more likely in light of the fact that the company is self-insured — those assets could then be taken.

It turns out that BP and other companies drilling for oil on U.S. public lands or offshore already have to make a commitment of the sort by posting bonds with the Interior Department. The bonds are meant to cover reclamation of the site after the drilling is completed; i.e., returning it to some approximation of its original condition, which in the case of offshore wells includes the removal of the drilling platform. According to a GAO report published earlier this year, the bond requirements are quite low and in some cases have not changed in decades. A company such as BP is required to post only $3 million for all of its drilling activities in the Gulf of Mexico.

The Oil Pollution Act of 1990 also requires that companies provide proof — whether in the form of insurance coverage or a bond — that they can meet their financial obligations relating to a spill, but as has been widely discussed, the liability limits mandated by the act are grossly inadequate.

The current catastrophe in the gulf demonstrates that the potential liabilities from an offshore drilling accident, especially the deepwater variety, are enormous. At the very least, the federal government should vastly increase the bonding requirements — or other ways of reserving assets — beginning immediately and including BP. Knowing that a substantial portion of their resources are immediately at risk might make oil companies think twice about employing reckless drilling practices.

The (Investment) House Always Wins

Thursday, April 22nd, 2010

Goldman Sachs, which has long prided itself on being one of the smartest operators on Wall Street, has apparently decided that the best way to defend itself against federal fraud charges is to plead incompetence. The firm is taking the position that it is not guilty of misleading investors in a 2007 issue of mortgage securities because it allegedly lost money – more than $90 million, it claims – on its own stake in the deal.

In fact, Goldman would have us believe that it took a bath in the overall mortgage security arena. This story line is a far cry from the one put forth a couple of years ago, when the firm was being celebrated for anticipating the collapse in the mortgage market and shielding itself – though not its clients. In a November 2007 front-page article headlined “Goldman Sachs Rakes in Profit in Credit Crisis,” the New York Times reported that the firm “continued to package risky mortgages to sell to investors” while it reduced its own holdings in such securities and bought “expensive insurance as protection against further losses.” In 2007 Goldman posted a profit of $11.6 billion (up from $9.5 billion the year before), and CEO Lloyd Blankfein took home $70 million in compensation (not counting another $45 million in value he realized upon the vesting of previously granted stock awards). Some bath.

Goldman is not the only one rewriting financial history. Many of the firm’s mainstream critics are talking as if it is unheard of for an investment bank to act contrary to the interests of its clients, as Goldman is accused of doing by failing to disclose that it allowed hedge fund operator John Paulson to choose a set of particularly toxic mortgage securities for Goldman to peddle while Paulson was betting heavily that those securities would tank.

In fact, the history of Wall Street is filled with examples in which investment houses sought to hoodwink investors. Rampant stock manipulation, conflicts of interest and other fraudulent practices exposed by the Pecora Commission prompted the regulatory reforms of the 1930s. Those reforms reduced but did not eliminate shady practices. The 1950s and early 1960s saw a series of scandals involving firms on the American Stock Exchange that in 1964 inspired Congress to impose stricter disclosure requirements for over-the-counter securities.

The corporate takeover frenzy of the 1980s brought with it a wave of insider trading scandals. The culprits in these cases involved not only independent speculators such as Ivan Boesky, but also executives at prominent investment houses, above all Michael Milken of Drexel Burnham. Also caught in the net was Robert Freeman, head of risk arbitrage at Goldman, who in 1989 pleaded guilty to criminal charges. When players such as Freeman and Milken traded on inside information, they were profiting at the expense of other investors, including their own clients, who were not privy to that information.

During the past decade, various major banks were accused of helping crooked companies deceive investors. For example, in 2004 Citigroup agreed to pay $2.7 billion to settle such charges brought in connection with WorldCom and later paid $1.7 billion to former Enron investors. In 2005 Goldman and three other banks paid $100 million to settle charges in connection with WorldCom.

In other words, the allegation that Goldman was acting contrary to the interest of its clients in the sale of synthetic collateralized debt obligations was hardly unprecedented.

What’s not getting much attention during the current scandal is that in late 2007 Goldman had found another way to profit by exploiting its clients, though in this case the clients were not investors but homeowners.

Goldman quietly purchased a company called Litton Loan Servicing, a leading player in the business of servicing subprime (and frequently predatory) home mortgages. “Servicing” in this case means collecting payments from homeowners who frequently fall behind in payments and are at risk of foreclosure. As I wrote in 2008, Litton is “a type of collection agency dealing with those in the most vulnerable and desperate financial circumstances.” At the end of 2009, Litton was the 4th largest subprime servicer, with a portfolio of some $52 billion (National Mortgage News 4/5/2010).

Litton has frequently been charged with engaging in abusive practices, including the imposition of onerous late fees that allegedly violate the Real Estate Settlement Procedures Act. It has also been accused of being overly aggressive in pushing homeowners into foreclosure when they can’t make their payments.

Many of these complaints have ended up in court. According to the Justia database, Litton has been sued more than 300 times in federal court since the beginning of 2007. That year a federal judge in California granted class-action status to a group of plaintiffs, but the court later limited the scope of the potential damages, resulting in a settlement in which Litton agreed to pay out $500,000.

Meanwhile, individual lawsuits continue to be filed. Many of the more recent ones involve disputes over loan modifications. Complaints in this area persist even though Litton is participating in the Obama Administration’s Home Affordable Modification Program and is thus eligible for incentive payments through an extension of the Toxic Assets Relief Program.

There seems to be no end to the ways that Goldman manages to make money from toxic assets.  On Wall Street, as in Las Vegas, the house always wins.

BONUS FEATURE: Federal regulation of business leaves a lot to be desired, but it is worth knowing where to find information on those enforcement activities that are occurring. The Dirt Diggers Digest can help with our new Enforcement page, which has links to online enforcement data from a wide range of federal agencies. The page also includes links to inspection data, product recall announcements and lists of companies debarred from doing business with the federal government.

A “Poster Child for Corporate Malfeasance”

Thursday, March 25th, 2010

One of the cardinal criticisms of large corporations is that they put profits before people. That tendency has been on full display in the recent behavior of transnational mining giant Rio Tinto, which has shown little regard for the well-being not only of its unionized workers but also of a group of executives who found themselves on trial for their lives in China.

The China story began last July, when four company executives — including Stern Hu, a Chinese-born Australian citizen — were arrested and initially charged with bribery and stealing state secrets, the latter offense carrying a potential death penalty. The charges, which most Western observers saw as trumped up, were made during a time of increasing tension between Rio and the Chinese government, one of the company’s largest customers, especially for iron ore.

Earlier in the year, debt-ridden Rio had announced plans to sell an 18 percent stake in itself to Chinalco, the state-backed Chinese aluminum company, for about $20 billion. Faced with strong shareholder and political opposition, Rio abandoned the deal in June 2009. The arrests may have been retaliation by the Chinese for being denied easier access to Australia’s natural riches.

Although Rio claimed to be standing by its employees, the case did not curb the company’s appetite for doing business with the deep-pocketed Chinese. Rio continued to negotiate with Beijing on large-scale iron ore sales. It seems never to have occurred to the company to terminate those talks until its people were freed. In fact, only weeks after the arrests, Rio’s chief executive Tom Albanese was, as Canada’s Globe and Mail put it on August 21, “trying to repair his company’s troubled relationship with China.”

Before long, Rio was negotiating with Chinalco about participating in a copper and gold mining project in Mongolia. One thing apparently led to another. In March 2010 — after its still-imprisoned employees had been officially indicted and were about to go on trial — Rio announced that it and Chinalco would jointly develop an iron ore project in the West African country of Guinea.

When that trial began a couple of weeks later, the Rio managers admitted guilt, but not to the more serious charge of stealing trade secrets. Instead, they said they had engaged in bribery — but as recipients rather than payers. While the four defendants may have been guilty of some impropriety, it is likely that the admissions were a calculated move to gain a lighter sentence in a proceeding whose outcome was predetermined. And that was the case in large part because their employer decided that its business dealings were more important than demanding justice for its employees.

Rio is no more interested in justice when it comes to its operations outside China. It has been accused of human rights violations in countries such as Indonesia and Papua New Guinea. And it has a track record of exploiting mineworkers in poor countries such as Namibia and South Africa while busting unions in places such as Australia. Recently, Rio showed its anti-union colors again in the United States.

On January 31 its U.S. Borax subsidiary locked out more than 500 workers at its borate mine in Kern County, California. The workers, members of Local 30 of the International Longshore & Warehouse Union had the audacity of voting against company demands for extensive contract concessions. The company wasted no time busing in replacement workers.

In a press release blaming the union for the lockout, U.S. Borax complained that ILWU members earned much more than workers at the company’s main competitor Eti Maden. The release conveniently fails to mention that Eti Maden’s operations are in Turkey.

Also missing from the company’s statement is the fact that the biggest driver of demand for boron – a material used in products ranging from glass wool to LCD screens – is the Chinese market. If U.S. Borax busts the ILWU in a way that keeps down boron prices, then the ultimate beneficiary may be Rio Tinto’s friends in China.

It is no surprise that mining industry critic Danny Kennedy once wrote that Rio Tinto “could be a poster child for corporate malfeasance.”

Blurring the Bailouts

Wednesday, March 4th, 2009

This is the time of year when most U.S. public companies file their 10-K annual reports with the Securities and Exchange Commission, which in turn makes them available to the public through its IDEA web page (formerly EDGAR). These reports include sections in which management discusses the firm’s performance over the past year and tries to put the best face on the financial results.

Many companies are, of course, reporting disappointing results this time around, but perhaps the most awkward filings are the ones being made by companies that had to get bailed out by the federal government to get through the year. Let’s take a look at how they are talking about being wards of the state.

We don’t yet know how General Motors is dealing with this challenge, since it notified the SEC that its 10-K will be late. So let’s focus on two of the other biggest supplicants: Citigroup and AIG. The first lesson, apparently, is not to use the term “bailout” when talking about being bailed out. The term appears nowhere in either firm’s 10-K.

Citi instead employs the bland statement that “the Company benefited from substantial U.S. government financial involvement.” Substantial, indeed. Citi matter-of-factly describes the capital infusions, loss-sharing agreements and loan guarantees through which the feds have made a commitment potentially costing several hundred billion dollars to keep the giant bank holding company afloat. With all the references to UST and USG, a casual reader might think Citi was referring to conventional investors rather than the U.S. Treasury and the U.S. Government.

AIG adopts a more narrative approach, writing that: “By early Tuesday afternoon on September 16, 2008, it was clear that AIG had no viable private sector solution to its liquidity issues. At this point, AIG received the terms of a secured lending agreement that the NY Fed was prepared to provide.” This does not quite capture the gravity of events that the New York Times, for example, reported on in a front-page story headlined: FED IN AN $85 BILLION RESCUE OF AN INSURER NEAR FAILURE; U.S. GETS CONTROL; POLICY REVERSAL ARISES FROM GROWING FEAR OF GLOBAL CRISIS.

Aside from downplaying the gravity of their bailouts, the Citi and AIG 10-Ks are less than lucid on what led up to their troubles. In describing conditions in 2008 that led to a $27 billion net loss, Citi takes no responsibility. The causes, instead, are said to have been “continued losses related to the disruption in the fixed income markets, higher consumer credit costs, and a deepening of the global economic slowdown.” Contrast this to its 10-K of two years ago, which stated: “We enter 2007 with good business momentum, as we expect to see our investment initiatives generate increasing revenues, and are well-positioned to gain from our balanced approach to growth and competitive advantages.” In other words, when things are going well, management strategy gets the credit; when the red ink begins to gush, impersonal market forces are to blame.

AIG, which reported an astounding $99 billion net loss for the year, also paints itself as a victim of conditions outside its control, saying “the 2008 business environment was one of the most difficult in recent decades.” The difference with Citi is that AIG’s management is blunter about the continuing dismal prospects for the company. The notes to its financial statements include a section entitled “Going Concern Considerations” that raises the possibility that the company may need yet more government assistance and that, even then, its survival is far from a sure thing.

Perhaps the most telling parts of the reports are the sections in which the companies have to disclose significant legal proceedings in which they are involved. It takes more than 7,000 words for AIG to summarize all of its legal problems, including about a dozen securities fraud class action cases. Citi engages in a similar recitation.

While the two companies are still in a state of denial about their responsibility both for their own circumstances and for the larger financial crisis (as illustrated in the image above from Citi’s website), the existence of these legal proceedings may see to it that they are eventually held accountable for their financial misdeeds.

Shareholder Litigation Not Yet Extinct

Monday, July 7th, 2008

Once feared class-action lawyers Melvyn Weiss and William Lerach have been disgraced after pleading guilty to charges of paying off plaintiffs, but the type of lawsuit they promoted—the shareholder derivative action—is not extinct. It has just come to light that the Coca-Cola Company recently agreed to pay $137 million to settle such a suit in which plaintiffs led by two union pension funds accused the soft-drink company of artificially inflating sales figures to boost its stock price.

The case, in which Lerach (photo) was originally one of many lawyers involved, was filed in October 2000 in federal court in Atlanta (Northern District of Georgia, Case No. 00-cv-02838-WBH; later consolidated with another action). The lead plaintiff, the Carpenters Health & Welfare Fund of Philadelphia, held about $80 million in Coca-Cola stock at the time. The company dismissed the charges as “ridiculous” in a press release and later claimed in its 10-K filing that it “has meritorious legal and factual defenses and intends to defend the consolidated action vigorously.”

At the center of the case were allegations of “channel stuffing” (pressuring bottlers to make large purchases of concentrate beyond their needs) and failing to write down the value of impaired assets in places such as Russia and Japan.

Coca-Cola has not made it clear why it decided to settle a case it had fought for nearly eight years. The capitulation was all the more surprising in that it occurred shortly after the company prevailed in Delaware Supreme Court in another derivative suit brought by the Teamsters in 2006. In that case, the union charged that Coca-Cola used its control (35%) over its largest bottler, Coca-Cola Enterprises (CCE), to maximize its own profits at the expense of CCE’s shareholders.

The company also faced a lawsuit brought against it and several affiliates in federal court in Miami concerning the murder of trade unionists at Coca-Cola bottling plants in Colombia. The company got the case dismissed, but it is still being challenged by the tenacious Campaign to Stop Killer Coke (which uses the provocative photo above on its website), the aim of which is to pressure Coca-Cola to get the bottling plants to end their alleged cooperation with Colombian paramilitary groups believed to be behind the murders.

Fallen Crusaders Against Corporate Abuse

Thursday, May 29th, 2008

For more than 30 years, big business has whined about class-action lawsuits filed on behalf of consumers, workers and shareholders. The Republican Party made plaintiffs’ lawyers one of its favorite bogeymen and “tort reform” a centerpiece of its policy agenda. John McCain carries on this dubious tradition, suggesting for example that putting limits on medical malpractice suits is a key element of healthcare reform.

Whether or not there ever was a real plethora of frivolous lawsuits, one fact is now undeniable: the plaintiffs’ bar is in disarray. Part of the reason is that conservatives succeeded in getting numerous state legislatures to impose restrictions on class-action lawsuits and individual damage cases. Yet perhaps more dramatic has been the spectacular demise in recent months of the country’s leading trial lawyers through personal legal entanglements.

The conventional wisdom is that these super lawyers were victims of their own greed, while conspiracy theorists might wonder how these giant killers were brought down in such short order. In any event, there have certainly been sighs or relief—if not spasms of schadenfreude—in boardrooms across America.

The most recent crusader to fall was Melvyn Weiss, who built a career filing lawsuits charging that companies had defrauded investors. In March, Weiss agreed to plead guilty to federal criminal charges, acknowledging his role in making millions of dollars in secret side payments to plaintiffs in class actions filed by his firm Milberg Weiss. He consented to $10 million in fines and forfeiture, and last week prosecutors proposed that he spend up to 33 months in prison.

Weiss’s former partner, the even more flamboyant William S. Lerach, entered a guilty plea last fall on similar federal charges. In February he was sentenced to two years in prison and ordered to forfeit $7.75 million. That was a small fraction of the several hundred million dollars in fees Lerach and his partners earned from scores of cases involving many billion dollars in settlements and awards from the likes of Enron and WorldCom as well as many less venal corporations.

In March, another larger-than-life trial lawyer, Richard “Dickie” Scruggs, filed a guilty plea in the face of allegations that he and others bribed a judge in Mississippi who was hearing a case involving a dispute over $26 million in legal fees from a mass settlement of insurance claims brought by victims of Hurricane Katrina. Scruggs is best known for his role in winning a $200 billion settlement from the tobacco industry in the 1990s.

There was never any doubt that Weiss, Lerach and Scruggs were motivated by personal enrichment at least as much as their quest for justice. Yet in the absence of adequate government regulation of business, their lawsuits served as a countervailing force against the power of big business. Now that they have been neutralized, what corporate abuses will go unchallenged?

Will Tesco Brings Its Litigious Ways to the USA?

Wednesday, April 9th, 2008

Say all you want about Wal-Mart—the giant retailer usually deals with its many adversaries in the court of public opinion rather than by filing lawsuits against them. The same can’t be said about Tesco, the British counterpart of Wal-Mart that has begun to enter the U.S. market.

In the past week, Tesco has brought two separate legal actions against its critics. First, it sued the Guardian newspaper and its editor Alan Rusbridger for “libel and malicious falsehood” in connection with a series of articles claiming that the company had used offshore partnerships as a way of avoiding up to £1 billion in taxes when selling UK properties. Tesco acknowledges that it may have saved £23-60 million in taxes but wants its day in court to argue that the £1 billion figure is erroneous. Playing hardball, Tesco says it is collecting communications from customers angry about the Guardian stories—and who say they are taking their business elsewhere—to justify a demand for “special damages.”

Now it’s been reported—by the Guardian—that Tesco has brought a libel suit against a former member of parliament in Thailand for criticizing the company’s expansion in that country. This follows a similar action against a Thai newspaper columnist.

Tesco may be tempted to bring similar suits in the U.S., given the negative coverage of its campaign to create a string of Fresh & Easy Neighborhood Markets. Some of the criticism is purely of a business nature. USA Today wrote recently that the stores, which it described as “about the size of a Trader Joe’s with lots of Whole Foods-type natural foods and prices that can seem Costco-esque,” don’t seem to be hitting the mark. The paper continued: “The unfamiliar combination—and a rather sterile store décor—seem to have left American shoppers confused about just what the chain is.” It’s apparently for this reason that Tesco recently decided to freeze its U.S. rollout, which began in Southern California, Las Vegas and Phoenix.

Like Wal-Mart, Tesco has started facing scrutiny—most notably in a report published last year by the Urban and Environmental Policy Institute of Occidental College—on supply-chain issues and its expected U.S. labor practices. If the rollout continues to falter, these issues may become moot. Otherwise, let’s hope the company spends more here on public relations and less on lawyers.