The Shadow Chancellor's Notebook by Orlando Plumbe

WSJ.com - Judge Questions Costs in Oracle Suit

Link: WSJ.com - Judge Questions Costs in Oracle Suit.

Mr. Ellison and lawyers representing Oracle shareholders had agreed that Mr. Ellison, without admitting wrongdoing for the 2001 stock sale, would donate $100 million over five years to charity. San Mateo Superior Court Judge John G. Schwartz seemed favorably disposed to the general outlines of the deal, but said he wanted to hear more testimony about why Oracle shareholders should bear the cost of $22.5 million in legal fees that were included in the proposed settlement, according to one account of the brief proceeding. Judge Schwartz directed the parties to return to his courtroom Nov. 15

Big Paychecks Are Exhibit A at C.E.O. Trials - New York Times

For some time I thought a study between the rise in executive compensation, and the rise in punitive damage awards would be worth whil;e. The correlation between executive pay and convictions suggests that there is a correlation. Link: Big Paychecks Are Exhibit A at C.E.O. Trials - New York Times.

But in the new millennium, as the story has moved from the boardrooms to the courtrooms, they have portrayed themselves as having been fumblers, sloppy with their paperwork and unaware of crimes in their midst - yet still deserving of their gargantuan paychecks.

And, for the most part, juries are not buying it.

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There is, of course, a lesson in this. Corporate executives who want the big pay had better turn in spectacular, precision performance, legal analysts say. Otherwise, if a scandal blows up inside the company, their own compensation may prove their undoing.

"Any highly paid corporate executive had better move swiftly to make sure they have a firm grasp on the finances of their company," Mr. Mintz said. "Because at the end of the day, these cases go to show that they are going to be held to a very high standard that may come back to haunt them."

MassMutual Board Fired CEO On Finding 'Willful Malfeasance'

A Board takes action. Link: WSJ.com - MassMutual Board Fired CEO On Finding 'Willful Malfeasance'.

The abrupt notice of termination given last week to the head of MassMutual Financial Group, one of the nation's largest financial companies, came after a board investigation concluded he had engaged in an improper pattern of self-dealing and abuse of power, according to people familiar with the probe. The probe made several allegations against former Chairman and Chief Executive Robert J. O'Connell, among them that he inflated the value of a special retirement account by tens of millions of dollars, bought a company-owned condominium at a below-market price and interfered in efforts to discipline his son and son-in-law, who worked at MassMutual, said people familiar with the probe.

$284 Million Ends Safety-Kleen Lawsuit - - CFO.com

In the fourth securities fraud case to go to trial since the encatment of the PSLRA--$284 Million Ends Safety-Kleen Lawsuit - - CFO.com.

Institutional bondholders have won a $200 million judgment against the former chief executive officer and chief financial officer of hazardous-waste disposal company Safety-Kleen Corp., reported the Dallas Business Journal. The bondholders also reached a settlement in which PricewaterhouseCoopers and several Safety-Kleen directors will pay a total of about $84 million, according to the Associated Press.

Worldcom Shareholder Claims Sent Down

From law.com - Article, despite the record settlements of the achieved by Worldcom shareholders in their federal securities claims before Judge Cote, their derivative claims got shut down in bankruptcy court: 

In another ruling arising from the 2002 WorldCom bankruptcy, Southern District of New York Bankruptcy Judge Arthur Gonzalez has turned down plaintiff shareholders' claims against the company's former directors. What sets his most recent decision apart is the judge's exploration of exactly what constitutes a derivative action and how it differs from a direct action.

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He cast aside several older tests, and referred to a two-part test declared in Tooley v. Donaldson, Lufkin & Jenrette, a 2004 Delaware Supreme Court decision to determine whether this case involved derivative or direct action claims.

The Tooley test considered a) who suffered the harm and b) who would receive the benefit of recovery: the corporation or individual shareholders.

After applying the test, the judge dismissed each of the four counts individually. In one instance, the judge called the plaintiff's claims of liability "convoluted." In another, the judge wrote that the "circular nature of the construct," referring to a line of argument made by Reynolds, "demonstrates its absurdity."

Loss Causation Clarified

This was expected and already the law in most circuits, but it helps to get the final word from the home office. WSJ.com - Supreme Court Reins In Suits By Shareholders.

But the Supreme Court, in an opinion by Justice Stephen Breyer, saw it differently. "The Ninth Circuit's approach overlooks an important securities law objective," he wrote. "The securities statutes seek to maintain public confidence in the marketplace ... by deterring fraud," partly through the option of private securities-fraud lawsuits, he wrote. But such laws aren't intended "to provide investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations actually cause." The shareholders' claim, Justice Breyer found, didn't show that the losses they suffered resulted from the alleged misrepresentations. Even if the purchaser sells after the truth outs and the price falls, the lower price might reflect "not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions or other events," he wrote.

It is also yet to be seen if this has any effect on damages shareholder seek or settlement amounts they will accept. Although one would expect that it would make proof of damages a little bit more exacting.

Another Settlment Where Outside Directors pay

The The New York Times reports.

A group of 10 former directors of Enron have agreed to pay $13 million out of their own pockets as part of a $168 million settlement of a lawsuit brought by onetime shareholders who lost billions of dollars in the company's collapse in 2001.

But read the fine print, the amount is meant to represent inside trading profits the outside directors made before Enron tanked and is part of a larger deal to leave some insurance for the legal fees of the officers. Finally, given the masive size of the Enron and Worldcom debacles, neither of the director funded portions of the settlment seems like a lot. We will wait and see if director funded payments become the norm in securities litigation.

Deep Pockets

From Today's WSJ.com - WorldCom Directors to Settle Suit. Directors digging into their own pockets to pay to settle a securities suit raises the satkes for directors indeed.

In an unusual legal move, 10 former outside directors for the former WorldCom Inc. have agreed in principle to pay $54 million -- including $18 million out of their own pockets -- to settle their portion of a class-action lawsuit brought by bondholders and shareholders in the wake of the telecommunications company's massive accounting scandal, according to people familiar with the matter. The remaining $36 million would be paid by the directors' liability insurers, these people said. Under the accord, the $18 million to be paid by the former directors represents about 20% of their combined personal net worth, excluding their primary residences, retirement accounts and certain joint marital assets. Some of the former directors would pay more than others, though the amounts that will be apportioned to each haven't yet been determined.

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Though the recent wave of corporate scandals has shown that many companies' boards were asleep at the wheel, outside corporate directors have been among the most difficult defendants for private litigants and regulators to target in accounting-fraud litigation. Directors can face liability in securities-fraud cases for oversight failures if their dereliction of duty is both severe and demonstrable. Historically, however, the hurdles for plaintiffs have been so substantial that such cases were rarely brought.

"This is clearly unprecedented and sends a message to directors that their own personal wealth is at risk if they're not diligent in their jobs," said Lynn Turner, research director at proxy advisor Glass-Lewis & Co. in Broomfield, Colo., and a former Securities and Exchange Commission chief accountant. "In the past, directors' personal wealth has not been at risk when they failed in their obligation to investors who elected them. Now, if you don't get the job done it appears you may very well pay."