Anthony Rickey and I recently posted a new paper focusing on the settlement approval process in securities class and stockholder derivative actions.   These settlements are a fascinating world. In most instances, plaintiffs’ counsel urge a judge to find that a settlement is reasonable, and defendants either stay silent or join in supporting the deal.  At this stage, plaintiff and defense interests often align. The defendant wants to get out of the case at the negotiated price.  Plaintiff’s counsel want to get paid. 

In many instances the settlement will be perfectly reasonable and a court should just approve it.  But there will also be times when a court should not approve a settlement or should do a bit more digging before deciding whether to approve the settlement and how to apportion the recovery between the class and its counsel.

How do courts identify these instances?  Courts generally excel at deciding disputes after adversarial briefing.  They may not have the institutional resources to slog through hundreds of pages in settlement disclosures or canvas other public records to determine whether to approve a settlement.  We suggest some possible reforms to the settlement approval process to help bring relevant information to the court’s attention.

Consider for example the information that came to light after the Boston Globe’s Spotlight team cast a close eye on the settlement in a class action filed against State Street Bank and Trust Company.  For those that haven’t followed the case, it settled for $300 million, with $75 million going to attorneys’ fees. The Globe’s review found that some attorneys billed out at $400 an hour or more for settlement purposes were, in reality, contract attorneys who were actually paid about $40 an hour or less for their work.  It also emerged that some hours had been double counted when the class counsel came to the court seeking to justify fee requests.  Troubled, the Court appointed a special master (Master) to investigate.

The Master soon found more cause for concern, including a $4 million dollar payment out of the attorneys’ fees to an attorney who had not done any work on the case.  The Master unearthed an email raising concerns about whether any money had been spent in ways that would compromise the lead plaintiff’s ability to act as a fiduciary for the class.  One particularly salient email read:

“We got you ATRS as a client after considerable efforts, political activity, money spent and time dedicated in Arkansas, and Labaton would use ATRS to seek legal counsel appointments in institutional investor fraud and misrepresentation cases. Where Labaton is successful in getting appointed lead counsel and obtains a settlement or judgment award, we split Labaton’s attorney fee award 80/20 period.”

Commenting about the dynamic to the Times, Columbia’s John Coffee explained that the “case had shed an important light on the ‘rather sordid market of buying and selling plaintiffs’ in securities class actions.”

We break down what happened in the State Street Litigation and explore some other potential hidden conflicts which might also cause some lead plaintiffs to have interests more aligned with their lawyers than the class they ostensibly lead.  Our article also suggests some reforms that courts and legislatures could undertake to surface otherwise hidden conflicts between plaintiffs and their legal representatives.

My friend and colleague, Priya Baskaran, asked me to post the following, which I am happy to do: 

Over the past year, a critical mass of law school faculty and staff have expressed interest in establishing an AALS Section on Community Economic Development (CED). The proposed section will provide a dynamic, collaborative environment to enhance the scholarship, activism, and direct legal work of CED-focused faculty and professional staff. Notably, the section will help bridge existing gaps between various actors in the CED universe by increasing opportunities for networking and enabling greater synergy and collaboration between scholars and experts in various substantive subjects and disciplines related to CED. Interested faculty and professional staff are invited to read the full petition.

I think this is a great idea, and I will be signing the petition (here).  I have been working with an interdisciplinary group on my campus, WVU Center for Innovation in Gas Research and Utilization (CIGRU). We are a multidisciplinary group of researchers who are experts in science, engineering, environmental, policy, law, and finance. The CIGRU conducts research and services relevant to gas, oil, and chemicals. Our experimental research includes broad areas covering catalysis, reaction engineering, material science, power generation, and gas turbine. The CIGRU undertakes U.S. government- and industry-funded research projects developing clean and renewable energy technologies. Our services include air emission control, regulatory and policy, law and finance relevant to shale gas.

I have been leading CIGRU’s Economic and Community Development Group for the past few years.  About 18 months ago, CIGRU earned a five-year seed grant awarded by the West Virginia Higher Education Policy Commission, under its Research Challenge Grant program. The WVU gas utilization team includes eight CIGRU researchers, working in partnership with Marshall University, the WVU Energy Institute, the WVU Bureau for Business and Economic Research, the West Virginia Chemical Alliance Zone, Morgantown’s National Energy Technology Laboratory and the Mid-Atlantic Technology, Research and Innovation Center. So, this idea resonates with me. I think this is a great idea, and it has my support. If you agree, I hope you’ll sign on, too.  

For anyone interested, CIRGUs grant announcement and a description of the program are available after the jump. 

Continue Reading Petition to Create AALS Section Community Economic Development

Last Friday, I had the honor to participate in Rutgers Law School’s Fourth Annual Corporate Compliance Institute, presented by The Center for Corporate Law and Governance.  I teamed up with Todd Cipperman, a lawyer and compliance professional who owns his own firm, in leading a discussion breakout session on current topics in financial services and securities compliance.  Todd is the author of The Compliance Advantage: Ten Must-Know Trends to Protect Your Investment Firm.  Our knowledge bases were complementary, and he was a great partner.

The Institute offered a super program, starting with a welcome lecture from Rutgers Law’s own Hui Chen, former Compliance Counsel Expert for the U.S. Department of Justice Fraud Division.  She outlined four concerns for us to focus on over the course of the program:

  • Variety – including the many taxonomies of compliance
  • Use of Data – including disparities in a firm’s treatment of other peoples’ data and its own
  • Measurements and Outcomes – including the importance of measuring outcomes in addition to processes
  • Ethics and Compliance – including the relationship between the two–whether they are co-extensive and, if not, whether one can exist without the other

Following these threads throughout the day proved to be a useful task.

Another highlight of the day for me was the luncheon talk offered by Eugene Soltes, author of Why They Do It, a book about the motivations for white collar crime that I am using in my current insider trading research project.  Having said that, I also learned a bunch from the two morning panels–one on recent corporate compliance trends (focusing in on trade sanctions, antitrust, and immigration) and the other on data compliance issues (addressing governance, stewardship, and privacy, among other things).  All-in-all, the day was a great way to learn and share.  Thanks to Arthur Laby for inviting me.

Leadership “must be in the air” as co-blogger Joan Heminway recently wrote (here and here).  I agree.  Last week, I had a chance to connect with Dr. Laura Sicola, a close friend from my days as a UPenn PhD student, and the founder of Vocal Impact Productions.  She shared that her second book on leadership, Speaking To Influence: Mastering Your Leadership Voice, would be released this Tuesday, April 16.  Exciting news! 

Many good books have been written on leadership.  What’s unique about Sicola’s work is her focus on the role of voice in building one’s executive presence.  In a highly-insightful TedxPenn talk with over 5.5 million views, Sicola notes that executive presence is thought to consist of: appearance, communication skills, and gravitas.  However, she argues that there’s a “missing link” uniting these considerations.  That link, according to Sicola, is vocal executive presence.   How one delivers information can reinforce and establish executive presence or undermine it.  She explains what it means for the voice to have both a cognitive and an emotional impact on listeners.  In sum, “if you want to be seen as a leader, you have to sound like one.” 

Here’s a blurb on Speaking To Influence:

“When you speak, whether on stage, in a meeting, or on the telephone, do you command the room confidently and naturally?  Are you seen as a true leader? Do you get the full respect you deserve and the results you want?

If you’re like most people, your response to many of these question is, “No, but I want to!” The reason is because we all have a “blind spot”: the gap between how we think we come across to others, and how we actually come across when we speak.

Have you ever had an argument in which someone angrily said to you, “It’s not what you said, it’s how you said it!”  That’s the blind spot, and if you’ve ever been there, then this book is for you.

Full of stories, examples, and exercises for you to try, Speaking To Influence helps you take the blinders off and see where you’re getting in your own way.  Discover the secrets to creating strong, positive relationships, establishing your best reputation, and achieving your greatest goals and purpose.”    

Every year, when we get to the section on shareholder voting in my Business Associations class, I assign this article about Netflix.  As it describes, Netflix has a staggered board and plurality voting and it takes a two-thirds vote of the stockholders to amend the bylaws.  Every year, shareholders submit proposals to change these matters; every year, a majority vote in favor, and every year, Netflix just ignores the vote and keeps on keeping on.

But now it seems there are some cracks in the wall. 

Last year, Netflix went on what I can only interpret as something of a charm offensive, publicizing what it claimed was unusually strong board oversight and transparency between the board and the management team.  I take this to mean that their shareholders had become sufficiently restive that the company felt it needed to respond.

But that apparently did not work as well as hoped.  This year, shareholders again submitted a series of governance reform proposals, seeking the right to call meetings, proxy access, the ability to act by written consent, the ability to amend bylaws by majority vote, and a bylaw amendment that would provide for director elections by majority rather than plurality voting.  All passed except the bylaw amendment, which did not reach the required two-thirds vote, but did get 57% of the vote of the outstanding shares and 72% of the voting shares.

But this time, instead of ignoring the vote, Netflix actually amended its bylaws to provide for proxy access. 

It seems that even Netflix cannot resist the pressure from investors forever.  And now I’ll have to give my students a different lesson.

As a former compliance officer who is now an academic, I’ve been obsessed with the $25 million Varsity Blues college admissions scandal. Compliance officers are always looking for titillating stories for training and illustration purposes, and this one has it all– bribery, Hollywood stars, a BigLaw partner, Instagram influencers, and big name schools. Over fifty people face charges or have already pled guilty, and the fallout will continue for some time. We’ve seen bribery in the university setting before but those cases concerned recruitment of actual athletes. 

Although Operation Varsity Blues concerns elite colleges, it provides a wake up call for all universities and an even better cautionary tale for businesses of all types that think of  bribery as something that happens overseas. As former Justice Department compliance counsel, Hui Chen, wrote, “bribery. . .  is not an act confined by geographies. Like most frauds, it is a product of motive, opportunity, and rationalization. Where there are power and benefits to be traded, there would be bribes.” 

My former colleague and a rising star in the compliance world, AP Capaldo, has some great insights on the scandal in this podcast. I recommend that you listen to it, but if you don’t have time, here are some questions that she would ask if doing a post mortem at the named universities. With some tweaks, compliance officers, legal counsel, and auditors for all businesses should consider: 

1) What kind of training does our staff receive? How often?

2) Does it address the issues that are likely to occur in our industry?

3) When was the last time we spot checked these areas for compliance ? In the context of the universities, were these scholarships or set asides within the scope of routine audits or any other internal controls or reviews?

4) What factors or aspects of the culture could contribute to a scandal like this? What are our red flags and blind spots? Do we have a cultural permissiveness that could lead to this? In the context of the implicated universities, who knew or had reason to know?

5) How can we do a values-based analysis? Do we need to rethink our values or put some teeth behind them?

6) How are our resources deployed?

7) Do we have fundamental gaps in our compliance program implementation? Are we too focused on one area or another?

8) Are integrity and hallmarks of compliant behavior part of our selection/hiring process?

Capaldo recommends that universities tap into their internal resources of law and ethics professors who can staff  multidisciplinary task forces to craft programs and curate cultures to ensure measurable improvements in compliance and a decrease in misconduct. I agree. I would add that as members of the law and business community and as alums of universities, we should ask our alma maters or employers whether they have considered these and other hard questions. Finally, as law and business professors, we should use this scandal in both the classroom and the faculty lounge to reinforce the importance of ethics, internal controls, compliance with law, and shared values.

 

I want to follow in Haskell’s wake and also plug Ipse Dixit, a podcast on legal scholarship.  It recently featured the BLPB’s own Joshua Fershee.  It’s perfect for hearing authors that you’ve only read in the past.  Hearing them set out their ideas in their own voices is wonderful.  It’s also available on iTunes and a number of other streaming platforms.  It’s now up to about 212 episodes, and covers a broad range of ideas and scholars.  There should be something for everyone.

The podcast continues to evolve and expand.  It’s begun adding additional co-hosts to the podcast to help produce new episodes.  I’m one of them and suspect I’ll have a hard time keeping up with another new co-host, Luce Nguyen, a student at Oberlin College.  Luce interviewed Joshua for that episode and has already taken the lead in terms of co-host production.  Luce is the co-founder of the Oberlin Policy Research Institute, an undergraduate public policy organization based at Oberlin College.  You can also follow both Joshua and Luce on Twitter:

A 2017 opinion related to successor liability just posted to Westlaw.  The case is an EEOC claim “against the Hospital of St. Raphael School of Nurse Anesthesia (“HSR School”) and Anesthesia Associates of New Haven (“AANH”), alleging gender discrimination and retaliation in violation of Title VII of the Civil Rights Act of 1964 . . . .” The plaintiff was seeking to join Yale New Haven Hospital (“YNHH”). MARGARITE CONSOLMAGNO v. HOSPITAL OF ST. RAPHAEL SCHOOL OF NURSE ANESTHESIA and ANESTHESIA ASSOCIATES OF NEW HAVEN, P.C., 3:11CV109 (DJS), 2017 WL 10966446, at *1 (D. Conn. Mar. 27, 2017). 

 
 
Apparently, the HSR School trained nurse anesthetists was owned and run by AANH a Connecticut “professional corporation.”  The plaintiff was in the HSR School for about six months before she was dismissed, she claimed, because of ” gender discrimination and retaliation for reporting a staff member’s inappropriate sexual conduct.” Id. The plaintiff sought to join YNHH because that entity took over running an anesthesia school that had been, in some form, the HSR school.  
 
The successor liability part is rather interesting, though largely devoid of facts from the transaction.  The court ultimately concludes that even though YNHH resumed a similar school, it was not a successor entity and could not be joined.  
 
A challenging part about the case is that entities are described, but often not clearly and with conflicting entity-type language.  For example, although AANH was a “professional corporation,” the court explained that ” [t]he AANH anesthesiologists, who were also partners in AANH, were responsible for deciding how the HSR School would operate.” Id. at *2. One of the doctors was also referred to as an “ownership partner in AANH.” Id. at *3. I suspect that anesthesiologists, like lawyers, traditionally created firms that were partnerships, so the principals often call themselves “partners,” regardless of their actual entity type. Still, it would be nice for courts to clarify the actual roles of those involved.  
 
Furthermore, in describing the HSR School, the court states, 
 
There is no evidence that the HSR School had an existence that was independent of AANH. In fact, the HSR School was going to cease operating due to the fact that AANH was going to cease operating. The HSR School was not a limited liability corporation (“LLC”), private corporation (“P.C.”), or other legal entity registered with the Connecticut Secretary of State. (Tr. 141-142). There is no evidence that the HSR School had its own assets, bank account, or tax identification number. There is no evidence that the HSR School itself (as opposed to AANH) ever paid anyone for rendering services to the HSR School. There is no evidence that anyone other than AANH had operated the HSR School. Consequently, the Court finds that the predecessor in interest, for the purpose of assessing successor liability, is AANH.
Id. at *6. Ultimately, it appears the court has determined this was some version of an asset purchase  (even though neither party provided a copy of the asset purchase agreement), so the liability stayed with AANH.  This appears to be correct, but it’s hard to know without that document.
 
And it is hard to know what the obligations are when additional relevant possible parties are.  The court further determined that the potential successor entities, “YNHH and Yale University are two separate corporate entities with separate governance structures.”  Except there is no statement as to what types of entities they are, where they were formed, or anything else other than a reference to testimony from a witness who said YNHH was a separate entity from Yale University.  It would seem to me that some of the related documentation would be valuable, but the court has spoken.  
 
And fair enough. But I have to correct this: “The HSR School was not a limited liability corporation company (“LLC”), private professional corporation (“P.C.”), or other legal entity.”