Business Law

Facebook’s Last-Minute Prospectus Change and Resulting Litigation

05-23-2012 1:55 PM with no comments

Less than three full business days after Facebook’s initial primary offering (IPO), its new shareholders have a class-action suit filed.  The shareholders are suing Morgan Stanley, the Facebook IPO’s underwriter for its failure to disclose to ALL shareholders that the Facebook Prospectus and Registration Statement (S-1) were amended at the last minute. The last minute amendment contained material information.  And the failure to disclose material information prior to selling shares in the company is a violation of the 1933 Securities Act.

The registration statement and prospectus were amended to reflect that most of the Facebook users are accessing their Facebook pages through their phones.  Those who advertise on Facebook, which is the major source of Facebook’s revenue, have data indicating that phone users do not generate advertisers dollars.  Those who go to their Facebook pages online are more likely to click on ads or discover and buy a new product.  The disclosure had to be made because there was risk associated with the company’s major source of revenue. You can read the Facebook S-1 registration statement here.

The prospectus and registration statement must disclose sources of revenues, risks going forward associated with those revenues, and any changes in revenue potential.  You can read an annotated version of the Facebook prospectus here. In the complaint filed in this shareholder suit, the lawyer for the shareholders (who represented Enron shareholder in their recovery of billions for their losses) alleges that the problems with ad revenue were not disclosed until an amendment was filed just days before the IPO and that the underwriters, including Morgan Stanley, were aware of the material information but did not tell all investors.  The complaint alleges only a selected few were told of the information in the amended filing materials.

Under the 1933 Securities Act, a shareholder can recover for the failure to disclose information if it is material, i.e., would have affected their decision to buy the stock.  The shareholders need not have read and relied upon the registration statement.  If there is information in the registration statement and prospectus that is materially inaccurate, shareholders are permitted to recover.  Those who sign the registration statement or provide information for the registration statement are liable to shareholders under both Section 11 and Section 12 of the 1933 Act. The underwriters as well as the company itself have liability under the 1993 Act because their names were on the registration statement and prospectus.

 Discussion Starters

1. Who is liable if a registration statement and/or prospectus contains false information?

2. What type of information would be critical to an investor?

3.  What kind of types of damages would the new Facebook shareholders have? 

Posted by Marianne Jennings

Congress Told Us to Do What?

05-22-2012 6:18 PM with no comments

The Dodd-Frank Act was passed in 2010. In it, Congress set a statutory deadline of April 17, 2011 for the Securities and Exchange Commission to issue a rule under Section 1504. It mandates that oil, gas and mining companies must disclose payments to foreign governments. That is, when U.S. companies do oil or mineral work in foreign countries, they must report who received payments. The intent is to reduce payments for corrupt purposes. Firms that do not comply could lose their public listing on stock exchanges and suffer other penalties.

More than a year after the deadline, the SEC has not issued a final rule. It did issue a proposed 102 page rule that received thousands of comments, but it has not issued a final rule. Oxfam has filed suit in federal court, requesting the court to force the SEC to issue a rule since Congress mandated that the rule exist more than a year ago.

Much of the squabbling about the rule is how far down the chain must a firm go? That is, suppose Exxon pays foreign companies for work they do. Those companies pay other companies that make payments to corrupt foreign officials. Should Exxon be required to know where every dollar goes? Yes, claim some advocates, such as Oxfam, which wants to reduce corruption. No, contend opponents; a company has little control over what happens once money leaves their hands.

Further, contend some companies, if a firm is required to provide detailed accounting of expenditures, that will give foreign competitors insights into methods of operation that are best kept secret.

Discussion: Will corruption in foreign countries be reduced by publishing such information? Will foreign firms that have no such reporting requirements have an advantage in getting contracts from foreign governments?

Posted by Roger Meiners

Inflated Employee Travel Expenses: Ron Paul and Double-Dipping

05-17-2012 12:43 PM with no comments

A Texas Libertarian organization, the Liberty Committee, is seeking reimbursement for almost $20,000 from Ron Paul because Mr. Paul billed the Liberty Committee, as well as taxpayers (through his position as a member of the House) for the same airplane tickets.  Roll Call, the publication on Capitol Hill, found 26 flights from 1998 to 2005 for which several layers of documentation show double payments. However, in early May, 2012, the Liberty Committee audit found a new group flights that were submitted to two sourcecs for payment and were reimbursed twice.  The total number of double reimbursement claims now stands at 52.

Notes on Mr. Paul’s credit card bills indicate indicate that Mr. Paul billed the Liberty Committee, his campaign, his political action committee and another nonprofit, the Foundation for Rational Economics and Education, for plane tickets and other expenses for which he also billed taxpayers.

The Liberty Committee is seeking reimbursement and considering suit to recover the payments.  However, the Liberty Committee noted that it may be past the statute of limitations for bringing suit. However, the audit was not done until earlier in 2012 and the demand for payment was made at the time of the discovery.  Whether the suit will be barred by the statute of limitations depends upon the basis of the claim.  Contracts statutes of limitations are generally four year, measured from the time of the breach.  Claims based on fraud are measured from the time of the discovery.  To be able to establish a claim in fraud, the Liberty Committee would have to show that the reimbursement was sought knowing that there was a double submission.  Given the travel activity of Mr. Paul and the complexity of representatives’ travel, it might be difficult to prove the intent to defraud. Mr. Paul did respond to the Liberty Committee by indicating, “Happens all the time.”

Travel expenses continue to be a headache for companies because employees often try to obtain reimbursement for items not actually documented or documented falsely. Auditors spend a great deal of their time on verifying those expenses.  Most companies make inflation of travel expenses a termination event.  That is, inflating or falsifying travel expenses is grounds for termination. However, for Representative Paul, the House Ethics Committee statute of limitations has run and it will not be investigating the double-billing. 

Discussion Starters

1.      Is this a form of embezzlement?  Is it theft?

2.     Why do you think employees try to inflate their travel expenses?

3.     How do employers handle terminations for inflated travel expenses?  

Posted by Marianne Jennings

Skechers Misrepresents Its Sneakers; Alas, No Pain, No Gain

05-16-2012 11:42 PM with no comments

Apparently physical fitness trainers speak the truth when they say there is no substitute for exercise when seeking to lose weight. Attempts by Skechers USA to suggest otherwise have been silenced by the Federal Trade Commission (FTC), a federal agency whose authority includes prevention of fraudulent, deceptive, and unfair business practices.  The agency files a complaint when it has “reason to believe” that a company is acting illegally and the public will benefit by pursuing the wrongdoer.   

Skechers sold an athletic shoe called the Shape-Up.  The company represented that the shoe, by the mere wearing of it, could help people lose weight, improve heart health, and strengthen and tone their buttocks, legs and abdominal muscles.  If only it were true!!   

In addition to the FTC’s complaint, attorneys general (chief law enforcement officer of a state, charged with protection of citizens) from 42 states were investigating Skechers for false advertisements and deception. Such multistate investigations are not unusual where a company engaging in fraudulent practices sells its products in many states.   

Among the misleading promotions used by Skechers was the phrase, “Get in shape without setting foot in a gym.”  Another objectionable aspect of the promotional campaign related to an endorsement from a chiropractor who recommended the shoe based on an “independent clinical study.”  Turns out, the chiropractor is married to a Skechers marketing executive, and the study was underwritten by Sketchers.  Oops!

Further, the FTC accused the company of cherry-picking the results, rather than presenting a balanced summary of the outcome.  Click here for information about the case on the FTC website.

Another version of the ads proclaimed that the newest way to burn calories and tone muscles was to tie your Shpae-up shoe laces (!).  Starring in the offending ads were Kim Kardashian and Brooke Burke, co-host of Dancing with the Stars.  The Kardashian ad was featured in a 2011 Super Bowl commercial. 

This case is part of an ongoing effort by the FTC to stop exaggerated advertising claims by numerous companies. 

A pair of these supposedly wonder shoes costs $100.  To settle the case, Skechers has agreed to pay $40 million, much of which will be used for refunds. Do you own a pair?  You might want to file for a refund.  You can do that at www.ftc.gov/bcp/cases/skechers/index.shtm.

 Additionally, the settlement prohibits Skechers from making any of the following claims unless they are truthful and supported by scientific evidence: claims about strengthening, claims about weight loss, claims about any other health or fitness-related benefits. The settlement also prevents Skechers from misrepresenting any studies. 

A quote from the company’s chief financial officer provides insight about the impact a multistate investigation and lawsuit can have on a business. Said the CFO, “Skechers could not ignore the exorbitant cost and endless distraction of several years spent defending multiple lawsuits in multiple courts across the country.”

 For newspaper coverage of the story, click here.

Discussion Question

1) Why is the FTC so concerned with misleading ads?

2) How can a company spare itself the expense and effort of defending a class action lawsuit?

Posted by Karen Morris

Village People's Lead Singer Exercises Newly Vested Copyright Benefit -Termination Rights

05-15-2012 12:48 AM with no comments

So, how many parties have you attended where the dance floor was mobbed when the disc jockey played “YMCA” by the Village People? That song and 32 others by the flamboyantly-dressed disco group were the subject of a newly-accrued copyright claim called termination rights.  A provision in the Copyright Act of 1978  gives recording artists and songwriters the ability to reacquire rights to their work 35 years after transferring the copyright to a recording  company.    

The rule is intended to protect authors and artists in situations where the publisher has ceased promoting the work but it still has an interested audience and thus retains some market value.   

Three members of the Village People each of whom wrote parts of the group's songs, transferred long ago their copyrights to their music publishers, Scorpio Music and Can’t Stop Productions.  The termination right has been asserted only by the lead singer, Victor Willis.  He was the band member dressed as either a police or naval officer.  Among the other songs involved in the lawsuit are “In the Navy” and “Go West”. Some demand for the songs continues for use in films, television shows, ring tones and public performances (all those parties!). 

The publishers resisted Willis’ attempts to reclaim his rights.  Scorpio Music and Can’t Stop Productions went to court seeking a declaratory judgment (a court order clarifying the legal position of the litigants) that Willis was not entitled to the rights.   

The publishers’ primary argument related to the fact that Willis alone among the three song writers sought to exercise his right under the Copyright Act.  The recording companies claimed that, when a work has multiple authors, a majority of them must seek termination for the new right to apply. The court rejected this argument as “not persuasive” and “lacking merit.”  Instead, the court held any one of several joint authors can alone terminate his own grant of copyright. Scorpio Music v. Willis, 2012 WL 1598043  (Ca., 5/7/12).   

The publishers also challenged the share of the copyright Willis would receive as a result of exercising his termination rights.  While his ownership share of the copyright to each song was one-third, he receives a lesser percentage of the income.  His financial share is 12-20% of the gross receipts (the percentage varies from song to song). The recording companies claimed that, if Willis is entitled to return of any rights,  the percentage of ownership he should receive back should be limited to the percentage of compensation he received.   The court rejected this argument, concluding it too “lacked merit”.  Instead, Willis is entitled to reclaim his full one-third interest.  For more information, click here.  For coverage by Rolling Stone magazine, click here.

Since this is the first case decided under the newly-applicable section of the Copyright Law, the decision will be precedent  (an earlier ruling that guides later decisions) for subsequent disputes.

Discussion Question:

1) By exercising termination rights, what benefits will accrue to copyright owners?

2) What factors would an artist likely consider when deciding whether to exercise termination rights?

Posted by Karen Morris

What’s All This About $2B, Hedges, the Volcker Rule, and Chase?

05-14-2012 3:37 PM with no comments

Even if you don’t know beans about Wall Street and high finance, you know something big is going on when Chase, its CEO, and some hedging activity makes the top story in every national newspaper. Part of the newsworthiness of the $2 billion plus in losses that Chase experienced was that its CEO, Jamie Dimon, had been so vocal in his opposition to the Volcker Rule, a regulatory proposal that was required under the Dodd-Frank Act (Wall Street Reform and Consumer Protection Act).  Simply stated, the Volcker Rule would prohibit banks from making the kinds of hedging bets that Chase made that resulted in the losses.  Those forms of trading would, under the proposed rules, be limited to non-bank entities. For a simple explanation of the Volcker rule, go here. Dodd-Frank includes time limitations for the passage of require regulations and the end of that time period is fast approaching even as the Chase loses are being revealed.

Hedging is an activity used by banks to protect themselves against a downturn, something that would result in losses from the write-downs or write-offs of the loans they have made.  At Chase, the bank attempted to get some insurance against this risk by purchasing credit default swaps (based on an index of corporative derivatives) because it was nervous about the debt situation in Europe.  However, European nation risk began to ease up and Chase felt it no longer needed as much insurance.  So, Chase began selling off its swaps.  Turns out, Chase sold too quickly.  In April, European nation debt defaults stepped up and Chase was positioned on the wrong side and with so much that it could not find a way to hedge its losses.  All of this was kicking in for some time, but Thursday, May 11, 2012, was when Chase had to make its debt problems public and reveal the $2 billion loss.   

The portion of Dodd-Frank that required a change in swaps market participation by banks as well as the proposed rule itself have resulted in intense debate.  Mr. Dimon was the lead opponent to the Volcker rule and he carried great credibility because Chase was not positioned in 2008 in the types of hedging instruments that felled so many Wall Street banks. Mr. Dimon wanted to allow banks flexibility in their hedging activity.  Regulators argued that the exposure and resulting bank failures were too great a risk and wanted such tradining limited.

Chase did not require a bail-out in 2008 when the market and many banks collapsed and its asset base remained strong. However, Chase’s recent fall, that was the result of bad hedging activity in its investment unit operations and not its banking operations, has cost Mr. Dimon his regulatory credibility.  As he said, “We have egg on our face.”

All of the other major banks’ share prices felt the impact of the Chase hedging losses because of the concerns about the regulation now going through as is, thus limiting bank’s ability to hedge. Despite all the hearings, public comments, and media debates, the problems at Chase seem to almost guarantee the passage of the Volcker rule. 

Discussion Starters

1.      Who would have proposed the Volcker rule?  What agency?

2.     What purpose did Mr. Dimon’s public discourse on the Volcker rule play?

3.     Is there any way for the bank to challenge the rule if passed?

Posted by Marianne Jennings

"Elsewhere" Means Elsewhere

05-12-2012 4:03 PM with no comments

Actor Kevin Costner planned to build a high-end resort near Deadwood and Rapid City, South Dakota called The Dunbar. The plan for the thousand acre piece of property was for a luxury hotel, a golf course, and winter sports. An old fashion train might run visitors to and from the airport. Apparently he got the idea while filming the movie “Dances with Wolves” in the area.

At some point during planning for the resort that has not been built, Costner met Peggy Detmers. She is an accomplished sculptor. They signed a contract in 2000 for her to design, cast, and put in place the sculpture seen above. It depicts, larger than life, three Lakota warriors chasing bison over a cliff (a “buffalo jump” that killed or disabled the bison).

Detmers agreed to do the work for $310,000 which was a quarter of what she said she would normally get for such a large job, as the work took years. She accepted the low price as she would earn extra income from the sale of small reproductions to be sold at the resort.

Before Costner gave up, at least for a while, on the resort, in 2003 he built “Tatanka:Story of the Bison”—a visitor center near Deadwood that displays the sculpture. Detmers says she was told the visitor center was just the beginning—the resort would soon be built. Eventually she gave up hope and sued for breach of contract.

The focus of the litigation was on this paragraph of the contract:

“Although I do not anticipate this will ever arise, if The Dunbar is not built within ten (10) years or the sculptures are not agreeably displayed elsewhere, I will give you 50% of the profits from the sale of the one and one-quarter life scale sculptures after I have recouped all my costs incurred in the creation of the sculpture and any such sale. The sale price will be at our above standard bronze market pricing. All accounting will be provided. In addition, I will assign back to you the copyright of the sculptures so sold (14 bison, 3 Lakota horse and riders.”

The contract also stated: “We will locate a suitable site for displaying the sculptures if The Dunbar is not under construction with three (3) years after the last sculpture has been deliver to the mold makers.” Since construction did not start within three years, they agreed to locate them at the site called Tatanka that is now the visitors’ center. When that happened in 2003, the parties seemed to be moving forward, but Detmers became frustrated by lack of progress and sued Costner for breach in 2008. She sought an order requiring Costner to sell the sculptures with her to get 50% of the proceeds.

At trial, Detmers objected to the use of parol evidence, claiming the contract was unambiguous. The court agreed there would be no parol evidence. The issue was if the schulptures were “agreeably displayed elsewhere” as called for in the contract.

The trial court held yes—since The Dunbar had not been built, the parties agreed to place the sculptures at Tatanka, so the contract was fulfilled.

On appeal, Detmers claimed Tatanka was only temporary since she had been promised that The Dunbar would be built. But, the South Dakota Supreme Court held: The plain words of the contract unequivocally provide that if The Dunbar was not built or the sculptures were not agreeably displayed elsewhere, then Detmers would be entitled to the relief described.” The Dunbar was not built and Tatanka was “elsewhere” so the contract has been fulfilled.

Discussion: Is the key clause in the contract unclear? How should it have been written to cover the possibility of the resort not being built?

Posted by Roger Meiners

Waxing Poetic

05-11-2012 7:17 PM with no comments

Whether you drink it or not, you have probably seen an ad for Maker’s Mark bourbon which has a distinctive red wax seal.

The company began using the red wax seal in 1958; it trademarked the wax seal in 1985. Diageo introduced Jose Cuervo Reserva tequila bottles with a red was seal in 2001. Maker’s Mark sued, claiming trademark infringement.

Diageo contended that consumers would not be confused by the presence of the red wax seal on its bottles. Tequila and bourbon are not the same booze. Maker’s Mark may own the wax seal for bourbon, but not for other liquors.

The Sixth Circuit Court of Appeals disagreed, finding that there is a likelihood of confusion. The factors considered were: the strength of the plaintiff’s mark, the relatedness of the goods, the similarity of the marks, evidence of actual confusion, the marketing channels used, the defendant’s reason for choosing the mark, and the likelihood of expansion of product lines.

The wax seal is not functional—it is just decoration. If it were functional, it would be invalid. Trade dress, a part of trademark law, involves product features that are non-functional but are recognized on sight by consumers, thereby creating value.

After all, the court noted, “all bourbon is whiskey, but not all whiskey is bourbon.” The court helpfully explained that bourbon tastes different than Scotch because it is made from corn, a crop not known to Scotland, where rye was used to make Scotch. The term “bourbon” comes from Bourbon County, Kentucky, names in honor of the Bourbons, the royal family of France.

Discussion: How famous do you think the non-functional appearance of a product should be before it achieve trade-dress status? Should Maker's Mark be able to stop usage of red seal waxes on non-alcoholic products?

Posted by Roger Meiners

Whistleblower Claim Fails--As Usual

05-10-2012 7:04 PM with no comments

Front running is an illegal practice when a stock broker executes trades on a security in his own account when taking advantage of knowledge of pending orders from customers. That is, the customer has placed a trade order, the broker, before executing the order either buys or sells on his own account given the belief that when the customer’s trade is executed the price of the security will rise or fall in a direction that generates an immediate gain for the broker’s account.

Joseph Sullivan was a compliance officer for the hedge fund Peconic Partners. He confronted his boss, Peconic CEO William Harnish about engaging in front running to the detriment of firm customers. Harnish fired him.

Sullivan then sued for wrongful termination for his role as a whistleblower under federal securities law. However, responding to his complaint, the SEC did nothing. Hence, Sullivan could not claim status as a securities whistleblower.

The highest court in New York agreed, 5-2, with the lower courts, that Sullivan had no claim. At common law he was an at-will employee. Since the SEC found no wrongdoing, he could not claim whistleblower status under federal law.

In dissent, one judge said that the court turned “a blind eye to the potential for abuses that may be committed by unscrupulous financial services” by failing to protect a compliance officer who was trying to exercise his duty.

Discussion: SEC oversight of securities professionals has long been claimed to be lax—there are simply too many brokers for the SEC to diligently investigate every claim. The SEC did not rule that there was no front running, it simply dropped the matter. Where does that leave prospective whistleblowers?

Posted by Roger Meiners

Wal-Mart Bribery Accusations Lead to Shareholder Derivative Suit

05-09-2012 10:27 PM with no comments

Per an earlier post in this blog, Wal-Mart is under investigation by the Securities and Exchange Commission and the United States Justice Department for possible bribery in Mexico.  The discount retailer has a strong presence there.  Money was allegedly paid to secure necessary permits, zoning approvals, reductions in fees, and other similar purposes.  The company now faces a derivative lawsuit from a large shareholder – the California State Teachers’ Retirement System.  It owns 5.3 million shares worth approximately $313 million. 

A derivative lawsuit is one brought by shareholders in the name of a corporation when the company suffers a wrong and the board fails to seek redress.  The procedure is of particular importance when the misconduct is committed by the corporate directors and officers since they are not usually inclined to sue for injury they caused.  Indeed, a derivative lawsuit is frequently brought following accusations of corporate officers’ wrongdoings.   Defendants in the Wal-Mart case include current directors, several executives and some former board members and officers. 

When shareholders bring a derivative suit, they act as protectors of the corporate entity.  Any money recovered benefits the corporation’s treasury, not the shareholders personally.

The pension plan’s case against Wal-Mart seeks more than damages that might result from the bribery investigation.  Another objective is a commitment from the company to upgrade its corporate governance and internal controls, and to utilize outside talent to oversee and ensure compliance with regulations and the company’s own ethics code. Said the CEO of the pension fund, “The severity of this occurrence demands that shareholders step into the role of the board, and act essentially in their stead, to protect the interests of shareholders. . . . Our connection to this stems from ensuring that there is a responsible board of directors representing our interests day in and day out, overseeing compliance, overseeing a code of ethics.”  For more information, click here.

The fallout from the Mexican bribery claims is broader than the derivative suit. The company’s annual meeting is scheduled for June 1, 2012.  It is predicted to be antagonistic.  Another large shareholder/pension plan that is New York City-based intends to vote its shares against five directors seeking re-election. They include the current and past CEOs, Michael T. Duke and H. Lee Scott, Jr., as well as members of the board's audit committee.  In 2005, principals of that pension plan had  attempted to convince the Wal-Mart board to increase its monitoring of legal and regulatory practices in the wake of reports of illegal hiring of undocumented immigrants and violations of child labor laws. Wal-Mart’s board declined to adopt the pension plan's recommendation.  For more information, click here.

I recommend marking June 2^nd on your calendar to check the news for updates on Wal-Mart’s annual meeting.

Discussion Questions:

1) What would likely be the reaction of a company's board of directors to the commencement of a derivative lawsuit?

2) What do you think might occur at Wal-Mart's shareholder meeting on June 1st?

Posted by Karen Morris

Celebrity Bankruptcies: From Millions to Nada

05-09-2012 11:42 AM with no comments

With actor Gary Busey’s declaration of bankruptcy, we gain some insight into what causes bankruptcy and the end results for those who proceed through Chapter 7 liquidation proceedings.  Mr. Busey’s filing indicates that he has $50,000 in assets and $1,000,000 in debts. Other celebrity bankruptcies offer additional insights as well as some good instruction on the process and impact of bankruptcy.

·       Michael Vick, who was one of the highest paid NFL players, filed for bankruptcy in 2008, from prison.  Mr. Vick could not afford to pay his bills as well as the fines that were imposed when he entered a guilty plea on charges related to a dog-fighting operation.  The former Atlanta Falcons player would not have the fines discharged in bankruptcy, but he was relieved of his other debts related to his personal property.

·       MC Hammer, the “Hammer Time” mega star of the early 1990s declared bankruptcy in 1996 with $9.6 million in assets and $13.7 million in debts.  Mr. Hammer’s problem was that he had salary costs of $500,000 per month in order to maintain his entourage.

·       Mike Tyson, the champ, facing sexual harassment charges. and the lawyer fees that go with them, declared bankruptcy in 2003.  Today, Mr. Tyson says that he is broke but happy.

·       Willie Nelson, Country Western singer, declared bankruptcy in 1990, a necessary result of his owing $16.7 million in taxes because the IRS won its case on Nelson’s tax shelters, which were fraudulent.  Mr. Nelson also said that he had too many hangers-on that he was supporting.  Mr. Nelson was not able to get all of his tax debt discharged because the last three years survive bankruptcy.  That is, not all tax debt are fully dischargeable and there is no discharge of those tax debts that resulted from fraud.

·       Walt Disney, the founder of Disney Films, Disneyland, Disney World, and Disney Entertainment, declared bankruptcy in Kansas City before he moved to Hollywood.  Mr. Disney ran a small animation studio there and when his only customer went bankrupt, Mr. Disney tried to continue on, living in his office and eating only canned beans.  He eventually gave up, declared bankruptcy, and moved to Hollywood, where his animation skills were welcomed and, as a result, he founded an empire

·       Sir Elton John is the quintessential profligate spender whose purchases landed him in bankruptcy.  By the time he declared bankruptcy in 2002, Sir Elton had credit card charges of $400,000 per month.  His total debt per month was $2,000,000.  He was discharged from most of his credit card and contract debt.

·       Sinbad, the comedian, failed to pay taxes on his earnings from Jingle All the Way. California’s Department of Revenue filed a $2.5 million lien on his home and he and his wife declared bankruptcy shortly after in 2009.  Again, California will be paid, but the comedian and his spouse are relieved of other debts.

·       Gary Coleman, the 4’8” comedian/actor, simply could not pay all the medical bills related to his various health problems.  He was once worth $7,000,000, but declared bankruptcy with $72,000 in debt and no assets.  The actor passed away in 2010 and there is a great deal of dispute among relatives over his estate, which grew following the bankruptcy.

Discussion Starters

1.      What are the causes of bankruptcy?

2.      What types of debts are discharged in bankruptcy?  Which are not?

3.      What advice would you give to celebrities and athletes about management of their income and bills?

Posted by Marianne Jennings

What Tangled Webs We Weave

05-08-2012 10:19 PM with no comments

Three Cups of Tea (2007): “In 1993 Greg Mortenson was the exhausted survivor of a failed attempt to ascend K2, an American climbing bum wandering emaciated and lost through Pakistan's Karakoram Himalaya. After he was taken in and nursed back to health by the people of an impoverished Pakistani village, Mortenson promised to return one day and build them a school. From that rash, earnest promise grew one of the most incredible humanitarian campaigns of our time-Greg Mortenson's one-man mission to counteract extremism by building schools, especially for girls, throughout the breeding ground of the Taliban.Award-winning journalist David Oliver Relin has collaborated on this spellbinding account of Mortenson's incredible accomplishments in a region where Americans are often feared and hated. …”  (Amazon)

Three Cups of Deceit (2011): “Greg Mortenson, the bestselling author of Three Cups of Tea, is a man who has built a global reputation as a selfless humanitarian and children’s crusader, and he’s been nominated for the Nobel Peace Prize. But, as Jon Krakauer demonstrates in this extensively researched and penetrating book, he is not all that he appears to be.
 Based on wide-ranging interviews with former employees, board members, and others who have intimate knowledge of Mortenson and his charity, the Central Asia Institute, Three Cups of Deceit uncovers multiple layers of deception behind Mortenson’s public image. …” (Amazon)

Best-selling author (and a large contributor to Mortenson’s foundation for schools in rural Pakistan, such as the one pictured here) Jon Krakauer served as whistleblower about the story told in the best-selling book, Three Cups of Tea. Many supporters of Mortenson’s foundation were outraged. Krakauer documented that parts of Mortenson’s story (told with co-author David Relin) were not true and, likely more enraging, that the foundation spent more money on travel, including chartered jets, than on school construction.

Among the hell that broke loose, especially in Montana, where Mortenson lives, was a suit filed in federal court by two members of the Montana legislature against Mortenson for fraud, RICO (Racketeering) violations, and unjust enrichment. The complaint evolved into a class action against the authors and publisher.

Can an author and publisher be sued for saying a story is true when it is not all as presented? Defendants claimed First Amendment protection against the suit. The judge agreed and dismissed the suit. The court noted that it “cannot accept as true, and as a matter of sufficiency of pleading, plaintiffs’ conclusory state that 'by writing, publishing, advertising, marketing and promoting the books as nonfiction and true stories, the characteristics of said books became an implied contractual condition of sale.”

Discussion: If copyright holders could be sued for false information that earned nothing more than the sale of a publication, what would be the effect of such a rule? What about the claim that the book enticed people to donate to the foundation?

Posted by Roger Meiners

Résumé Trip-Ups: Yahoo’s CEO and His Computer Science Degree, Not

05-07-2012 11:54 AM with no comments

Scott Thompson, made CEO of Yahoo in late 2011, has a little problem with his résumé. It states that he has an accounting and computer science degree from Stonehill College, earned in 1979.  One slight problem, however.  Stonehill College did not offer a degree in computer science until four years later.  Always nice to be ahead of your time, but not ahead of the existence of a degree.  One of Yahoo’s investors (holding 5.8%), the hedge fund, Third Point, alleged that Mr. Thompson did not have a computer science degree, as disclosed on the company’s website as well as in its SEC 10K report.  Mr. Thompson says that the allegation is the result of a “personal vendetta” by the CEO of Third Point, Daniel Loeb. You can read more of the Yahoo and observer scuttlebutt on the controversy at Don Reisinger’s column on CNET. There is a proxy battle going on at the moment, and Mr. Loeb is seeking a position on the board.

The 54-year-old Thompson opted initially to not address the issue, either publicly or with Yahoo employees who were with him at a series of strategic meetings for the company.  The board conducted an investigation and Mr. Thompson resigned, noting that he was battling thyroid cancer. Mr. Loeb and two other outsiders will take their positions on the Yahoo board today.  Some board members and employees felt that it was not a good time to remove the relatively new CEO.  Other board members and employees believed that Mr. Thompson’s credibility was damaged and that morale is at an all-time low. Interestingly, you can view a Yahoo! video on the issue here. Patti Hart, the director who shared the search committee, has also resigned from the board.

The board faces several issues with the allegation.  The first, of course, is whether to retain Mr. Thompson as CEO.  Mr. Thompson has significant computer experience with PayPal, as its president, and VISA. Executives’ employment terms and conditions are established by the board, and the board is accountable to the shareholders because the shareholders vote for the board candidates each proxy year. The second issue is the need for filing an 8K statement with the SEC to correct the credentials if the investigation substantiates the allegation. The third issue is the company’s credibility in the market place, both in terms of the new CEO’s credentials as well as in the stability of the company. Yahoo’s stock has been hovering at $10 to $20 per share for the last four years.  Microsoft had wanted to acquire the company for $33 per share, so there is some shareholder dissatisfaction. The fourth issue relates to the ethical culture within Yahoo.  Generally when companies discover that employees have misrepresented their qualifications via a degree that really did not exist, they are terminated. If a different standard us applied to the Yahoo CEO, particularly with a qualification as sensitive as a computer science degree at a website company, employees will react in a number of ways including a loss of respect for the CEO, violation of company rules, and, in some cases sabotage and theft as a way of seeking some form of justice for the perceived inequity.  The final issue is control of the company, something that Mr. Loeb would win because the board hired Mr. Thompson and was resposible for vetting him and checking his background.

Problems with  résumés in the executive suite have been steady.  The Wall Street Journal documents the following examples:

Company                         Executive               Title                       Problem

Bausch & Lomb                 Ronald Zarrella        CEO                       No MBA

RadioShack                      David Edmondson   CEO                       inflated degrees

MGM Mirage                     J. Terrence Lani      CEO                       questions about degrees

Herbalife                           Gregory Probert      COO                      Embellished degree         

Veritas                              Kenneth Lonchar     CFO                       No MBA

A.T. Kearney                     Gene Shen             CEO                       Exaggerated  academic credentials and work experience

CSX                                 Clarence Gooden    CCO                       Misrepresented academic credentials                       

Amir Efrati and Joann S. Lublin, “Résumé Trips Up Yahoo’s Chief,”  Wall Street Journal, May 5-6, 2012, p. A1. 

Discussion Starters

1.      Is a CEO an employee at will?

2.     If Mr. Thompson had not resigned, what signals do employees receive about ethics at Yahoo?

3.     If you were an employee and had a computer science degree, how would you react?

Posted by Marianne Jennings

SEC Raises Limit on Cheap Arbitration Proceedings

05-06-2012 7:25 PM with no comments

Earlier this year the Financial Industry Regulatory Authority (FINRA), the non-governmental regulatory authority over the securities exchanges, filed a request with the SEC, which oversees FINRA, to amend FINRA’s Customer and Industry Codes of Arbitration Procedure.

FINRA allows “simplified arbitration” for customer disputes. Such matters may be handled entirely by paper. There is no need for the parties to appear in person or have their representatives appear. FINRA will resolve the dispute based on the paper filing. The cap for such disputes was $25,000. FINRA requested raising the cap to $50,000 for such simplified and expedited matters and, after considering comments filed during the review periof, the SEC approved FINRA’s request on May 3. Such matters are handled by one arbitrator. If the amount in dispute is between $50,000 and $100,000, one arbitrator will handle the matter unless one of the parties requests three arbitrators. Disputes for more than $100,000 are handled by a panel of three arbitrators.

The simplified arbitration has lower process fees and lower preparation fees. Customers who file complaints need not hire an attorney and can prepare their own argument. If the unhappy client of a securities firm wishes to use an attorney or appear in person, that choice is available.

FINRA handled 5,680 arbitration cases in 2010; customers prevail in about half of the cases brought. Thousands of possible arbitrators are offered to the parties. Most accounts at financial firms, such as Fidelity or Merrill Lynch, have arbitration requirements. Mediation is also an option as the FINRA website explains. Unhappy investors must use arbitration in case of a dispute the Supreme Court has affirmed. FINRA works to keep the costs low assure that it is not seen as a tool of the industry.

Discussion: Lawyers are lobbying to allow customers to sue instead of be required to go to arbitration. What is in it for them?

Posted by Roger Meiners

This Cerveza Is Not for You

05-05-2012 11:21 AM with no comments

State and local lawmakers constantly try to think up ways to stick non-residents with higher taxes than are paid by residents and ways to benefit local businesses compared to non-local businesses. For example, airports routinely charge higher taxes on cars rented at the airport than cars rented outside of the airport, since most people who rent cars at airports are not local residents. If not for the Commerce Clause, we would likely have many more such tactics.

Puerto Rico employs such a scheme by imposing higher taxes on beer from large breweries than it imposes on beer from small breweries. That is, local breweries pay about half the tax per gallon of beer than does Budweiser or Coors for the beer they haul to the island. Compañía Cervecera de Puerto Rico, maker of Medalla brand beer, is the biggest beneficiary of the tax structure.

Coors sued, contending that the tax was a violation of the Commerce Clause. The tax effectively discriminated against out-of-state beer makers compared to the tax rate imposed on local beer makers. (Puerto Rico is a commonwealth, not a state, but the status is much the same on this issue.)

After bouncing around in federal court for six years, the First Circuit Court of Appeals held that Coors may not challenge the constitutionality of the tax in federal court. It must attack the tax policy of the Puerto Rico legislature in state court in Puerto Rico.

The basis for the decision goes back to a 1937 federal statute that holds that federal district courts shall not “enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State."

That is, Coors may not challenge the constitutionality of the discriminatory tax structure in federal court. It must go to court in Puerto Rico (which has been ignoring this issue for 35 years, it is asserted). If Coors can finally force resolution of the issue through the Puerto Rico court system, if not pleased with the results, then it can appeal to the U.S. Supreme Court.

Discussion: Are state courts as likely to strike down state statutes as unconstitutional as are federal courts?

Posted by Roger Meiners