• So Near and Yet So Far; Worker on Sick Leave Seeks Share of Lottery Jackpot

    You no doubt have heard about groups of workers who pool their money and buy lottery tickets, thereby improving their odds of winning.  Occasionally these groups luck out and win a jackpot.  So it was for a group of colleagues in Youngstown, Ohio who each paid $5 monthly and then crossed their fingers hoping for a win.  Luck was a lady.  They struck it rich with a $99 million jackpot. 

    Not sharing in the joy was a fellow worker who had been a regular contributor to the group for eight years until he went on sick leave due to a bad back three months before the big win. He did not ante up his $5 for any of the three months he was away.  When the group distributed the winnings he was not allocated a share. He is now suing for his claimed portion which would equal $2 million.  He alleges an unwritten rule that the group would cover the monthly payments for workers out sick or on vacation. 

    Anytime parties form a joint venture, which is a partnership for a limited purpose, they should enter a contract to address the various issues involved with the pursuit.  For a lottery pool, the contract should address such issues as the amount and frequency of required contributions, who will be responsible to collect the money and buy the tickets, where the tickets will be maintained, how winnings will be divided, and rights, if any, of members who miss a payment.   

    The contract should be in writing and signed by all the members. Oral contracts are hard to prove.  If the parties recall the terms differently, or if one denies the existence of the contract, a lawsuit can result.  A writing eliminates the proof problem.  The contract says what it says.

    When there is a question about the contents of a written contract, courts follow accepted rules of contract interpretation. The first such rule is that the court will enforce the intention of the parties as evidenced by the terms of the agreement.  Another rule is - if the agreement is not ambiguous, the court will enforce the contract terms as they exist.

    Concerning the winning Ohio workers, they presumably had an agreement requiring each member to contribute $5 a month and in return, would be entitled to an equal share of any winnings.  Such a term is clear and enforceable.  If the parties intended that occasional failure to pay the $5 fee would not negate a member’s right to participate in winnings, they could have so stated in the agreement.  Absent such a provision, the parties’ intentions are clear – pay money for a share in the winnings.  Thus, the sick worker (who is now no doubt sicker still over this circumstance) who did not make his $5 payment, would not be entitled to a share of the winnings. 



  • Trustee Attacks Deloitte for Failure to Uncover Massive Fraud

    Taylor, Bean & Whitaker (TBW), a mortgage company based in Ocala, Florida, shut its doors in 2009 after federal agents raided its headquarters. Seven executives were convicted of federal criminal charges and its chairman, Lee Farkas, was sentenced to 30 years in prison.

    The bankruptcy trustee for TBW has now sued the company’s auditor, Deloitte Touche, for $7.6 billion, claiming that fraud at TBW had gone on since 2002 and should have been uncovered by Deloitte. The suit claims that Deloitte’s certification of TBW’s books gave it the appearance of a legitimate mortgage business when, in fact, it was selling fake or overvalued mortgages, misstating liabilities, and hiding overdrawn bank accounts.

    Of course, when a firm collapses, those who lost money go searching for deep pockets, which may include the auditors. They usually have a successful defense of not being aware of what was going on, given the information they were prevented. In his case, plaintiff notes that seven years’ worth of information should have made the scam clear and Deloitte, the world’s largest accounting and consulting firm, carelessly overlooked red flags.

    It may be noteworthy that the case was filed in Florida, as the defenses allowed Deloitte in that state may be weaker than in other jurisdictions. In some Florida cases, the auditor has been held to have a duty to detect fraud. In most jurisdictions, since the company that was involved in the fraud is the party in bankruptcy, it cannot complain that it was involved in fraud previously.

    Discussion Questions:

    1.      Is it reasonable to assume that auditors should have a greater sense of an on-going fraud after a period of years?

    2.      Since shareholders of a firm rely on auditor statements, does that give them a plausible claim against the auditor?


  • Sarah Palin, The Rogue, Random House, and Libel

    Random House released author Joe McGinniss’s new book, The Rogue: Searching for the Real Sarah Palin.  The book includes salacious allegations about the former governor of Alaska and one-time vice presidential candidate.  Those allegations include affairs, drug use, and abuse of her children.  

    Governor Palin’s

    attorney sent a letter to Random House with the copy of an e-mail from Mr. McGinniss that was written during the time that the manuscript was under legal review.  The e-mail, written by Mr. McGinniss to Jesse Griffin, the author of anti-Palin blog  is excerpted below:

    From: Joe McGinniss
    To: Jesse Griffin
    Sent: Thursday, January 27, 2011 6:15 PM
    Subject: I have to ask you for help


    Legal review of my manuscript is underway and here’s my problem: no one has ever offered documentation of any of the lurid stories about the Palins. Shailey Tripp is the latest example.

    A lurid, sensational, defamatory story about Todd, based only on the account of a woman charged with prostitution, who is no doubt desperate for money, and who sold her story to the Enquirer, is a gift from heaven for Sarah.

    Jesse, you can ridicule Sarah for calling in to the execrable Bob & Mark, but the fact is that as far as this story goes, there’s no there there. And rumors about what might come in weeks ahead are not facts. In fact, they’re garbage.

    And even you write frequently that you know things you can’t yet post, but that soon “all will be revealed.” This has been going on since I first became aware of your blog, but as far as I know you haven’t substantiated a single claim or provided verification for a single rumor that you’ve posted about Sarah’s personal life, or the personal lives of any Palin family members. Thus, she gets to denounce what she calls “lies.”

    Thus–as Random House lawyers are already pointing out to me–nothing I can cite other than my own reporting rises above the level of tawdry gossip.

    Not malicious speculation or third-hand rumors relayed by those who hold a grudge.

    For any or all of those who’ve told you they’ll speak out, but not yet, now is the time. My book represents the last best chance to put the truth about Sarah in front of the American people in a documented, verifiable way. But I need facts that I can rely on. I didn’t live this long and work this hard over so many decades to wind up as AlaskaWTF between hard covers.

    as always, and looking forward to seeing you in spring or summer,

    Mr. McGinniss’s book was published with the allegations for which he was seeking proof.  Mrs. Palin’s lawyer is challenging the truth f those allegations.

    Mrs. Palin’s lawyer has threatened a libel suit if the allegations in the book are not withdrawn and publication and distribution of the book halted.  Consider the following questions:

    1.      Is Mrs. Palin a public figure?

    2.     Why is this e-mail so important for a libel suit?

    3.     What does the e-mail show?

    4.     Is the e-mail privileged?

  • Bringing Back the Inquisition: Science on Trial

    Four hundred years ago Galileo Galilei was tried in Italy by the Inquisition and found “vehemently suspect of heresy” for asserting that the earth was not the center of the solar system. It was just another planet rotating around the sun. After the trial he spent the rest of his life under house arrest. The Catholic Church later lifted the ban on his works and has had nice things to say about him.

    Now, seven Italian scientists are on trial in Italy for failing to predict an earthquake in Italy that killed 309 people in 2009. Six of the scientists work for the Italian National Institute of Geophysics and Vulcanology. All are charged with manslaughter. Prosecutors charge that the scientists did not fulfill their duty and instead conveyed “incomplete, imprecise, and contradictory information about the dangers of seismic activity.”

    Critics say earthquake prediction is a very inexact science. The scientists knew the area was prone to earthquakes, and were monitoring equipment, but they did not recommend evacuation of the area after a moderate earthquake of 3.9 hit shortly before the large quake of 6.3 on the Richter scale.

    The American Association for the Advancement of Science has expressed “concern” about the matter as have many other scientists who explain that earthquake prediction is a not a well-developed area.


  • A Professor's Research Leads to Insider Trading


    A professor at Columbia University is connected to an insider trading case.   The Securities and Exchange Commission has charged an investment advisor with insider trading.  After consulting with the professor, the advisor allegedly purchased a significant quantity of stock in a company that produced but one product – a drug that was the subject of the professor’s research.   Soon after the purchase, the stock price increased significantly, resulting in a substantial profit for the advisor and his clients.


    The law involving insider trading is amazingly democratic.  Insider trading refers to an investor who uses information about a company, which is not yet accessible by the public, as the basis for deciding to buy or sell stock.   Stated differently, the SEC defines it in a long-winded description as follows.   “It is the trading that takes place when those privileged with confidential information about important events [relating to the corporation] use the special advantage of that knowledge to reap profits or avoid losses on the stock market, to the detriment of  .  .  .  typical investors who buy or sell their stock without the advantage of “inside” information.”


    The underlying rationale is that all investors – insiders or not – should be have access to the same information before anyone can use that information to make decisions about purchasing and selling stock.   Another objective is to insure fairness and integrity in the securities markets and thereby promote investor confidence.  Enforcement of the insider trading laws is a priority for the Securities and Exchange Commission.


    Consequences for insider trading include both civil and criminal penalties, including high fines and lengthy prison terms.


    So what  exactly was the professor’s involvement in the case against the investment advisor?  Turns out the professor  is a kidney expert and researcher.  He conducted a confidential study of a particular drug for a pharmaceutical company.  The investment  advisor spoke with the doctor about the study and learned that the results were quite favorable.  Before this information was made public, the advisor bought large amounts of the stock in the company whose sole product was that drug.   After the test results were made public, the drug sold exceptionally well, reaping large profits for the company and for investors in its stock, including the investment advisor.  These facts illustrate clearly insider trading.




  • The Kelo Eminent Domain Case: A Landfill Now and All Are Punished

    When the U.S. Supreme Court decided Kelo v. City of New London, 545 U.S. 469(2005), a constitutional and legislative shock wave rumbled across the country.  States changed their statutes and constitutions on when and how local government could take private property for redevelopment purposes, and property owners began resisting local redevelopment plans.

     The Kelo case began in 1978 when the city of New London, Connecticut undertook a redevelopment plan for the area in and around the existing park at Fort Trumbull. The plan had the goals of the ambience a state park should have, including the absence of existing pink cottages and other architecturally eclectic homes that had long been part of the area, one of which was owned by Susette Kelo. The central focus of the plan was getting the Pfizer pharmaceutical company to bring its new research facility to the Fort Trumbull area with a hoped-for economic boost from a major corporate employer.

    Under the plan Kelo’s and others’ homes would be razed to make room for Pfizer and its facilities. The homeowners filed suit challenging New London’s legal authority to take their homes. The trial court issued an injunction preventing New London from taking certain of the properties but allowing others to be taken. The appellate court found for New London on all the claims, the Connecticut Supreme Court affirmed (in a 4-3 decision), and the landowners appealed to the U.S. Supreme Court, which affirmed the Connecticut Supreme Court decision by a 5-4 vote. 

    Ms. Kelo’s home and 15 others were razed.  Pfizer merged with Wyeth in 2009 and closed all company operations in New London. The Fort Trumball area has no houses, no research park, no businesses, and is now undeveloped land.  However, following Hurricane Irene, officials from the city of New London announced that the citizens of their fair city could dump their branches and fallen trees at the site where Ms. Kelo’s home once sat. In short, the Fort Trumball area is now a land fill.

    Last week, journalist Jeff Benedict, whose book Little Pink Houses, documents the story of Ms. Kelo and her neighbors and the failed project, spoke at a dinner honoring the members of the Connecticut Supreme Court.  Ms. Kelo was in the audience along with the justices who decided her case.  Mr. Benedict told the story of the failed city project and the impact on Ms. Kelo and others.  Afterwards, Justice Richard Palmer thanked Mr. Benedict for telling the story and then apologized to Ms. Kelo for what happened to her. Ms. Kelo cried because she said it was the first time in the 12-year-battle that anyone had offered an apology.  


    1.     What are the requirements for eminent domain?

    2.     What are the usual reasons for a “taking,” or eminent domain?

    3.     Which part of the U.S. Constitution provides protection for property owners when it comes to eminent domain?


  • If You Think Driving without a License Can Be Costly, Try Copying Songs without a License

    Joel Tenenbaum began downloading songs when he was in high school. Using Napster (shut down in 2001), he shared the songs with others. In college, his song sharing continued, using a variety of peer-to-peer networks, including Kaaza (now operating legally with subscribers) and Limewire (shut down in 2010).

    Tenenbaum had more than a thousand songs available, knew by a “traffic tab” how much activity there was, and knew that the distribution of copyrighted music was illegal. Various ISPs he used warned him that he was potentially involved in illegal activity. Ignoring warnings, he was sued by Sony and other leading music copyright holders and music providers. He initially claimed he was not responsible for the accounts he created to try to hide his identity, but that ruse did not work and at trial he admitted to the copying and sharing.

    The jury was instructed that the Copyright Act entitles a plaintiff to a sum of not less than $750 and not more than $150,000 per sound recording downloaded or distributed without a license for willful violations. The jury awarded $22,500 per infringement, for 30 instances, for a total of $675,000 in damages.

    The trial judge reduced the award by a factor of ten, to $2,250 per violation for a total award of $67,500. On appeal by the plaintiffs, the First Circuit Court of Appeals reinstated the jury verdict, finding that the damage provision of the Copyright Act was not unconstitutional and that the trial judge improperly reduced the award.


  • SEC Attorney Investigating Madoff Accused of Conflict of Interest

    The general counsel (managing attorney) for the Securities and Exchange Commission is under investigation for an alleged conflict of interest involving his work on the Bernard Madoff  case.


     Madoff  is the former investment advisor and money manager who admitted to operating the largest Ponzi scheme in history, defrauding thousands of investors of billions of dollars.

    A Ponzi scheme is a swindle in which investors are, unknowingly, paid with sums obtained from later investors, creating an illusion of profitability.


    Business ethics and some laws require that a person with a conflict of interest not participate when decisions are made relating to the topic about which the conflict exists.  A conflict of interest means an individual has multiple interests in an issue, one of which could possibly corrupt the reasons he advocates for a particular outcome.  Most ethics codes require that people with a conflict of interest recuse themselves (abstain) from decision-making relevant to the issue on which the conflict exists..  This is because a conflict of interest interferes with a person's ability to remain impartial.


    For example, a judge has a conflict of interest if a defendant before her in a legal proceeding is her child. In such circumstance the judge must refer the case to another court.   In the Business Law course when we study corporations we learn about required action by a member of a board of directors who has a conflict of interest involving a resolution presented for board action.  To avoid the conflict, three requirements are necessary: 1) the director must disclose the conflict; 2) the board must pass the resolution by a vote of a majority of board members without a conflict; and 3) the provision must be fair to the corporation.  This later requirement is intended to prevent a circumstance where the board, perhaps influenced by friendship with the director who has the conflict, adopts a resolution that favors the interested director and is disadvantageous to the corporation.


    The SEC lawyer under suspicion is David M. Becker, who was responsible for advising the agency’s commissioners (officials in charge) on the appropriate policy for compensating victims of Madoff’s scheme.  Becker convinced the Commission to change its recommended method and adopt instead a plan more generous to Madoff’s victims.  Turns out Becker’s late mother had invested with Madoff, and when she died  Becker inherited her interest.  Her death predated his work on the case.


    A federal Law requires that government employees be disqualified from participating in a matter “if it would have a direct and predictable effect on the employee’s own financial interests.”  It cannot be disputed that the plan adopted by the SEC would directly impact Becker. 




  • Employee vs. Contractor: The Department of Labor and the IRS Step Up Enforcement

    A Government Accountability Office 2009 report concludes that misclassification of workers as independent contractors resulted in a loss of $2.72 billion in wages taxes.  The report also concluded that 30% of employers misclassify their workers. Based on this report, the DOL and IRS have sent letters to the largest home builders, including Lennar, KB Home, D.R. Horton, the Pulte Group, and NVR Inc., and requested their pay and compensation records. Other industries that the two agencies will be checking include hospitality, janitorial services, agriculture, day care, health care, and restaurants. In addition to the wage tax issues, the DOL is looking at minimum-wage and overtime violations.

    States are joining in the investigations because classification of workers as independent contractors means that the companies do not pay for workers’ compensation insurance. 

    Many builders who actually have employees on staff to do construction have complained to regulators because they are required to pay for workers’ compensation and their share of wage taxes and, as a result, cannot compete against builders who utilize independent contractors.  In response, the state and federal agencies will be focusing on whether the ongoing use of the same contractors by these building companies allows them to be classified as independent contractors. For an explanation of the rules on independent contractor vs. employee, go to this discussion.

    As the video notes, employers would be well served to do their own internal audits of classification. 


    1.       What are the factors that determine whether a worker is an employee or an independent contractor?

    2.      Why do employers want more independent contractors?

    3.      If a worker is an independent contractor, discuss the differences in terms of what ebenfits and protections are afforded employees.

    4.      What if builders own the subcontractors that hire the workers as independent contractors?  Would that make a difference in their classification?




  • Yahoo's Board of Directors Fires the CEO

    The CEO of Yahoo!, the internet service company, was recently fired.  Her termination illustrates a number of laws relevant to corporate governance.  In the Business Law course you learn that shareholders vote for directors, and in turn directors select the officers.  The vote for directors occurs at an annual shareholders’ meeting.   Directors are elected by majority vote.  We also learn that officers can be terminated at any time.   What we learn from the Yahoo! Experience is that a board can be fickle.  It wants the CEO to enhance the company’s sales and raise the price of the stock.  Failure by the CEO to achieve the board’s goals will likely result in her firing. 

    For Yahoo! the shareholders meeting was held in late June, 2011. Directors were elected by a vote of 90%.  At that meeting the chairman of the board sang the praises of the CEO, Carol A.  Bartz.  Yet, less than two and a half months later she was fired. 

    Stock prices customarily rise when good news about the company is reported, and fall when bad news occurs.  The board had anticipated that Ms. Bartz would undertake important initiatives that would increase the company’s stock price.  However the stock made little headway under her leadership, part of what prompted the board’s action terminating her.  Following Ms. Bartz’ departure,  the stock price  increased 6.27% to $13.72.

     She was replaced by an interim CEO, the chief financial officer.  The board will likely begin a search process soon to find Ms. Bartz’ permanent replacement.  To assist the CFO in running the company in the interim, the board appointed what it is calling an Executive Leadership Council consisting of five senior executives.


    1) A corporation’s board of directors plays a very important role in setting policy for the company.  Why is selection of board members allocated to a vote of shareholders? 

    2) Should the authority of the board of directors to hire and fire officers be restricted in any way?

     3) Why is the price of stock impacted by a corporation’s successes or failures? 




  • Now, Exactly, How Did That Gator Get You?

    Presently, health care providers such as physicians and hospitals are required to use about 18,000 codes to describe medical services rendered in bills submitted to insurers. That tiny number is not enough. New federal regulations will expand the number of codes to about 140,000. As the illustration above indicates, not much is left out. What, when, where, how, etc. is supposed to all be covered. Did the alligator sit on you, whip you with his tail, or bite you?

    The rules of the Centers for Medicare & Medicaid Services applies to providers, payers and vendors as the U.S. health care industry. A first new set of rules, Version 5010, which takes effect 1/1/12 “refers to the revised set of HIPAA transaction standards; adopted to replace the current Version 4010/4010A standards. Every standard has been updated, from claims to eligibility to referral authorizations.” Then, on 10/1/13, ICD-10 takes effect for “medical diagnosis and inpatient procedure coding.” This list of 140,000 codes will be required of nearly all health industry participants. Did you get hurt in an opera house, on a squash court, or in a bathroom in a mobile home? All there. For example, Code V91.07XA, concerns a "burn due to water-skis on fire."

    To get into this burgeoning industry, one can become certified by the American Academy of Professional Coders. Increasingly, to comply with ever more complex regulations and industry standards, firms must have employees who can ensure compliance.


  • Round One Goes to DuPont in Major Trade Secret Theft Case

    DuPont won a $920 million judgment in U.S. District Court against the South Korean company, Kolon, for theft of trade secrets. The theft concerns its famous product Kevlar which, with products in the same family of aramids, brings in $1.4 billion is revenue annually.

    DuPont learned that Michael Mitchell, who had worked as a Kevlar engineer/marketer, was the key man in transferring secrets from engineers who worked at a DuPont-Toray joint venture in Japan to the Korean company.  DuPont called the FBI. Mitchell was arrested and, in 2010, sentenced to 18 months in federal prison for trade secret theft.

    Once Kolon was sued, its executives busily deleted e-mails and other electronic records about the matter, which resulted in court order that the destruction of evidence would be revealed to the jury in the trade secret case. That fact, which was revealed to the jury, probably did not go over well.

    After the verdict was announced, the stock of Kolon fell 25% over the next two days on the South Korean stock exchange.

    Kolon will, of course, appeal and, not to be outdone, is suing DuPont for antitrust violations for monopolizing the sale of Kevlar-type materials.

    Stay tuned for Round Two of the kind of litigation that keeps a lot of lawyers employed.


  • Gibson Guitars, Indian Wood, Search & Seizure, and the Lacey Act

    On August 24, 2011, federal agents conducted a search of Gibson Guitar’s production facilities in Nashville and Memphis after serving Gibson’s CEO, Henry Juszkiewicz, with four search warrants.  The federal agents seized guitars, pallets of wood, and electronic files.  Gibson had to send workers home and shut down production.  The Justice Department obtained the warrants for purposes of seizing evidence that Gibson violated the Lacey Import Act, a federal law under which businesses can be prosecuted for the importation of “fish or wildlife taken, possessed, transported, or sold in violation of … any foreign law.” 16 U.S.C. § 3372(a)(2)(A). The Justice Department seized the guitars and wood because its theory is that Gibson’s use of wood from India that is not finished by Indian workers is illegal, something that it believes to be a violation of the Lacey Act if the export of the wood to Gibson was done prior to it being finished.  The government of India has not supported the actions taken by the U.S. Justice Department because the government there does not consider wood to be a form of wildlife.  The position of the Justice Department is that the Lacey Act applies to flora and fauna and that, therefore, the importation of wood would be covered under the Indian law and therefore a violation of the Lacey Act.  Finished wood would, however, not be considered a form of fauna and could be imported by Gibson.

    The Lacey Import Act has been a source of controversy since the decision in McNab v. U.S., 331 F.3d 1228 (11th Cir. 2003), a case in which David Henson McNab, Abner Schoenwetter, Robert D. Blandford, and Diane H. Huang appealed the convictions and sentences they received after a jury found them guilty of Lacey Act violations in connection with their importation, sale, and purchase of Caribbean spiny lobsters from Honduras. At trial, Honduran officials disagreed on the interpretation of their own laws on spiny lobsters and the court struggled with the task of interpreting foreign laws.  The case became a focus of groups concerned about overreaching by the federal government.

    The Lacey Act was passed originally in 1900 and was applicable to the states.  That is, the federal law was designed to keep businesses from poaching wildlife from other states.  The act was amended in 1981 to include foreign laws in order to stop what the hearings referred to as “massive illegal trade in wildlife from other countries.”

    Gibson has begun a petition drive to stop the federal seizure so that it can resume operations and bring its 1,100 employees back to work.  Gibson also issued the following statement, “Agents seized wood that was Forest Stewardship Council controlled. Gibson has a long history of supporting sustainable and responsible sources of wood and has worked diligently with entities such as the Rainforest Alliance and Greenpeace to secure FSC-certified supplies. The wood seized on August 24 satisfied FSC standards.” Gibson’s facilities in Nashville were raided in 2009, but no charges have been brought on the basis of what agents took in that raid.


    1.      Are businesses subject to the laws of countries in which they are doing business?  What if they are simply entering into contracts with businesses from those countries?  What if no one from the company ever travels to those countries and all transactions are handled through electronic communications?

    2.     Why does the interpretation of foreign laws present a problem for U.S. courts?

    3.     Why do you think Gibson is the only guitar maker to be singled out for searches and seizures when other guitar makers import the same wood from India?

    4.     Gibson has cooperated with the federal government on the searches.  Is it required to do so?  If Gibson agreed to the searches, are the warrants necessary?

  • Not Being Learned, Social Workers Are Due Overtime Pay

    Ever thought of being in social work? The Department of Social and Health Services (DSHS) for the State of Washington hires employees to help with its mission of protecting abused and neglected children through 44 field offices around the state. DSHS states that it has “rigorous educational qualification” for social workers.

    What degrees is the agency looking for? According to its hiring “cheat sheet”: “Acceptable: Counseling, Psych[ology], Social Work, Human Services, Sociology, Child Development, Family Studies, Pastoral Counseling, Anthropology, Gerontology, Therapeutic Recreation, Education, Therapeutic Fields, Criminal Justice. Not Acceptable: History, Economics, Civics, Philosophy, Communications, Archeology, Nursing, Theology, Pastoral Studies, Religion, Recreation, Women's Studies, Native American Studies, Public Administration, Political Science, Law & Justice, Human Resources, Leisure Studies, Physical Education, Law Enforcement, Liberal Arts. Business Administration, Computer Science, Natural Sciences, Physical Sciences, Math, Fine Arts, General Studies.”

    According to DSHS, social workers with such degrees qualify under the “learned professional” exemption of the Fair Labor Standards Act, so that the employer is not required to pay overtime.

    The Department of Labor questioned this and brought suit, contending that social work is not a “learned profession” so DSHS must pay overtime. The district court held for the DSHS, finding that agency requirements for social workers are “exacting” and so constitute a “learned profession.” The Department of Labor appealed.

    The Ninth Circuit Court of Appeals reversed, finding that the exemption from overtime is for employees in a “bona fide executive, administrative, or professional capacity.” Professional capacity, Department of Labor regulations state, means an employee with “knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.” The social worker degree qualifications do not cut it.

    This ruling is not peculiar to social work; employers often try to classify employees as "executives" to get around the overtime requirement.

  • Sarbanes Oxley; CEO Bonuses at Stake

     Ten years or so ago, several corporations (Enron, WorldCom Adelphia) misrepresented their liabilities and revenues, causing many investors to be misled into buying stock worth much less than they thought.  Lots of people lost lots of money.  As a result, our government sought to protect investors and prevent a reoccurrence of accounting frauds by adopting the Sarbanes Oxley Act in 2002.  The Act is sometimes called Sarbox or SOX, and is named after its two main sponsors in Congress, Senator Paul Sarbanes and Representative Michael Oxley. The Act expands the financial disclosures required by a public corporation, and increases the potential liability of directors, officers auditors, and lawyers for releasing false or misleading financial information. 

    When a corporation files false financial information, Sarbox Section 304  authorizes the Securities and Exchange Commission to recover money from a corporation’s chief executive and financial officer.  Specifically, the SEC can recover their bonuses or incentive-based compensation, plus any profits they realized from the sale of the corporation’s securities, during the 12 month period following the filling with the SEC of the document containing the inaccurate financial information. The justification for section 304 rests on the fact that chief officers’ bonuses and incentive pay are based on how well the company performs.  The more sales and income a corporation claims, the greater are the bonuses and incentive pay. 

    Recouping the money from a CEO and/or a CFO is called a clawback, which means taking back money that has been distributed, enabled by special circumstances..

    The SEC is only beginning to flex its section 304 muscles.  In the limited number of cases utilizing this section to date, the cited improprieties in financial reporting have been variously described as claims of millions of nonexistent sales, inflated sales, false revenue reports, accounting irregularities, and overstatements of operating income.   Amounts retrieved by the SEC have ranged from $350,000 to more than a million dollars.

    Until recently the SEC restricted its enforcement of section 304 to CEOs and CFOs who were alleged to have been personally involved in the wrongdoing.  Now the agency has expanded its interpretation of the conduct that enables a clawback.  It no longer requires involvement or even knowledge by the officer. This interpretation, upheld by judicial opinion[1], is intended to motivate chief officers to rigorously monitor the accuracy of financial information issued to the public.






    [1] SEC v. Maynard L. Jenkins, 718 F.Supp.2d 1070 ( D. Az., 2010).

  • Credit Cards, Colleges and Universities, and Students

    The connection between credit card companies and colleges and universities provides those colleges and universities with $73.3 million, funds that are used by alumni associations, fraternities, and sororities.  The Penn State Alumni association disclosed that the credit card fees its receives account for 20 to 25% of the association's operating budget.  Colleges and universities partner with companies such as GE Money Bank and other credit card companies.  In exchange for the marketing access the colleges and universities provide, those schools receive a percentage of the revenue the cards generate for the financial company sponsoring the special credit card.  According to the Federal Reserve, these are the top five universities for receipt of credit card revenue:

    1.  Penn State

    2.  University of Texas

    3.  University of Michigan

    4.  University of Southern California

    5.  University of Tennessee

    The top universities for revenue per card are:

    1.  Boston College

    2.  Northwestern

    3.  University of Cincinnati

    4.  University of Memphis

    5.  University of Minnesota

    Many college and university spokespersons say that the majority of their credit cards go to alumni, not students.  When the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act was passed in 2010, changes to portions of federal laws on credit card solicitation were amended with specific provisions that govern how college students are solicited. Some colleges and universities have modified their agreements with the financial companies so that only alumni can be solicited, not students.  However, the financial companies see access to students as "the holy grail." (John Wisely and David Jesse, "Schools Rely on College-Linked Card Revenue,"  USA Today, Sept. 7, 2011, p. 3B).

    The new protections are complex and have limited student access.  The regulations can also be found at 12 C.F.R. Sections 226.46 - 226.59. A summary of the protections appears below:

    1.  Verification of student ability to pay

    2.  Controls on interest charges

    3.  Controls on increasing interest charges

    4. Disclosures on over-limit spending

    5.  Mandatory reporting by colleges and universities to the Federal Reserve on their credit-card programs.


    1.  How do these changes differe from existing regulations on credit cards?

    2.  Why did this area of credit card solicitation attract specific congressional attention?

    3.  What effect will the public disclosure of the credit-card relationships and revenues have on colleges' and universities' programs?


  • A Real Gusher: Billion $ Litigation Piled on Billion $ Litigation

    Halliburton Energy Services has filed suit against BP in Harris County (Houston, Texas) Court for grossly negligent misrepresentation, defamation, and business disparagement. This suit adds to what is already likely the largest set of civil litigation in United States history.

    Both companies gained undesired attention and massive costs due to the Deepwater Horizon oil spill in the Gulf of Mexico that killed eleven workers, injured more, and caused the largest oil spill in U.S. history. Deepwater Horizon was the offshore drilling rig working the deepest well in the Gulf. It was owned by Transocean, which leased the rig to BP for many years. Work on the Deepwater Horizon at the Macondo well was performed by Halliburton and other companies under contract to assist BP.

    BP commissioned a study about the explosion and spill (the Bly report) which, the Washington Post reported, placed most of the blame on Halliburton and other contractors.

    A year after the report was issued, Halliburton has fired back, contending in its court filing that its work is asserted by BP to be a “root cause of the blowout.” Halliburton says that BP knew the cement work being done could be inadequate, but it wanted to avoid a costly change in design. That, Halliburton contends, was a major factor in the accident. The Bly report is “self-serving.”

    “Since the blowout, and in a transparent attempt to minimize its liability, BP, the operator and leaseholder for the Macondo well, has intentionally and continually misrepresented its role in the Macondo tragedy by concealing its own conduct that caused the incident and the action BP failed to take to prevent it,” Halliburton asserts in the complaint. Halliburton states that BP “failed to disclose” important information to Halliburton about the situation as most costly work would have been needed.

    “Such changes would have cost BP millions of dollars on a well that was already painfully over budget and behind schedule. Regrettably, and consistent with its mantra that ‘every dollar counts,’ BP chose not to stop work and redesign the well before going forward with its temporary abandonment procedures, in favor of saving time and money at the expense of safety, resulting in the death of 11 men, countless other injuries and an unprecedented oil spill,” Halliburton says.BP’s actions are “malicious” in “hopes of covering up its own culpability.”

    BP lost billions from the Deepwater Horizon tragedy and seen its stock fare worse than most large oil companies in recent years. Despite a change in top management, its troubles, which include being booted out of a joint venture in Russia and having its offices in Moscow raided by Russian regulators, have continued. Litigation is likely to take years.

    Question: If Halliburton experts at the time believed there would be problems, should the company have withdrawn from the situation or try to make the best of it?

  • Sound-Off by GroupOn CEO Ticks-Off SEC; On the Road to Going Public


    Have you bought anything from Groupon lately – the online coupon giant?  If so, you are one in 28 million.  The company, which began three years ago, is growing in leaps and bounds.  Indeed, its record of increasing record-setting sales continues ($30 million in 2009; $713 million in 2010; $645 million for the first QUARTER of 2011).  Now it has decided to issue stock to the public for the first time, a process called an Initial Public Offering or IPO.  The purpose of an IPO is typically to raise money for the company to use for expansion.  No firm date for Groupon’s  sales to begin has yet been announced.


    Before stock can be sold, a company must file a registration statement with the Securities and Exchange Commission.   A registration statement contains much information about the business and includes a prospectus.  This is a document that describes the nature of the business, its directors and officers, the industry in which it operates, financial statements, and risks to its future success.  The prospectus is distributed to potential investors so they can familiarize themselves with the company and make an informed decision whether or not to buy.  The prospectus is a disclosure document and so contains the good, the bad, and the ugly.  It is devoid by law of any marketing efforts.  So it contains no glossy pictures, no hype, no testimonials.  Groupon filed its registration statement in early June, 2011.  The complete registration statement is  available on the SEC website – www.sec.gov.


    Two events may cause Groupon to delay its start of stock sales.  The first is the uncertainty in the stock market causing investor skittishness.


     A second possible cause is related to the quiet period, sometimes called a waiting period, mandated by the SEC.   This encompasses the time between filing the registration statement and the start of stock sales, typically several months.  In the interim the SEC reviews the submitted materials for general compliance with applicable rules, and potential investors review information about the company.  Marketing efforts to promote the stock while potential buyers are considering the investment might cause them to minimize or disregard the risks outlined in the prospectus.  This  the SEC seeks to avoid.  The marketing prohibition during the quiet period means the company cannot use Facebook or Twitter to extol its successes, or permit its officers to be interviewed by the media, or otherwise promote itself.  Instead all information must be disclosed in one place where potential investors can easily find it – with the SEC.  If questions are raised in social media or elsewhere about the company or its prospectus, the company can address the concerns by adding at anytime to its filing at the SEC.


    Groupon may have run afoul of the waiting period.  Its chief executive, Andrew Mason, sent an email to its 8000 employees disputing media reports about the company and its accounting methods.   The note stated that Groupon’s business exceeds that of its competitors and the company is seeing “unprecedented growth.”   These are exactly the type of claims that are prohibited during the quiet period.   The SEC has forced delays in IPOs when a company violates the waiting period. 

    Stay tuned for future developments.






  • How "Natural" is "Natural"?

    The Kashi company, founded in the 1980s, promotes an image of healthy foods, mostly cereals and snack bars. The name, the company says, is a blend of words meaning kosher or pure food and the name of some founders of American Macrobiotics. Its website indicates that the company is small; only about 70 employees.

    The company was purchased by Kellogg in 2000, so the 70 people in the Kashi subsidiary have deep support of one of the largest cereals company in the world.

    A class action suit has been filed against Kashi/Kellogg for mislabeling products. Filed in federal district court in southern California, the complaint alleges that consumers have been duped by labels that Kashi products are “all natural” or contain “nothing artificial.” The company cultivates “a healthy and socially conscious image in an effort to promote the sale of these products.”

    Plaintiffs contend that the company “inserted a spectacular array of unnaturally processed and synthetic ingredients to its so-called ‘all natural’ products. For example, Kashi’s so-called ‘All Natural’ GoLean Shakes are composed almost entirely of synthetic and unnaturally processed ingredients, including sodium molybdate, calcium phosphate, calcium pantothenate, pyridozine hydrochloride, thiamin hydrochloride, potassium iodide, and other substances that have been declared to be synthetic substances by federal regulations.” Some ingredients, the complaint contends, are not recognized by the FDA as safe food additives.

    The “false and misleading representations and omissions violate state and federal law … including California’s Unfair Competition Law, California’s Consumer Legal Remedies Act, Michigan’s Consumer Protection act, common law, and federal statutes.” Plaintiffs request class action status, assorted damages, restitution to consumers, and a laundry list of orders as long as the list of ingredients in a box of Kashi’s 7 Whole Grain Cereals Flakes.


  • AT&T, T-Mobile, Antitrust, and Your Cell Service

    AT&T-T-Mobile Deal Targeted by U.S... by Bloomberg

              AT&T entered into a stock purchase agreement on March 20, 2011 to acquire T-Mobile from its parent, Deutsche Telekom AG. On September 1, 2011, the U.S. Justice Department  filed suit against AT&T and T-Mobile to block the acquisition on the grounds that the merger would reduce competition in the wireless phone market.  The litigation presents a classic case study in antitrust law. The first step in determining whether such a merger would create a monopoly is to look at the existing market and determine the impact the acquisition would have on the competitors and market share.

              AT&T has approximately 98.6 million connections to mobile wireless devices, and T-Mobile has approximately 33.6 million connections.  Both serve customers throughout the United States, with networks that each reach the homes of at least 90 percent of the U.S. population. AT&T and T-Mobile are two of only four mobile wireless providers with nationwide networks. The other two nationwide networks are operated by Verizon Wireless  and Sprint Nextel Corp. Although there are smaller wireless providers exist, those providers are significantly different from the big four. For instance, none of the smaller carriers' voice networks cover even one-third of the U.S. population, and the largest of these smaller carriers has less than one-third the number of wireless connections as T-Mobile.  Regional competitors often lack a nationwide data network, nationally recognized brands, significant nationwide spectrum holdings, and timely access to the most popular handsets. The "Big Four" -AT&T, T-Mobile, Verizon, and Sprint -provide more than 90 percent of service connections to U.S. mobile wireless devices.

              T-Mobile has a unique market presence, and is known as a "challenger brand." T-Mobile has positioned itself in the market as a value provider, using what are known as "disruptive pricing" plans that do place competitive pressure on its three larger rivals. The Justice Department suit alleges that if  AT&T eliminates T-Mobile as an independent, low-priced rival, it would remove a significant competitive force from the market. Additionally, T-Mobile is known for its investments in an advanced high-speed network and its innovations in technology and mobile wireless telecommunications services. The Justice Department complaint alleges that the likely result of the merger is that consumers will face higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest. The complaint alleges that the result would be that the merger would substantially lessen competition in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18 because T-Mobile as a "maverick" is a disruptive, innovative market force.

              However, there are experts who maintain that T-Mobile is “treading water,” that is, it may be a failing company.  For example, T-Mobile has lost customers to smaller companies such as Virgin Mobile and Leap. Since 2008, T-Mobile’s market share has slipped from 12% to 10%. In addition, its parent company Deutsche Telecom has indicated that it will no longer be investing in the U.S. market. T-Mobile’s market advantage may be that it has an empty and fast network that it is able to sell more cheaply and with fewer limits on use than what the other big companies are able to offer. Other market developments are likely to impact T-Mobile negatively.  For example, if Sprint reaches a deal with Apple to offer the iPhone, T-Mobile would be the only carrier without the popular device.

              The Justice Department has been very active over the past few years in litigating mergers and acquisitions.  The Department stopped the NASDAQ acquisition of the NYSE Euronet and reached a settlement with Comcast over its acquisition of NBC Universal.  Its suit to stop the merger of H & R Block with 2SS Holdings goes to trial next week. 


     1.      How much market share would represent the ability to control prices and exclude competition?

    2.     Why would the fact that T-Mobile is losing market share be important in determining whether the merger is anticompetitive?

    3.     What is the significance of going from 4 major competitors to three?

    4.     Could other companies acquire T-Mobile and increase competition/  Do you have any examples of such possible mergers?

  • Barry Bonds Case -Prosecutors Ditch not Pitch Perjury Charges

    Barry Bonds Case – Prosecutors Decide to Ditch not Pitch Perjury Charges


    Barry Bond is a baseball great, no matter what measurement you use.  He played outfielder in the major leagues from 1986 to 2007 for the Pittsburgh Pirates and the San Francisco Giants.  He set the record for the greatest number of Most Valuable Player Awards (seven),  He is a 14-time All-Star and holds numerous major league baseball records including the home run record with 762, and the single-season record with 73.  


    Unfortunately he was also a central figure in baseball’s steroids scandal.  Most sports including baseball ban the use of performance- enhancing drugs.  The primary reasons for the ban are health threats caused by the drugs, the appropriateness of equality of opportunity for success for all athletes, and the public’s interest in “clean” (“doping-free”) sports.


    Bonds was indicted on charges of perjury (lying under oath) and obstruction of justice ( influencing threatening, harming or impeding a witness, juror or legal office by furnishing false information or otherwise impeding an investigation)  for allegedly lying to a federal grand jury that was investigating steroid use in professional athletics.  He was convicted on April 13, 2011 of the obstruction of justice charge but the jury was hung (unable to reach a unanimous verdict)- on several counts of perjury.  On one of the charges, the vote was 8 to 4 for acquittal and 9-3 on another charge. Although a sizeable majority favored acquittal, a verdict of guilty or not guilty requires not just a majority but rather a unanimous vote.  The prosecutors have been debating whether to retry Mr. Bonds.  Just yesterday they announced their decision not to retry him.


    When a jury is hung on a charge, the defendant remains innocent until proven guilty.  The prosecutor has a choice.  He can retry the case or cut his losses and move on.  Factors that the prosecutor will consider when making that decision is the strength or weakness of the case and the seriousness of the charge. Another consideration is whether the defendant was found guilty on another charge.    In this case, Bonds was found guilty on the obstruction charge so the prosecutors are assured that, no matter what they decided on the perjury charges, Bonds will face sentencing.


    Bonds will be sentenced on December 16th for the obstruction of justice conviction.    The maximum sentence is 10 years in prison.  Federal sentencing guidelines (rules for judges that help assess appropriate jail time) suggest 15-21 months.  The rules set out a uniform sentencing policy for individuals and organizations convicted of federal felonies and serious misdemeanors.  The guidelines do not apply to less serious misdemeanors.


     Prior to sentencing, the judge can request a presentence investigation.  This is a detailed report about many aspects of the defendant’s life to assist the judge in devising an appropriate sentence.  Among the areas addressed are the defendant’s history in the following areas: criminal, work, military, medical , mental health, addictions, and family.


    The goals of sentencing  include punishment, deterrence for both the defendant and others, and rehabilitation.