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Cypen & Cypen
MARCH 19, 2009

Stephen H. Cypen, Esq., Editor


In apparently the first ruling of its kind, a bankruptcy judge held the city of Vallejo, California, has authority to void existing union contracts in its effort to reorganize, holding that public workers do not enjoy the same protections Congress gave union workers at private companies. Municipal bankruptcy is so rare that no judge had yet ruled on whether Congressional reforms in the 1990s that required companies to provide worker protections before attempting to dissolve union contracts also applied to public workers’ union contracts. A federal bankruptcy judge has now held that when Congress enacted 11 U.S.C. § 1113 to limit companies from outright rejection of union contracts, it was limited to Chapter 11 bankruptcies. By failing to extend the limits to Chapter 9, which covers municipal bankruptcy, the judge said cities have broader latitude to break existing union pacts. There are 50,000 municipalities, but only 567 Chapter 9 filings since 1937, when the law was created. By contrast, there may be as many as 10,000 corporate bankruptcies in a single year. Vallejo declared bankruptcy in 2008, blaming spiraling payroll costs and declining revenue, asking the bankruptcy judge to void all four contracts with 400 police, firefighters, electricians, maintenance workers, secretaries, clerks and other city workers. Two unions, police and city clerks/managers, have settled with the city, making concessions in the contracts. Only firefighters’ and electricians’ contracts have not been resolved. In ruling that Section 1113 had not been incorporated into Chapter 9, the bankruptcy judge pointed out that Congress considered such an extension in 1991, but did not add Chapter 9. reported on this landmark ruling.


Last year the U.S. Seventh Circuit Court of Appeals handed mutual fund advisers a big win when it held that Section 36(b) of the Investment Company Act of 1940 does not require that investment adviser fees be reasonable in relation to a judicially-created standard (see C&C Newsletter for July 10, 2008, Item 5). Instead, the law provides that an adviser has a fiduciary duty and owes an obligation of candor in negotiation, and honesty in performance, but may negotiate in his own interest and accept what an institution agrees to pay. Federal Securities Laws, of which the Investment Company Act is one component, work largely by requiring disclosure and then allowing price to be set by competition in which investors make their own choices. On March 9, 2009, the United States Supreme Court granted a petition for writ of certiorari filed by investors who owned shares in open-end mutual funds, which they contended were charged fees that were too high and violated the Investment Company Act of 1940. Jones v. Harris Associates L.P., Case No., 08-586 (U.S., March 9, 2009) (certiorari granted).


For over thirty years, the City of Warwick, Rhode Island, entered into a series of collective bargaining agreements for crossing guards’ employment, and continued to make contributions to the union pension fund. When the last CBA expired, the City terminated employment of its crossing guards and discontinued making pension payments, “as there was no longer a CBA in place.” The pension fund informed the City that its termination constituted a withdrawal, and that the pension fund was required by federal law to assess and collect a withdrawal liability from the City (here, almost $200,000). The City filed a declaratory judgment in federal court to establish that it was not subject to withdrawal liability under the Multiemployer Pension Plan Amendments Act of 1980, and to enjoin the pension fund from enforcing any such liability against the City. The pension fund moved to dismiss the City’s declaratory judgment action on the ground that federal law requires arbitration before a party can seek judicial review. In 1974, Congress enacted the Employment Retirement Income Security Act to provide comprehensive regulation for private pension plans. In 1980, Congress amended ERISA by enacting MPPAA in order to strengthen multiemployer pension plans financially by discouraging employers from withdrawing and leaving a plan with unfunded liabilities. A multiemployer pension plan is exempted from federal regulation if it is a “governmental plan,” which is defined in MPPAA as a plan established or maintained for its employees by the government of the United States, by the government of any state or political subdivision thereof or by any agency or instrumentality of any of the foregoing. In order to qualify for the exemption, a government employer must demonstrate that it established or maintained its pension plan. When a state or local government body voluntarily accepts a private welfare benefit plan for its employees it cannot later complain that ERISA regulation of that plan invades its sovereignty. Moreover, if non-governmental employees participate in the plan, the exemption does not apply. The City had not alleged that the pension fund served governmental employers exclusively and did not dispute the pension fund’s representation that the majority of its contributing employers were from the private sector. There was also no evidence that the City established or maintained the fund or that the fund was established for the primary purpose of establishing pension benefit coverage for governmental employees. Having determined that the pension fund did not fall within the governmental plan exception, MPPAA mandates any dispute between the parties concerning a determination made thereunder shall be resolved through arbitration. Thus, the pension fund’s motion to dismiss was granted. City of Warwick v. Labors’ International Union of North America National (Industrial) Pension Fund, Case No. 08-366 (U.S. D.R.I., February 23, 2009).


Computerworld reports that the New York City Police Pension Fund has notified about 80,000 current and former New York Police Department officers of the potential compromise of their personal information after a civilian employee recently stole storage media containing the data. The individual was an employee of the Police Pension Fund, who was arrested after a security breach at one of the Pension Fund’s disaster recovery sites. At time of his arrest, the individual was in possession of certain business records containing data about retired and active members of the NYPD. The compromised data included Social Security numbers, names, addresses and bank account information. In the notice, the Pension Fund said although the property was recovered, there is no assurance that the information had not been compromised. There is some (relatively) good news: undercover information/identities were not compromised, and anyone hired after May 2007 was not affected by the breach. How comforting.


The U.S. Department of Labor has reached a settlement agreement with Consulting Services Group of Memphis, Tennessee, and its affiliated broker-dealer, providing for restitution to plan clients, as well as implementation of reforms and disclosures on compensation/fee arrangements with plan clients in the future. CSG as already paid $277,803 and has agreed to pay a $27,780 civil penalty. The settlement agreement requires full disclosure of compensation and potential conflicts of interest by CSG in all contracts with employee benefit plans governed by the Employee Retirement Income Security Act. Under the agreement, CSG must provide specific information describing all compensation received by CSG and its affiliates from any source, how the compensation is determined and whether CSG or any affiliate acquired a financial interest in any transaction to be entered into with an ERISA plan. The firm also agreed to refrain from making misrepresentations in marketing materials. Finally, the settlement agreement calls for procedures to ensure that record keeping by CSG for ERISA plans is accurate, and invoices provided to plans correctly reflect services provided and the total cost to the plans. The settlement was based on an investigation by the Department’s Employee Benefits Security Administration into alleged violations of ERISA by CSG, which revealed receipt of undisclosed and unauthorized compensation and failure timely to provide promised commission rebates to certain ERISA plans from 2002 to 2006.


Principal Financial Group has released its Well-Being Index for the first quarter of 2009. The following key findings are featured:

  • Politics/Economy - The majority of employees (73%) and retirees (63%) stated the economy/jobs should be President Obama's primary focus. Nearly half of employees (49%) and retirees (53%) agreed that they were confident in the Obama administration's ability to deal with the economic crisis and bring this country out of a recession. Respondents were split on the expected state of the economy at the end of 2009. About a third of employees (35%) and retirees (33%) expected the current economic crisis to be better than it is today by the end of 2009. A quarter or so of both employees (24%) and retirees (27%) expected the economy to be worse at the end of 2009 than it is today.
  • Financial Well Being - Significantly fewer retirees (63%) than employees (74%) were very or somewhat concerned about their long-term financial future. However, this percentage of retirees is up significantly from 1st quarter 2008 (49%). Additionally, the percentage of retirees (33%) agreeing that they were extremely happy about their current financial well being is down significantly from 1st quarter 2008 (46%).
  • Investment Changes – Twenty-seven percent of employees with retirement savings were making changes to their investments (up significantly from last quarter’s 18%), 23% to stable and 4% to volatile. Significantly more employees (23%) this quarter were moving to stable investments compared to 4th quarter of 2008 (14%). Similar to employees, 24% of retirees have moved to more stable investments.
  • Economy's Impact on Spending - When asked how the current economy has impacted their overall spending in the past two months, two-thirds of retirees and three-fourths of employees have reduced their overall spending to some degree, both up significantly from last quarter. The top trigger to get employees spending again (43%) was a major personal tax cut and the top trigger for retirees was a significant rise in the stock market (40%).
  • Income Tax Refunds – Seventy-eight percent of employees expected to receive a tax refund for 2008, while significantly fewer retirees (45%) expected a refund. When asked what they plan to do with the refund, employees (41%) and significantly fewer retirees (19%) plan to pay down or pay off short-term debts. Four in ten employees and a third of retirees planned to save or invest their refund.

The survey was conducted among 1,155 employees and 540 retirees. The first Well-Being Index was in 2000.


Taxpayers are e-filing their Federal income tax returns from their home computers in record numbers this year, IRS announced. As of March 6, 2009, more than 18 million income tax returns were filed from home computers, up 20% compared to the same time last year. So far this year, almost 52 million tax returns have been e-filed, up 6% compared to the same time last year. However, the number of people using IRS Free File has fallen from almost 3 million last year to just under 2 million for the same time this year, a reduction of about 30%. A number of factors could be causing the decrease in Free File volumes, including national advertising of other free online tax preparation offers and elimination of electronic filing fees by some software providers. As of March 6, about 91% of tax returns resulted in a refund. This percentage, however, is usually at its highest at the start of the filing season because taxpayers expecting refunds generally file earlier than taxpayers who must make a payment. IRS cautioned that year-to-year analysis of total returns filed will be an anomaly this year, because last year’s results include those returns filed for the economic stimulus payment. As the year progresses, IRS expects to receive and process more individual income tax returns during 2009 than in 2007, but fewer than in 2008. IR-2009-023 (March 13, 2009).


Some of the largest U.S. pension funds unveiled guidelines for regulations aimed at restoring confidence in capital markets, including a bigger role for shareholder activists from their ranks. According to Reuters, the group urges five principles to rebuild trust in markets and serve as a framework for regulators. The pension funds group calls for:

  • Increased disclosure and transparency;
  • True regulatory independence;
  • A greater shareholder voice in capital markets;
  • Earlier identification by regulators of issues posing risks to global markets; and
  • Preserving institutional investors’ freedom to invest in a full range of opportunities.

The groups members are California Public Employees’ Retirement System, California State Teachers’ Retirement System, Colorado Public Employees’ Retirement Association, Connecticut Retirement Plans and Trust Funds, Los Angeles City Employees’ Retirement System, Los Angeles County Employees’ Retirement System, Los Angeles Fire and Police Pensions, New York State Common Retirement Fund and State Universities Retirement System of Illinois. Of course, we back anything that works.


Representative Joe Crowley (D-NY) has introduced the Healthcare Enhancement for Local Public Servants Act of 2009 (HELPS II). The bill, which amends the Internal Revenue Code to allow public employees a deduction for distributions from governmental plans for health and long-term care insurance, is an extension of the Healthcare Enhancement for Local Public Safety Retirees Act (HELPS), which was signed into law as part of the Pension Protection Act of 2006. H.R. 1413, if passed, would allow all public employee retirees to use tax-free distributions from their qualified retirement plan to pay for healthcare and long-term care insurance premiums. Under the original HELPS legislation, the benefit was available only to retired public safety personnel. The legislation also introduces additional provisions, such as survivor benefits, indexing of the $3,000 in distributions for insurance premiums to inflation and removes the administrative responsibility from pension funds. Good move all around.


Cornerstone Research, which specializes in assisting attorneys with complex business issues that arise in litigation and regulatory proceedings, has issued its “Securities Class Action Settlements: 2008 Review and Analysis.” Amid turmoil of recent economic conditions, the number of Securities Class Action Settlements approved in 2008 was lower than the number of settlements in 2007, but not dramatically different from earlier years. In 2008, 99 Securities Class Actions settled, a slight decline from the 2007 total of 110. In dollar terms, the value of cases settled in 2008 was lower than the historically-unprecedented high totals reported from 2005 through 2007. Looking more closely at the cases settled in 2008, the largest industry concentration among settled cases was for issuers with a primary business in the high-technology sector (19 companies), followed by the telecommunications sector (13) and the finance sector (12). In keeping with historical data, two-thirds of the cases settled in 2008 were for issuers whose common stock traded on NASDAQ. Typically, cases in the sample settled approximately three years after filing; however, for cases settled in 2007 and 2008, the average time from filing to settlement approval increased to three and one-half years. The length of class periods has also been increasing steadily. The average length of a class period among settlements in 2008 was more than 800 days, well above the average of 518 days for all previous settlements through 2007. The report discusses the above and other findings in further detail, updating previous reports on case settlements filed since the Private Securities Litigation Reform Act was passed in 1995. The sample includes more than 1,000 class actions settled from 1996 through 2008. Cases in the sample are limited to those involving allegations of fraudulent inflation in the price of a corporation’s common stock. The median amount for cases settled in 2008 was $8 Million. While this amount is lower than 2007's all-time high, single-year median of $9 Million, it represents an increase over the median for all cases settled from 1996 through 2007. In contrast, the average settlement fell dramatically from $62.7 Million in 2007 to $31.2 Million in 2008. The average settlement decline is partly due to the fact that there were no approved settlements in excess of $1 Billion in 2008, while the third largest securities class action settlement in history (Tyco International) was reported in 2007. Overall, there have been nine settlements in excess of $1 Billion over the previous ten years. If the top four settlements of all time are excluded from the analysis, the average settlement amount of $31.2 Million in 2008 is in line with the historic average of $34.6 Million for cases settled through 2007. As industry observers, researchers and academics have noted, institutional investors continue actively to participate in post-PSLRA class actions, often choosing to serve as lead plaintiffs. In 2008, institutions served as lead plaintiffs in more than 60% of settlements. Cases involving institutional investors as lead plaintiffs are associated with significantly higher settlements. The sample identifies both public pension plans and union funds as a subset of all institutional investors. While frequency of union funds acting as lead plaintiffs has increased in the last few years, closer analysis reveals that the higher settlements in cases with institutional investors as lead plaintiffs are associated with public pension plans, as opposed to union funds or other types of institutional investors. There is not necessarily a causal effect between public pension plan involvement and settlement outcomes, as it possible that these sophisticated investors choose to participate in stronger cases. In addition, part of the reason for higher settlements in these cases is because public pension plans tend to participate in larger cases. However, presence of a public pension plan as lead plaintiff is associated with a statistically significant increase in settlement size, even when controlling for estimated damages (case size) and other factors that affect settlement amounts (such as nature of the allegations). Why can’t corporate America just learn to behave?


Section 119.071(2)(g)1.a., Florida Statutes, provides that all complaints and other records in custody of any agency that relate to a complaint of discrimination relating to race, color, religion, sex, national origin, age, handicap or marital status in connection with hiring practices, position classifications, salary, benefits, discipline, discharge, employee performance, evaluation or other related activities are exempt from disclosure under Section 119.07(1), Florida Statutes, until a finding is made relating to probable cause, investigation of the complaint becomes inactive, or the complaint or other record is made part of the official record of any hearing or court proceeding. When the alleged victim chooses not to file a complaint and requests that records of the complaint remain confidential, all records relating to an allegation of employment discrimination are confidential and exempt from disclosure. When an individual proceeds to negotiate a settlement of a claim that has been filed, there is no reasonable way to interpret such action as a choice not to file the complaint. Moreover, the Florida Legislature has made it clear, with specific exceptions, that any portion of an agreement or settlement having the purpose of concealing information relating to the settlement of a claim against the state, its agencies or subdivisions, or any municipality is void as against public policy and unenforceable. Thus, where an alleged victim pursues a claim through settlement negotiations, the confidentiality provisions of Section 119.071(2)(g)2., Florida Statutes, would not apply. AGO 2009-10 (March 13, 2009).


Section 1012.31(3)(a)4., Florida Statutes, provides that the payroll deduction records of an employee shall be confidential and exempt from provisions of Section 119.07(1), Florida Statutes. Certain tax information appears on the Marion County School Board’s payroll data base, and is designated as Federal Withholding Tax Deduction, FICA tax deduction and Medicare tax deduction. Examples of other designations for payroll deductions that customarily appear on the School Board’s payroll data base are credit union deductions, United Way contributions, tax-sheltered annuity deductions, insurance deductions, garnishments, union dues, child support deductions and fees for newly-hired employees. The Florida Attorney General concluded that, utilizing commonly understood meaning of the words “payroll deduction records,” it appears the Legislature intended the exemption broadly to reach all documents or materials contained in a public school employee personnel file that reflect amounts subtracted by the school district from pay of an employee and the purposes or entity to which those deductions are directed. Therefore, those portions of the Marion County School Board’s payroll data base included under such headings as Federal Withholding Tax Deduction, FICA tax deduction and Medicare tax deduction would fall within the scope of “payroll deduction records,” and are confidential and exempt from production and copying under the Florida Public Records Law. AGO 2009-11 (March 13, 2009). (Three days later, on March 16, 2009, the Florida Attorney General issued similar informal written opinions to two other school districts.) One general lesson to be learned from these Attorney General Opinions: Not all exemptions to Chapter 119, Florida Statutes, the Florida Public Records Law, are contained within that law itself.


The American Dream has been revised, not reversed; pragmatism is replacing consumerism as the bar stops rising; buyer’s remorse sets in; all according to The 2009 MetLife Study of the American Dream, the third of its kind. Work -- and the paycheck and benefits associated with it -- is the linchpin holding together the American Dream. A disturbing 50% of Americans say they are only one month, two paychecks or less, away from not being able to meet their financial obligations if they were to lose their job. And, a startling 28% of total respondents could not survive financially for more than two weeks. Even the “mass affluent,” those making $100,000 or more per year, are not immune, with 29% saying that they could not meet their financial obligations for more than one month following a job loss. Other key findings of the study include:

  • Safety Net More Important than Ever: Americans are placing a premium on protection and stability. Across generations, eight in ten say having a personal safety net will be more important this year than last. However, nearly three-quarters of Americans admit to not having an adequate safety net.
  • Greater Demand for Guarantees: In keeping with consumers’ increased appetite for security comes greater demand for predictable returns and guarantees. Eight in ten of those surveyed report that they are now more concerned with guarantees and stability than they are with returns.
  • Americans Expect Long Haul: Fully 84% of Americans believe the U.S. economy is heading in the wrong direction (up from 64% in 2006), and more than nine in ten believe that it will take at least 12 months for the economy to recover. On a national level, nearly 44% of Americans expect the overall economy to be worse in 2009 than it was in 2008.
  • Dream Fueled by Optimism for Minority Populations: Despite conventional wisdom, minority populations (African Americans, Hispanic Americans and Asian Americans) are more optimistic than Caucasian Americans that the dream is still possible. Eighty two percent of African Americans believe that they will achieve the American dream in their lifetime, as do 89% of Hispanic Americans and 83% of Asian Americans. Meanwhile, only two-thirds of Caucasians concur.


CEO --Chief Embezzlement Officer.

CFO-- Corporate Fraud Officer.


“As the years went by I realized this day, and my arrest, would inevitably come.” Bernard L. Madoff (pleading guilty to a Ponzi scheme involving billions of dollars)

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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