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Cypen & Cypen
JUNE 16, 2011

Stephen H. Cypen, Esq., Editor

1.      MUTUAL FUND INVESTMENT ADVISER AND ADMINISTRATOR NOT LIABLE FOR MISLEADING STATEMENTS IN MUTUAL FUND PROSPECTUS: First Derivative Traders, representing a class of shareholders in Janus Capital Group, Inc. (JCG), filed a private action under Securities and Exchange Commission Rule 10b-5, which forbids any person to make any untrue statement of a material fact in connection with purchase or sale of securities.  The complaint alleged that JCG and its wholly owned subsidiary, Janus Capital Management LLC (JCM), made false statements in mutual fund prospectuses filed by Janus Investment Fund -- for which JCM was investment adviser and administrator, and that those statements affected the price of JCG’s stock.  Although JCG created Janus Investment Fund, it is a separate legal entity owned entirely by mutual fund investors.  The District Court dismissed the complaint for failure to state a claim.  The Fourth Circuit reversed, holding that First Derivative had sufficiently alleged that JCG and JCM, by participating in the writing and dissemination of the prospectuses, made the misleading statements contained in the documents.  On certiorari review by the United States Supreme Court, the Court held that because the false statements included in the prospectuses were made by Janus Investment Fund, not by JCM, JCM and JCG cannot be held liable in a private action under Rule 10b-5.  Rule 10b-5 does not expressly create a private right of action, but such an action is implied. For Rule 10b-5 purposes, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.  Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. The Court rejected the contention that “make” should be defined as “create,” thereby allowing private plaintiffs to sue a person who provides false or misleading information that another person puts into a statement.  Janus Capital Group, Inc. v. First Derivative Traders, 22 Fla. L. Weekly Fed. S1124 (U.S., June 13. 2011). 

2.      NEVADA ETHICS IN GOVERNMENT LAW IS NOT UNCONSTITUTIONALLY OVERBROAD: Nevada’s Ethics in Government Law requires officials to recuse themselves from voting on, or advocating passage or failure of, a matter with respect to which independence of judgment of a reasonable person in his situation would be materially affected by his commitment in a private capacity to the interest of others, which includes a commitment to a member of the officer’s household or his relative, and any other commitment or relationship that is substantially similar to one enumerated in the statute. Nevada Commission on Ethics administers and enforces Nevada’s law.  The Commission investigated Carrigan, an elected local official who voted to approve a hotel/casino project proposed by a company that used his long-time friend and campaign manager as a paid consultant.  The Commission concluded that Carrigan had a disqualifying conflict of interest under the statute’s catchall provision, and censured him for failing to abstain from voting on the project. Carrigan sought judicial review, arguing that the Nevada law violated the First Amendment.  The State District Court denied the petition, but the Nevada Supreme Court reversed, holding that voting is protected speech and that the statute’s catchall definition is unconstitutionally overbroad. On certiorari review by the Supreme Court of the United States, the court held that the Nevada Ethics in Government Law is not unconstitutionally overbroad.  The law prohibits a legislator who has a conflict both from voting on a  proposal and from advocating its passage or failure. If it was constitutional to exclude Carrigan from voting, then his exclusion from advocating during a legislative session was not unconstitutional, for it was a reasonable time, place and manner limitation.   A universal and long-established tradition of prohibiting certain conduct creates a strong presumption that the prohibition is constitutional. Restrictions on legislators’ voting are not restrictions on legislators’ protected speech.  A legislator’s vote is the commitment of his apportioned share of the legislature’s power to passage or defeat of a particular proposal. He casts his vote as a trustee for his constituents, not as a prerogative of personal power. NevadaCommission on Ethics v. Carrigan, 22 Fla. L. Weekly Fed. S1130 (U.S., June 13, 2011). 

3.      DIABETIC POLICE OFFICER MAY HAVE QUALIFIED IMMUNITY FOR UNINTENTIONAL SHOOTING: While at a crime scene, diabetic police officer experiences intense hunger, and asks fellow officer to take him to nearby convenience store.  There, he consumes a donut and soda, emerges and fires his weapon until it is empty, hitting a trucker.  Trucker sues under 42 U.S.C. § 1983 and various state-law theories, and officer maintains that because of his hypoglycemic reaction, he did not intend to fire his weapon, much less to shoot trucker. The district court granted the officer’s motion for summary judgment in part, concluding that he was not entitled to qualified immunity with respect to the § 1983 claim that alleged a violation of the Fourth Amendment.  On appeal by the officer, the appellate court reversed, holding that the lower court erred in denying the officer’s motion for summary judgment on trucker’s Fourth Amendment claim, without considering officer’s subjective intent. On remand, the district court should determine whether the evidence, viewed in light most favorable to trucker, would support a finding by a reasonable jury that officer subjectively intended to effect a seizure of trucker by firing his weapon.  If not, officer is entitled to qualified immunity.  Gardner v. Board of Police Commissioners, for Kansas City, Missouri, Case No. 10-2179 (U.S. 8th Cir., June 9, 2011). (This item was adapted from summary by Chuck Carlson.) 

4.      COMPLAINT SEEKING DETERMINATION OF PENSION BENEFITS DISMISSED FOR LACK OF EXHAUSTION OF ADMINISTRATIVE REMEDIES: In a putative class action brought against the Halliburton Company, its pension plan and Dresser Industries, Inc.’s pension plan, former employees sought redetermination of pension benefits, compensatory damages and declaratory relief on behalf of themselves and others similarly situated, pursuant to Employee Retirement Income Security Act of 1974. (Halliburton had acquired Dresser, and become the sponsor of its pension plan.) Defendants moved for judgment on the pleadings dismissing the complaint, in its entirety and with prejudice, based upon plaintiffs’ failure to exhaust administrative procedures for processing pension benefit claims under the Plans.  A United States District Judge has granted that motion. Federal courts regularly dismiss claims for judicial determination of benefits under an ERISA-regulated plan where a plaintiff has failed to plead and prove exhaustion of the plan’s administrative remedies. Only where plaintiff can make a clear and positive showing that pursuing available administrative remedies would be futile will a court release plaintiff from exhaustion requirement. One plaintiff’s contention that she exhausted administrative remedies by calling the Halliburton Pension Center and requesting a retirement quote was rejected. Kirkendall v. Halliburton, Inc., Case No. 07-CV-289 (WD NY, June 8, 2011). 

5.      IN DISSOLUTION OF MARRIAGE, TRIAL COURT SHOULD USE COVERTURE FRACTION TO CALCULATE MARITAL PORTION OF RETIREMENT ACCOUNT: Former husband appealed a final judgment dissolving his marriage, arguing that the trial court incorrectly calculated the marital portion of his retirement account.  Because the trial court did use an incorrect coverture fraction, that part of the final judgment was reversed. The marital portion of a retirement account is to be equitably distributed under Section 61.075, Florida Statutes.  A coverture fraction is a formula used by the trial court to determine the marital portion of a retirement pension fund.  To determine the amount of a retirement or pension fund accumulated during the marriage, the trial court creates a fraction where the numerator is the amount of time the employee was married while participating in the plan and the denominator is the total time the employee has in the plan. The trial court then multiplies the plan’s present value by the coverture fraction to calculate total present value of the retirement fund that accrued during the marriage. Here, the trial court erred in using a numerator of twelve months when the husband only worked and contributed to the subject retirement plan for about six months. Horton v. Horton, 36 Fla. L. Weekly D1228 (Fla. 2d DCA, June 10, 2011). 

6.      IN DETERMINING INCOME FOR CHILD SUPPORT PURPOSES, FORMER SPOUSE’S CONTRIBUTIONS TO VOLUNTARY RETIREMENT ACCOUNT SHOULD HAVE BEEN CONSIDERED: Former husband appealed a trial court order determining former wife’s income for child support purposes. Because the trial court failed to consider former wife’s contributions to a voluntary retirement account in determining her income for child support purposes, the appellate court reversed. Section 61.30(3), Florida Statutes, lists allowable deductions in order to calculate net income.  Although for purposes of calculating child support, mandatory retirement payments are included as allowable deductions under Section 61.30(3)(d), voluntary retirement payments are not.  Here, former wife testified that she was contributing to an IRA, and no evidence was presented to support a finding that she was contributing to a mandatory retirement plan.  The appellate court directed the trial court to recalculate former wife’s income and child support for each year the trial court failed to consider her contributions to a voluntary retirement plan. Although Section 61.30(2)(a)(7) includes pension, retirement or annuity payments as gross income, the former wife’s withdrawals from any voluntary retirement account shall not be included as income for purposes of determining child support. (Obviously, former wife should not be charged twice with the same “income.”) Fuesy v. Fuesy, 36 Fla. L. Weekly D1225 (Fla. 2d DCA, June 10, 2011). 

7.      LANGUAGE IN MARITAL SETTLEMENT AGREEMENT, WHICH SPECIFICALLY REFERS TO A BENEFICIARY-DESIGNATED DEFERRED COMPENSATION FUND, BUT DOES NOT STATE WHO IS TO RECEIVE DEATH BENEFITS, DOES NOT TRUMP PREDISSOLUTION BENEFICIARY DESIGNATION: During coverture, Manuel opened a deferred compensation fund and listed Linda as beneficiary. During subsequent divorce proceedings, the parties reached an agreement as to distribution of their assets, including Manuel’s deferred compensation fund. The Marital Settlement Agreement provided that Husband shall retain the deferred compensation fund. The agreement did not contain a general waiver provision or any other provision referencing the deferred compensation fund at issue. Upon Manuel’s subsequent death, his daughter learned that Manuel had not changed the named beneficiary on the deferred compensation fund.  Having filed a motion for civil enforcement of the final judgment, the daughter asserted that Linda had failed to comply with the final judgment because Linda made claims on property given to Manuel in the divorce proceedings, including the deferred compensation fund.  Although a general master recommended that the deferred compensation fund be paid to the daughter, the Circuit Court sustained Linda’s exceptions, finding that no reference was made in the marital settlement agreement with regard to Linda’s disposition of her expectancy interests or her beneficiary rights.  Thus, Linda contended, the recipient is determined by looking only to the designated beneficiary. On the daughter’s appeal to the Third District, the appellate court reversed, agreeing instead with the general magistrate: the language in the marital settlement agreement was sufficient to waive Manuel’s pre-dissolution designation of Linda as beneficiary. On ultimate review by the Florida Supreme Court, the court quashed the Third District’s decision. The high court held that absent provision in the marital settlement agreement as to who is or is not to receive death benefits or specify who is to be beneficiary, the court should look no further than the named beneficiary in the separate document of the policy, plan or account. General language in a marital settlement agreement, such as who is to receive ownership, is not specific enough to override the plain language of a beneficiary designation in the separate document.  The spouse, who owns the policy, plan, or account following dissolution of marriage, is otherwise free to name any individual as the beneficiary; however, if the spouse does not change the beneficiary, the beneficiary designation in the separate document controls. Crawford v. Barker, 36 Fla. L. Weekly S252 (Fla., June 9, 2011). 

8.      BOSTON GLOBE SAYS SAME-S.EX STIPEND MAY BE FIRST IN THE COUNTRY: In a move that may be the first of its kind in the United States, Cambridge, Massachusetts, will soon begin making payments to same-s.ex married public employees to defray cost of what local officials have called a discriminatory federal tax. Beginning in July, the city will begin paying quarterly stipends to city employees in a same-s.ex marriage who must pay federal taxes on the value of health benefits their spouse receives from the city. Federal law requires employers to calculate value of benefits received by a same-s.ex spouse as taxable income to the employee, but health benefits of an opposite-s.ex spouse as not taxable. While a number of private employers, such as Google, already offer an additional stipend or payment to same-s.ex married employees to defray cost of the federal tax, Cambridge is apparently the first municipality in the nation to do so. The city, which in 2004 was the first in the nation to offer same-s.ex marriage licenses, currently provides health insurance benefits to spouses of 22 employees who are married to a partner of the same s.ex. When fully implemented, the stipend will cost the city about $33,000 a year. The federal tax costs same-s.ex married families as much as $3,000 a year more than opposite-s.ex married families. 

9.      FLORIDA COUNTY JUDGE RULING CALLS INTO QUESTION RED LIGHT CAMERA LAW: In yet another odd wrinkle in the ongoing dispute over red-light cameras, a Broward County, Florida, judge has ruled that police cannot ticket drivers for running red lights.  As reported by The Miami Herald, a county court judge has decided tickets for running red lights are unconstitutional when issued by a police officer, because they carry a higher fine than red light camera citations (about $260 versus $158), and impose points on the driver’s license.  This distinction, ruled the judge, violates the U.S. Constitution’s and the Florida Constitution’s equal protection clauses. 

10.    PBGC WILL FIGHT HARRY & DAVID ON PENSIONS: The Pension Benefit Guaranty Corp. will fight Harry & David Holdings’ move to ditch its pension plan, which covers 2,700 workers and retirees. However, reports that the gourmet food and gift company said dropping the pensions is a key component in its reorganization plan to exit Chapter 11 court protection later this summer. PBGC does not ask a company to risk its business if it cannot afford its pension plan, but many companies have gone through bankruptcy with their pensions intact -- and PBGC thinks Harry & David might be one of them. The pension plan is underfunded by $23.6 Million; PBGC said the company would owe $45 Million if the plan is terminated. If the plan is terminated, PBGC will have to pay pension benefits to Harry & David employees, but, because of limits set by law, some retirees might get reduced pensions.  Time after time, PBGC has worked successfully with companies and their creditors to make sure the bankruptcy process recognizes the rights of pensioners, too. PBGC assures pension benefits of 44 million people connected with 27,500 pension plans. The agency pays benefits of more than 1.5 million people in failed pension plans, but receives no taxpayer dollars, as operations are financed by insurance premiums and with assets and recoveries from failed plans. The situation seems quite clear to us: employees of Harry & David simply want the fruits of their labors … preferably on a monthly basis. 

11.    NICE WORK … IF YOU CAN GET IT: Congressional Research Service has issued a Memorandum to Senator Tom Coburn, responding to his request for data on federal employees’ salaries and how they relate to salaries of state governors. The memorandum includes a state-by-state list of each state governor’s salary and an aggregated list of the number of federal employees who work within that state whose total pay is greater than their governor’s salary. According to CRS calculations, 77,057 federal employees earned more in total annual pay than their respective state governors earned in 2009. (Data on salaries of each state’s governor do not include total compensation, which may involve health/retirement benefits, housing, security and transportation costs.) At $212,179, California’s Governor is highest-salaried. At $70,000, Maine’s is lowest. The most common occupation for an employee who earned more than the governor of the state in which he worked was medical officer:  18,351 medical officers earned more than the governor of the state in which they worked.  Medical officers equaled 23.8% of all employees who earned more than the governor of the state in which they worked.  Following Medical Officer, were Air Traffic Control (6.7%), General Attorney (5.6%), General Engineering (4.6%) and Miscellaneous Administration (3.6%). In Florida, the Governor’s salary is $132,932; 3,756 federal employees in Florida earn more than the Governor. Colorado is the highest, with 10,875 federal employees who earn more than the Governor; while Delaware only has 37 such employees. 

12.    WHO SAID LAWYERS ARE WHORES?: Police say a 25-year-old attorney arrested on prostitution charges reportedly had been engaged in that activity for several years. As reported by (DeKalb, Ill.) Daily Chronicle, Reema N. Bajaj was arrested following an investigation into an unrelated case, where detectives discovered e-mails sent among Bajaj, a suspect in an unrelated case and another man.  The e-mails were explicit regarding arrangements that led to the prostitution charges. Bajaj allegedly offered to perform a sexual act for $100 (which, depending upon the circumstances, could work out to $400 an hour).  Apparently, until a few months ago, Bajaj routinely had engaged in prostitution, but gave it up before becoming an attorney in November. 

13.    WARNING ABOUT STRUCTURED NOTES WITH PRINCIPAL PROTECTION: Securities and Exchange Commission’s Office of Investor Education and Advocacy and Financial Industry Regulatory Authority have issued an investor alert called “Structured Notes with Principal Protection:  Note the Terms of Your Investment,” to educate investors about risks of structured notes with principal protection, and help them understand how these complex financial products work. The retail market for these notes has grown in recent years, and while these structured products have reassuring names, they are not risk-free.  Structured notes with principal protection typically combine a zero-coupon bond, which pays no interest until maturity, with an option or other derivative product whose payoff is linked to an underlying asset, index or benchmark. The underlying asset, index or benchmark can vary widely, from commonly cited market benchmarks to currencies, commodities and spreads between interest rates.  The investor participates in a return that is linked to a specified change in value of the underlying asset.  However, investors should know that these notes might be structured in a way such that their upside exposure to the underlying asset, index or benchmark is limited or capped. Investors who hold these notes until maturity will typically get back at least some of their investment, even if the underlying asset, index or benchmark declines.  But protection levels vary, with some of these products guaranteeing as little as 10 percent -- and any guarantee is only as good as the financial strength of the company making the promise. Additionally, investors considering these notes should be aware that they could tie up principal for upwards of a decade with possibility of no profit on their initial investment.  SEC Release 2011-118 (June 2, 2011). 

14.    MAYBE HOTEL HOUSEKEEPERS SHOULD GET HAZARDOUS DUTY PAY: The Pierre Hotel has suspended a supervisor and agreed to equip all room attendants with panic buttons in the wake of two alleged sexual attacks on Manhattan hotel housekeepers. reports the decision came after meetings with union officials, who pressed for strengthened protection for workers. The Pierre will give room attendants the alarms, modeled after those used by some elderly people to alert a central security office -- as soon as a system can be devised. Police arrested Mahmoud Abdel Salam Omar, board chairman of an Egyptian salt-production company, on charges that he locked a housekeeper in his room at the Pierre, and groped her and rubbed against her after she came to deliver three boxes of tissues. (Hint: he ordered three boxes of tissues.) The Sofitel New York, where former International Monetary Fund chief Dominique Strauss-Kahn (affectionately known as DSK) was accused of an assault, has also agreed to arm attendants with panic buttons. Could it be there is something in the New York water? 

15.    ATTORNEYS’ ERRONEOUS DISBURSEMENT OF CLIENT FUNDS FROM TRUST ACCOUNT COVERED BY PROFESSIONAL LIABILITY POLICY: A law firm filed declaratory judgment action against its insurer to determine whether the professional liability policy issued to the law firm provided coverage for the law firm‘s erroneous disbursement of client funds from its trust account. Although the district court granted the carrier’s motion for summary judgment and denied coverage, the U.S. Court of Appeals reversed. The professional liability insurance policy covered, among other things, all claims of negligence arising from an act or omission in performance of professional services rendered by the law firm. The policy defined professional services to include services as a trustee but only for those services typically and customarily performed by an attorney. The act for which the law firm claimed coverage under the policy involved distribution of its trust account funds in response to a fraud perpetrated upon it by a client. The district court found no coverage under the policy because there were no negligent acts or negligent omissions resulting from performance of, or failure to perform, professional services. In addition, the district court found that the law firm’s other clients’ potential claims would be in the nature of restitution rather than damages covered under the policy. The appellate court disagreed: when an attorney receives money from his client to place into his trust account for the client’s purpose, a fiduciary relationship is established and failure to return the money on demand (or use it as instructed) carries with it substantial potential consequences. (The law firm had unknowingly deposited a forged cashier’s check into its trust account, the result of which was that funds belonging to other clients were transferred out of the account.) The management of such funds held in trust for clients constitutes a professional service as defined by the policy. And, clearly management of trust accounts is a professional service customarily performed by attorneys, as indicated by the Florida Bar’s devotion of an entire chapter of its rules of attorney conduct to the topic. Nardella Chong, P.A. v. Medmarc Casualty Insurance Company, Case No. 10-12237 (U.S. 11th Cir., May 27, 2011). 

16.    RAMBLINGS: Texas News: The legislature raised the state’s speed limit to 85-miles an hour. They already let you have an open beer in the car and carry a gun. Add in texting while driving and what could possibly go wrong? 

17.    PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.):  A clear conscience is usually the sign of a bad memory. 

18.    QUOTE OF THE WEEK:  “If it is to be, it is up to me.” William H. Johnson

19.    ON THIS DAY IN HISTORY: In 1858, Abraham Lincoln says “A house divided against itself cannot stand.” 

20.    KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources. 

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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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