Cypen & Cypen
SEPTEMBER 3, 2009
Stephen H. Cypen, Esq., Editor
So, you think your deposits are safe because of insurance by the mighty Federal Deposit Insurance Corp.? Wrong again, Insolvency Breath. FDIC’s fund that protects more than $4.5 Trillion in U.S. bank deposits fell to just $10.4 Billion at the end of June, as the banking industry continues to struggle with souring loans and regulators brace for pain in trying to clean up the mess. The level of the FDIC's fund, lowest since the savings and loan crisis, almost guarantees that the government will have to hit the banking industry with another special fee to recapitalize its reserves. The agency said it had 416 banks on its "problem" list at the end of the second quarter, up from 305 at the end of March. Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system. FDIC insures deposits at the nation’s 8,195 banks and savings associations, and promotes safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. FDIC receives no federal tax dollars -- insured financial institutions fund its operations. Boy, now we sure feel confident.
A majority of U.S. institutional private equity investors surveyed by alternative investment research firm Preqin opposes an SEC ban on use of placement agents, although most largely support SEC's efforts to restrict political contributions from money managers. According to Pensions & Investments, the survey of 50 leading U.S.-based institutional investors showed 70% opposing a ban on placement agents and 83% supporting restricted political contributions. Seventy-seven percent of respondents said placement agents were more important for smaller private equity firms, while 15% said they were more important for larger private equity firms. Some 70% said the ban would benefit larger firms, but no one said it would benefit smaller firms. SEC has proposed banning use of placement agents, pension consultants and other third parties in soliciting investments from public pension funds. (Another SEC proposal would bar money management executives and employees who make political contributions of $250 or more to officials involved in investment manager selection for a public plan from providing services to that plan for a period of two years.) As we have said (see C&C Newsletter for August 13, 2009, Item 9), banning is not the way to go -- disclosure and regulation would solve the problems.
The American Bar Association filed suit in federal court against the Federal Trade Commission, seeking an injunction to block application of the so-called Red Flags Rule to practicing lawyers (see C&C Newsletter for August 6, 2009, Item 1). According to law.com, ABA has been lobbying for months to exempt lawyers from the regulations, which require businesses and organizations that act as "creditors" to establish a program for preventing identity theft. According to a Federal Trade Commission guide, the program must identify potential areas of vulnerability within a business and include policies for detecting and responding to red flags. FTC has included lawyers, doctors and many other professionals in its definition of "creditors" because they bill customers only after providing services. The bar association disagrees with the interpretation. The 20-page complaint says that applying the rule to lawyers is arbitrary, capricious and contrary to law, and that FTC has failed to articulate, among other things: a rational connection between the practice of law and identity theft; an explanation of how the manner in which lawyers bill their clients can be considered an extension of credit under the Fair and Accurate Credit Transaction Act; or any legally supportable basis for application of the Red Flag Rule to lawyers engaged in the practice of law. In response, FTC spokesperson said the commission believes that it cannot exempt any professions without specific authority to do so.
Investors are still trading common stocks of Fannie Mae, Freddie Mac and American International Group Inc. by the billions, even though analysts say their prices are almost certain to go to zero. All three are majority-owned by the government and are losing huge sums of money, according to an Associated Press report. The Securities and Exchange Commission and other regulators lack authority to end trading of stocks in such "zombie" companies that technically are alive -- until the government takes them off life support. Shares of the two mortgage giants and the insurer have been swept up in a summer rally in financial stocks. Investors have been trading their shares at abnormally high volumes, despite analysts' warnings that they are destined to lose their money. Meanwhile, the government continues to support the companies with billions in taxpayer money, saying they still play a crucial role in the financial system. Fannie and Freddie buy loans from banks and sell them to investors -- a critical step in the mortgage market process. They have tapped about $96 Billion out of a potential $400 Billion in aid from the Treasury Department. Officials have said AIG's failure would be disastrous for the financial markets. Treasury and the Federal Reserve have spent about $175 Billion on AIG and AIG-related securities. The company also has access to $28 Billion from the $700 Billion financial industry bailout. But analysts say the wind-down strategies for the companies are almost sure to wipe out any common equity, making their shares worthless. The stocks remain in circulation mainly for two reasons: (1) they have violated no rules on the New York Stock Exchange where they are traded and (2) no regulator has the power to suspend their trading without evidence securities laws are being violated. SEC says it has no reason to suspend trading of stocks that still technically meet its standards, which include filing timely financial reports and disclosing events that could affect share values.
Ford appealed the district court’s judgment granting the Union’s motion to dismiss for lack of subject matter jurisdiction her complaint alleging breach of duty of fair representation under Labor Management Relations Act. On appeal, the Second Circuit affirmed. Dismissal of a case for lack of subject matter jurisdiction is proper when the district court lacks statutory or constitutional power to adjudicate it. As language of LMRA makes plain, public employees are not covered by that statute. Ford claimed that her employer is not a political subdivision of New York, and questioned whether it was a mayoral agency. It is clear, however, that the New York City Department of Health and Mental Hygiene is a political subdivision of New York that is exempt. Ford vs. D.C. 37 Union Local 1549, Case No. 08-2317 (U.S. 2d Cir., August 25, 2009).
The City Attorney of the City of Hallandale Beach recently posed the following question to the Florida Attorney General:
May an order of the city’s Unsafe Structures Board substitute for a judicial warrant to authorize the city to enter premises found to be in violation of the city’s code without the owner’s consent, to abate the violations and to arrest the owners?
Section 162.04(4), Florida Statutes, recognizes that an enforcement board, having determined that a violation presents a serious threat to public health, safety and welfare or is irreparable or irreversible in nature, must notify the local governmental body. Upon notification, the governmental body enforcing the code is authorized to make all reasonable repairs required to bring the property into compliance. There is no mention that further process is required to authorize the governing body to enter the property in order to make the necessary repairs. An individual charged with violation of a municipal ordinance may be arrested, but only after compliance with Chapter 901, Florida Statutes, which addresses the arrest of individuals and, among other things, prescribes circumstances in which a warrantless arrest may be made. Nothing in Chapter 901, Florida Statutes, appears to authorize a municipal administrative entity such as the Unsafe Structures Board to issue arrest warrants, and there is no authority to conclude that an order of such board would have the effect of an arrest warrant. Accordingly, the Florida Attorney General concluded that an order of the city’s Unsafe Structures Board allows the city to enter the premises to make reasonable repairs to abate or correct a code violation presenting a serious threat to the public health, safety and welfare without the owner’s consent, but does not substitute for a judicial warrant necessary to arrest the owner. AGO 2009-37 (August 26, 2009).
The Florida Attorney General was recently asked “What is the proper disposition of public records of a municipal services taxing and benefit unit that has been replaced by an independent special district by special act of the Legislature?” Prior to June 11, 2009, fire suppression services were provided to residents of Spring Hill by Hernando County through the Spring Hill Fire & Rescue District Municipal Services Benefit Unit. Hernando County employed MSBU’s firefighters and maintained their personnel files. During the 2009 legislative session, a special act was adopted creating the Spring Hill Fire Rescue and Emergency Medical Services District, an independent fire control district organized for purposes set forth in the special act and in Chapters 189 and 191, Florida Statutes. The special act creating the district made no provision for disposition of MSBU, its assets or its public records. The Attorney General concluded that public records in custody of the Spring Hill Fire & Rescue District Municipal Services Benefit Unit should be delivered, pursuant to section 119.021(4), Florida Statutes, to the records custodian of the successor to those duties and responsibilities, that is, the Spring Hill Fire Rescue and Emergency Medical Services District. AGO 2009-39 (August 26, 2009).
Those were the words used by a United States District Judge in denying American International Group, Inc.’s claim seeking to impress upon Starr International Company, Inc., a multi-billion dollar oral trust in AIG’s favor. In many circumstances, oral commitments are just too slippery to be enforced, a fact of human nature that the English Parliament recognized as early as 1677, when, declaring that certain contracts were unenforceable if not reduced to writing, it enacted what was tellingly called “An Act for the Prevention of Frauds and Perjuries,” now known to every lawyer as the Statute of Frauds. The law will not recognize an oral trust unless evidence of its creation is unequivocal. As detailed in the scholarly 59-page opinion, AIG did not come close to shouldering such burden. Starr International Company, Inc. vs. American International Group, Inc., Case No. 05 Civ. 9283 (S.D. NY, August 31, 2009).
MetLife has released the results of its most recent study of risk management attitudes and aptitude among defined benefit plan sponsors. This study was designed and fielded to encourage public dialogue around pension risk-related issues for plan fiduciaries, help plan sponsors develop a new framework for understanding risks, and explore solutions for mitigating risk exposure. Defined benefit plans in the U.S. account for $2.3 Trillion in assets, and cover nearly 42 million plan participants, of whom over 20 million are active employees. Though shrinking in number, these traditional employee benefit plans remain an important part of the investment and retirement security landscape. Thus, it is perhaps surprising that relatively little is known about how effectively these plans are managing their risks. At a time of great market volatility, a close examination of the full range of plan risks and tools available to manage those risks is of critical importance. While the legacy of the extraordinary financial market events of 2008 is yet to be determined, it is certain that it will include an enduring awareness that risk management practices are only as effective as the depth of understanding of the risks themselves. The research underlying the study was performed before the market downturn. The downturn presents enormous challenges, and it is not suggested by any means that the study provides easy or full answers to those challenges. The hope is that the study can provide new perspectives on risk management methodologies that can, along with other factors, help in recovery and in preparing for the future. The primary objective of the research, a quantitative study of large plan sponsors supplemented by a series of in-depth individual interviews, is to develop a baseline for current state of risk management within DB plans -- and to identify early warning signs of risk management gaps. The study comprised two parts: an index (which measures the extent to which plan sponsors are managing the risks they believe are most important) and an analysis (which examines patterns and interrelationships between risk attitudes and behaviors). The conclusions are those of the researchers, and do not necessarily reflect inclusions by the plan sponsor community. The report presents plan sponsors’ views on current risk management practices, and identifies inconsistencies between the risks plan sponsors view as “important” and those they say they are managing effectively. The survey measured the relative importance ascribed to 18 risk factors by respondents; not all risks get equal attention. For example, asset allocation was selected 54% of the time as the risk factor to which plan sponsors pay most attention, while only 2% selected early retirement risk as most important. By developing a better framework for reviewing risk holistically, plan sponsors can strive better to manage such risks as they work to keep the promise of a secure retirement for plan participants.
In our August 27, 2009 Newsletter, we reviewed a commentary from Forbes positing that people might be better off not putting any more money in their tax-deferred retirement savings (see C&C Newsletter for August 27, 2009, Item 4). A reader, who knows whereof he speaks, sent us the following comment:
I read with interest your piece on the wisdom of saving in a tax-deferred manner given the possibility of higher future taxes.
One offsetting point which readers might be asked to consider is that tax-deferred savings are generally protected in bankruptcy, so tax-deferred savings do provide a measure of protection against unfortunate circumstances or risk taking which proves unfortunate. Given the ups and downs of life, there may be good reason to have a cushion that is available when the individual is no longer able to work.
An excellent thought, which brings to mind another point: most such accounts, at least in Florida, are also protected from alienation, execution, garnishment, etc. We always welcome comments, suggestions, critiques and, especially, corrections.
Despite recent events in the economy, most workers are satisfied with their current employer-sponsored retirement benefits. In particular, many place a high value on plans that offer security and flexibility, according to a survey by Watson Wyatt. The survey found that 54 percent of employees are satisfied with their company's retirement program. Findings also show that employees are using company programs as their primary source of retirement savings -- 61 percent of employees view their company's retirement program as the primary vehicle to save for retirement, and nearly one-third (29 percent) would not save for retirement without it. More employees with defined benefit plans (62 percent) are satisfied with their retirement program, compared to those with only defined contribution plans (51 percent). The reason may be because many appreciate the security DB plans offer: Almost half (46 percent) of employees said they would be willing to pay a higher amount out of their paycheck to ensure a guaranteed benefit in retirement. Further, workers with a DB plan are also more likely to want to stay with their employer until retirement (67 percent versus 54 percent of those with only a DC plan).
Stung by a $250 Million Manhattan real estate investment that tanked, Gov. Charlie Crist and two other Cabinet-level elected officials want to see more of Florida's retirement pension fund invested in Florida real estate. Crist, who according to the Miami Herald has never owned a home, said he is familiar with the saying “buy low and sell high.” Ash Williams, head of the State Board of Administration, which oversees the Florida Retirement System, agreed to take a deeper look into the strategy, but cautioned that there has been a mixed record in other states. In 2007, SBA invested $250 Million in a New York residential real estate project built for World War II veterans. Williams, who was not on board when SBA made that stellar investment, said the project is in such trouble that it is valued at zero on the books. It’s hard to tell what effect a big player like FRS will have on the Florida real estate market.
Their marriage was as short as it was spontaneous, according to the New York Law Journal. Jan and Leonard were married in 1966 during a three-day stopover in Acapulco. They were told the marriage would make it easier for Jan to obtain a visa for Australia, where Leonard was headed on a Fulbright scholarship. Jan obtained her visa, and the couple returned to the United States 13 months later, at which time they immediately and permanently separated. The couple's fortunes also diverged. Leonard made a substantial fortune as a businessman and financier; Jan became homeless, and mentally and physically ill. Now, nearly 40 years after she filed for divorce and 35 years after she agreed to $100 per week for life in alimony, Jan has sought an upward modification, citing a substantial change of circumstances and the danger of her becoming a public charge. In a lengthy, sympathetic decision, a New York trial judge has denied the request, finding no compelling reason why Leonard should be held any more responsible than society as a whole for what has happened to his ex-wife. Nothing in the record suggested that he caused her problems or that anything involving their marriage somehow contributed to her leading the life she has led. The ex-husband faithfully complied with the obligations imposed upon him by the divorce decree and had not missed a single payment over the past thirty-five years. Leonard, now 71, has headed several prominent national corporations. He has been profiled in Forbes, Smart Business and named an Ernst & Young Entrepreneur of the Year. Jan, now 67, has received public assistance since 1971, suffers from a mental disability and needs medical/dental work estimated to cost more than $100,000. The decision does not name the parties or their attorneys. (We suspect that Leonard might be a tad embarrassed by the situation, despite his prevailing on the legal issues.) Is this a great country, or what?
Lots of comedians incorporate humor about their in-laws into their acts, but a new lawsuit may be the first time one ended up embroiled in a lawsuit because of it. Sunda Croonquist (who?) is a longtime comedienne who regularly makes light of culture clashes that have arisen out of her marriage and her relationship with her husband's family. Croonquist's father was Swedish, her mother, African-American. She was reared Catholic, but married into a Jewish family from New Jersey. Many of her jokes sprang from this fish-out-of-water situation, and Croonquist claims that her husband's family used to enjoy the ribbing they got during Croonquist's stand-up routine. But the lawsuit currently pending in the District Court for the District of New Jersey tells a different story. In their complaint, Croonquist's mother-in-law, sister-in-law and her sister-in-law's husband claim that Croonquist regularly writes serious posts on her blog that accuse them of racism and prejudice while naming them by name. According to findlaw.com, if the allegations are true, First Amendment protections that comedians usually enjoy for jokes and parody could be in jeopardy. In another odd twist, Croonquist's husband -- who is an attorney -- will be defending her in the suit. The whole thing sounds like a comedy routine to us.
Don't interfere with somethin' that ain't bothering you none.
“Men occasionally stumble over the truth, but most pick themselves up and hurry off as if nothing ever happened.” Winston Churchill
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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.