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Cypen & Cypen
NOVEMBER 19, 2009

Stephen H. Cypen, Esq., Editor

1.            PENSION FUNDING INDEX:  According to the October 2009 Milliman Pension Funding Index, the funded status of the largest corporate defined benefit pensions fell last month, primarily because of poor investment returns.  Assets of the largest 100 corporate pension plans decreased by $7 Billion during October due to investment losses. However, asset losses were coupled with liability decreases of roughly $3 Billion based on increases in discount rates, the first time in the last seven months that discount rates increased.  The net result was that funded status for pensions sponsored by these companies decreased by $4 Billion during October 2009.  The funded ratio decreased to 75% as of the end of the month, compared to the 78.3% funded status at year-end 2008.  October's $7 Billion decrease in market value lowered the total pension asset value in the Milliman 100 Index to $1.016 Trillion from $1.023 Trillion at the end of September.  The monthly asset return was approximately -0.27%.  By comparison, the companies' expected monthly asset return rate was 0.65% (8.10% annualized).  For the last nine years, Milliman has conducted an annual study of the 100 largest defined benefit pension plans sponsored by U.S. public companies.  The Index projects funded status of pension plans, reflecting impact of market returns and interest-rate changes on pension funding status, utilizing actual reported asset values, liabilities and asset allocations of the companies’ pension plans.  The 2009 annual study was published on March 24, 2009. 

 2.            RETIREMENT RISK AFTER THE CRASH:  A recent Issue in Brief from Center for Retirement Research at Boston College is entitled “The National Retirement Risk Index: After the Crash.”  The National Retirement Risk Index measures the share of American households ”at risk” of being unable to maintain their pre-retirement standard of living in retirement.  The Index results from comparing households’ projected replacement rates -- retirement income as a percent of pre-retirement income -- with target rates that would allow them to maintain their living standard.  The results showed that even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, in 2004 43 percent would have been “at risk” of being unable to maintain their standard of living in retirement.  The NRRI was originally constructed using the Federal Reserve’s 2004 triennial national survey of U.S. households.  Release of the Federal Reserve’s 2007 survey seemed like a great opportunity to re-assess Americans’ retirement preparedness.  The problem is that the 2007 survey reflects a world that no longer exists.  Interviews were conducted between May and December, a period during which the Dow Jones Industrial Average reached 14,000 and housing prices were only slightly off their peak.  Between the time of the interviews and the second quarter of 2009, direct equity holdings of households declined by $7 Trillion and housing values dropped by $3 Trillion.  Thus, two updates are required:  one to show what the NRRI looked like in 2007 and one to show what it looks like in mid-2009.  As a prelude to the updates, Section I of the new brief describes the changing retirement landscape.   Section II reviews nuts and bolts of constructing the NRRI.  Section III updates the NRRI, using the 2007 survey, showing little change in the percent of households “at risk.”  Section IV then projects what the NRRI would have looked like had the survey been conducted in the second quarter of 2009, revealing that the share of households “at risk” has increased to 51 percent in wake of the financial crisis.  Section V concludes that the NRRI confirms what we already know:  today’s workers face a major retirement income challenge.  (Number 9-22, October 2009)  The big question is whether public employers know.  And the even bigger question is whether they care. 

 3.            WORKERS FAILING TO SAVE ENOUGH FOR EXPECTED RETIREMENT LIFESTYLE:  When it comes to their retirement, America’s 50-somethings seem to be in a state of denial.  Although the recent economic downturn has forced pre-retirees ages 50 to 59 to consider working years longer than they had hoped, their current rate of savings is unlikely to fund the retirement lifestyles they expect, according to the fifth annual Retirement Fitness Survey from Wells Fargo & Company.  Only 23% of pre-retirees are saving more for retirement than they were a year ago.  Most -- 57% -- are saving the same amount, and 20% are now saving less.  About 67% say their expectations for retirement have changed in the past year, and 56% now expect to work longer by an average of three additional years.  Overall, the financial positions and savings habits of this group are insufficient to last for their expected 20-plus years of retirement:

  • While pre-retirees surveyed expect to need $800,000 for retirement, they have saved only $300,000 (median amounts).  
  • Pre-retirees clearly have not assessed how long their savings will last in retirement.  They expect to live nearly 21 years in retirement, but plan on spending nearly 10% of their savings every year.  The industry recommendation is to withdraw no more than 4% annually. 
  • People have been overly optimistic about their investment returns.  When they started saving (typically in their 30s), both pre-retirees and retirees expected the value of their investments to grow by 8.7% each year, on average.  In fact, the compound annual growth rate of the S&P 500 from 1958 through 2008 was 6.6%. 
  • Despite their inadequate savings, nearly two-thirds lack any formal plans for retirement savings or spending strategies.  Only 35% of the pre-retirees have a written plan for retirement, and of this group, only 52% say they updated it in the last year during the market downturn. 
  • Less than half (40%) wish they had been more proactive about educating themselves about retirement preparation. 
  • Only 34% wish they had cut back more on their previous lifestyle and saved more for retirement. 

We see a bad moon rising. 

 4. FTC (AGAIN) EXTENDS ENFORCEMENT DEADLINE FOR IDENTITY THEFT RED FLAGS RULE:   At the request of Members of Congress, the Federal Trade Commission has delayed enforcement of the “Red Flags” Rule until June 1, 2010, for financial institutions and creditors subject to enforcement by FTC.  The Rule was promulgated under the Fair and Accurate Credit Transactions Act, in which Congress directed FTC and other agencies to develop regulations requiring “creditors” and “financial institutions” to address risk of identity theft.  The resulting Red Flags Rule requires all such entities that have “covered accounts” to develop and implement written identity theft prevention programs to help identify, detect and respond to patterns, practices or specific activities -- known as “red flags” -- that could indicate identity theft.  FTC previously delayed enforcement of the Rule for entities under its jurisdiction until November 1, 2009 (see C&C Newsletter for August 6, 2009, Item 1). 

 5. A FEW WORDS FROM EX-AIG CHIEF:  When Maurice “Hank” Greenberg has been in the news during the past five years, the story has usually been about American International Group Inc., the company he built into an insurance conglomerate and headed until his ouster in 2005.  Greenberg has been fighting with AIG over ownership of stock, and has criticized executives who followed him for taking so many risks that the company required a $185.2 Billion federal bailout.  In a wide-ranging interview with The Associated Press, Greenberg, who at 84 still plays tennis and skis, answered the following question: 

Q: What do you think of the government’s tight grip on companies?

A: It’s terrible.  I do not believe the government should be involved.  We have a political system.  We have the right to succeed and fail without government interference.  How often have we had a balanced budget in our country?  Not very often.  So governments have difficulty running governments.  They hardly have the ability to run companies.  I do not think it’s a great idea, for example, to set a salary limit of a couple hundred thousand dollars for a top executive.  What do you think is going to happen?  That executive will go elsewhere where he’s appreciated and where the company can pay him what he’s worth. 

Hank’s still swingin’.

 6. “TAIL RISKS”:  A major bank/investment firm has identified seven “tail risks,” those unpredictable-low-probability events that can nonetheless have a very meaningful impact on investor portfolio and asset prices: 

  • $100/bbl oil and a surge in inflation.  The risk scenario:  US CPI rises from -1% to 4% by year-end 2010, as a combination of ongoing monetary expansion, fresh declines in the US dollar and strong economic growth in Asia conspire to push oil prices well above $100/barrel.  Inflation jumps, complicating financing of the US budget deficit. 
  • A double dip in growth.  The risk scenario:  Some time in the next four quarters, US, UK and European GDP growth returns to negative territory driven by policy mistakes, fresh declines in bank lending to small businesses or acceleration in debt repayment by consumers, overwhelming any positive wealth effect from the equity market. 
  • An asset price bubble in China.  The risk scenario:  Asset prices in China go to all-time highs and sluggish economic growth keeps global rates low and global liquidity high, which fuels liquidity-driven speculation in Chinese equity and real estate markets and a rise in inflation expectations across emerging markets. 
  • Protectionism and a US dollar crisis.  The risk scenario:  US unemployment rises to a post-World War II high, the Euro rises to an all-time high versus the Chinese renminbi, US and European politicians panic and threaten China with trade sanctions, China hints it will stop financing the US deficit, the trade-weighted US dollar falls to all-time lows, which in turn causes US equity and bond markets to fall sharply. 
  • A debt default in Japan.  The risk scenario:  Japan’s dire fiscal situation reaches a tipping point as the new Japanese government escalates issuance of bonds in order to finance ambitious new spending policies; the Bank of Japan is forced to inflate away debt by weakening the yen sharply; Japanese Government Bond yields soar from 1.5% to 4%. 
  • A recovery in US housing and the US consumer.  The risk scenario:  against expectations, the combination of low interest rates, the wealth effect from a strong recovery in credit and equity markets and a steep yield curve stimulate household borrowing demand and encourage banks to begin lending again; following in the path of the UK and Australia, house prices in the US rise 5-10% in 2010, and consumer spending handily beats the bearish consensus forecast of 1.6% next year. 
  • The surprise is no surprise.  The  risk scenario:  both the perma-bears and the bubble-heads are disappointed by a prosaic, low-volatility 2010; a modest economic recovery occurs and policy makers are able to normalize economic policy without damaging asset markets.  Asset price returns mimic long-term historic averages:  10% for large-cap equities, 12% for small-cap equities and 6% for long-term government/corporate bonds. 

Each of the above seven “tail risks” has an optimal hedging strategy, dependent on timing of the event and market positioning at that moment.  Investors should also take into account their investment objectives and risk tolerance when considering any potential hedging strategy. 

 7. WHY ARE STOCKS SO RISKY?:   With the decline in privately and publicly guaranteed benefits for pensions and health care, people increasingly must finance a greater share of their retirement expenses through their own savings.  The relatively high long-term return on equity makes investments in stocks seem both an attractive and suitable means of accumulating the substantial wealth that savers will require.  Yet, the 50 percent drop in the Standard & Poor’s 500 Index from May 2008 to March 2009 is only the latest reminder that stocks pose considerable risk for investors.  In the past, equity returns over periods as long as ten or twenty years have diverged substantially from their long-term averages, tarnishing the appeal of stocks even as investments for the long run.  A new Issue Brief from Center for Retirement Research at Boston College analyzes the risk in stocks, partitioning it into two components.  The first reflects the growth of economic activity and corporate earnings.  The second reflects the way investors value those earnings.  The analysis finds that variations in business activity and profits -- the first component -- account for a relatively small share of the risk in stocks over holding periods as long as ten years.  Instead, variations in shareholders’ valuation of earnings account for most of the volatility of returns.  The brief also finds that the risk attributed to valuations of earnings tends to diminish over investment horizons as long as forty years or more, because the value of stocks broadly follows the trend in GDP and corporate profits.  Although stocks are better investments for the very long run, these periods can seem too long to suit savers who lack the capacity or willingness to absorb significant financial risks in the interim.  The brief is first in a series that will examine potential role of stocks as long-term investments for savers.  Future briefs will analyze the outlook for the long-run return on stocks and  stability of those returns, and examine ways of exploiting the long-run behavior of stock prices to offer savers attractive blends of returns and risks on their long-term investments. The first section of the brief reviews recent history of returns on equity.  The second section notes that the market value of equity has tended to follow the trend in GDP since the 1940s.  (The waves of market value of equity around this trend reflect variations in corporate earnings relative to GDP and variations in the market’s pricing of earnings.)  The third section shows that variations in corporate earnings are relatively small over holding periods as long as ten years and that most of the risk in stocks arises from the way the market values these earnings.  (Number 9-23, November 2009) 

 8. TWO SCIENTISTS WIN $6.2 MILLION AWARD IN AGE DISCRIMINATION SUIT: reports that a federal jury has awarded more than $6.2 Million in an age discrimination suit brought by two scientists who said they were fired from their jobs at a Pennsylvania chemical manufacturing firm when the company targeted only older workers for layoffs in 2005.  Significantly, the jury concluded that the company's age discrimination was "willful" -- a finding that leads to an automatic doubling of each plaintiff's back pay award.  Bonnie Marcus, 65, was awarded more than $667,000 in back pay; more than $670,000 in front pay; and $1.5 million in compensatory damages.  After the back pay award is doubled, Marcus’s total award is more than $3.5 Million.  Roman Wypart, 61, was awarded nearly $190,000 in back pay; more than $375,000 in front pay; and $2 Million in compensatory damages, for a total award of more than $2.7 Million after doubling of the back pay award.  The company argued that all of the layoffs were justified by reasons completely unrelated to age, and that evidence showed plaintiffs were terminated because funding for their positions were eliminated.  However, plaintiffs  argued that the company was manipulating its budget figures to justify layoffs in which every terminated worker was 55 or older.  A proper analysis of the same evidence, they said, showed that some of the younger workers should also have been considered for layoffs.  In the end, the jury found that age was the “but for cause” of the company’s decision to layoff both employees.  Plaintiffs did lose one pre-trial motion to present testimony that a key decision maker had allegedly expressed the view the company needed "to get rid of some of these old farts."  The evidence was excluded because the only witness who could testify to it was a man who heard it in a "whisper-down-the-lane" fashion, which made the statement triple hearsay.  S.B.D. 

 9. DISTRICT COURT MAY NOT HAVE AUTHORITY TO SELECT LEAD COUNSEL UNDER PSLRA:  A recent federal appellate case presented the issue of whether the district court had authority to select lead counsel under the Private Securities Litigation Reform Act of 1995.  Petitioner, Cohen, petitioned for a writ of mandamus vacating the district court’s order to the extent that it appointed Girard Gibbs LLP as co-lead counsel, and requiring the district court to appoint Kahn Gauthier Swick, LCC, as co-lead counsel.  The United States Court of Appeals granted the petition in part, and ordered the district court to vacate its order appointing Girard Gibbs LLP as co-lead counsel.  The PSLRA creates a rebuttable presumption that the most adequate plaintiff, whom the court must appoint as lead plaintiff, is the person or group that meets the following three requirements:  (a) has either filed the complaint or made a motion in response to the published notice; (b) in the determination of the court, has the largest financial interest in relief sought by the class; and (c) otherwise satisfies requirements of Rule 23 of the Federal Rules of Civil Procedure.  The PSLRA further provides that lead plaintiff shall, subject to approval of the court, select and retain counsel to represent the class.  The district court appointed Cohen and New Jersey Carpenters as co-lead plaintiffs.  The district court also appointed Milberg LLP and Girard Gibbs LLP as co-lead counsel.  Cohen objected, arguing that the appointment of Girard Gibbs (another group’s choice for lead counsel) was contrary to the PSLRA because it denied him his right,  as lead plaintiff, to select counsel for the class.  The district court adhered to its order finding that a court may refuse to approve a lead plaintiff’s selection of counsel.  The reviewing court found this position untenable:  although it cannot be contested that the district court had authority to reject Cohen’s choice of lead counsel, it does not follow that having done so it had authority to select lead counsel of its own choosing.  The fundamental point is that the PSLRA unambiguously assigns the authority to select lead counsel to the lead plaintiff.  The statutory provisions subjecting lead plaintiff’s selection of counsel to approval of the district court in no way suggest that the district court shares in lead plaintiff’s authority to select lead counsel or that disapproval of the lead plaintiff’s choice divests lead plaintiff of such authority; the provision merely gives the district court limited power to accept or reject lead plaintiff’s selection.  Cohen’s petition for writ of mandamus was granted to the extent it sought to vacate the district court’s order appointing Girard Gibbs LLP.  The cause was remanded to the district court to accept or reject Cohen’s selection of Kahn Gauthier Swick, LCC, applying the applicable standard.  The court did give the district court some gentle guidance for its decision on remand:  (a) the district court should not reject the lead plaintiff’s proposed counsel merely because it would have chosen differently; (b) selection of lead counsel is not a beauty contest, it is an important client prerogative; (c) the PSLRA assumes that the lead plaintiff is as or more capable than the court to select class counsel; (d) if lead plaintiff has made a reasonable choice of counsel, the district court should generally defer to that choice; (e) the district court should disapprove lead counsel only when necessary to protect interest of the class; and (f) in the event that the district court determines lead plaintiff has not made a reasonable choice of counsel, it should articulate its reasons for disapproving such choice and provide an opportunity for lead plaintiff to select acceptable counsel.  In Re  Cohen v. United States District Court for the Northern District of California, Case No. 09-70378 (U.S. 9th Cir., November 5, 2009). 

10. TEN TIPS FOR BEGINNING A SUCCESSFUL LEGAL CAREER:  Because we have many lawyer subscribers, we present The Legal Intelligencer’s top 10 tips to transition seamlessly a successful legal career:

1. Realize how little you know, and ask questions.  If you develop a reputation for having a false sense of confidence, more senior attorneys will ultimately lose their ability to detect when you can actually handle an assignment and when you are faking it. 

2. But ask your questions at the right time and direct them to the right people.  Questions about the scope or deadline of an assignment, for example, are perfect questions for partners, and should probably be asked at the time you receive the assignment.

3. Don't live lavishly.  Try to live on about half to three-quarters of your income and save the rest as if you never made it.

4. Get to know the staff and be courteous to them.  You're going to need the staff members' help, often when you least expect it, and it will be much easier and painless to get that last-minute assistance if the staff knows and likes you. 

5. But learn to do it yourself.  Learn the filing process; figure out what attachments you need, cover sheets, certificates of service, other forms, etc.

6. Learn the rules of civil procedure.  If you know the rules, you can use them to gain real advantages against your adversaries. 

7. Become an expert and seek out new opportunities.  Become the office expert on some area so that people come to you as a resource. 

8. Network.  When meeting new people, write down what aspect of their business or experience you find interesting or useful. 

9. Work really, really hard.  Unlike law school, where you had almost complete control over when and how you completed your assignments, you are now expected to focus and make the most of time in the office -- and that can be a challenge.

10. But keep perspective.  Get involved with other activities, whether they are bar associations, hobbies, athletics or whatever.  It is possible to have life outside of the firm; make it a priority. 

11. Do not utilize the Scott Rothstein method of achieving “success.”  [We just threw this one in to see if you were paying attention.]

11. WASH. HIGH COURT REVERSES SCHOOL SALARY RULING:  Variation in the way Washington teachers and other school staff are paid does not pose a constitutional problem, the state Supreme Court has ruled.  In overturning a county superior court ruling brought by the Federal Way School District, the court held cost of living differences account for most of the uneven distribution of state money in school districts.  Although Federal Way receives the lowest school salary money from the state, the court said that the legislature had been steadily closing the gap between districts.  However, a recently adopted initiative mandated uniform yearly cost of living increases without regard to salary difference, thus widening salary gaps among school districts.  The latest disparity among school districts is in the salary figures for administrators:  $84,362 vs. $57,986 -- a 45 percent gap.  The superior court erroneously held that the legislature’s current funding allocations systems violates the education article of the state constitution, which requires the legislature to provide for a general and uniform system of public schools.  In fact, a general and uniform system is one in which every child in the state has free access to certain minimum and reasonably standardized educational and instructional facilities and opportunities at least to the 12th grade -- a system administered with that degree of uniformity that enables a child to transfer from one district to another within the same grade without substantial loss of credit or standing and with access by each student of whatever grade to acquire those skills and training that are reasonably understood to be fundamental and basic to a sound education.  Federal Way School District No. 210 v. The State of Washington, Case No. 80943-7 (Wash., November 12, 2009) (En Banc). 

12. CONN. FIREFIGHTERS WHO WON DISCRIMINATION CASE SEEK PROMOTIONS:  White New Haven firefighters are seeking promotions after winning their discrimination lawsuit before the United States Supreme Court (see C&C Newsletter for July 2, 2009, Item 1).  Twenty firefighters, including one Hispanic, sued New Haven after the city threw out results of a 2003 promotion exam for lieutenants and captains when too few minorities did well. According to a report from Associated Press, the firefighters' attorney has now filed papers in U.S. District Court asking that 14 firefighters be promoted.  On the other hand, the City is proposing the eligibility lists for promotion be based on the 2003 exams. 

13. YOU COULD HAVE HEARD A PIN DROP:  At a time when our president and other politicians tend to apologize for our country`s prior actions, here`s a refresher on how some of our former patriots handled negative comments about our country:

A U.S. Navy Admiral was attending a naval conference that included Admirals from the U.S., English, Canadian, Australian and French Navies.  At a cocktail reception, he found himself standing with a large group of Officers who included personnel from most of those countries.  Everyone was chatting away in English as they sipped their drinks but a French admiral suddenly complained that, whereas Europeans learn many languages, Americans learn only English.  He then asked, “Why is it that we always have to speak English in these conferences rather than speaking French?”

Without hesitating, the American Admiral replied, “Maybe it's because the Brits, Canadians, Aussies and Americans arranged it so you wouldn't have to speak German.”

You could have heard a pin drop.

14. AN OLD FARMER’S ADVICE:  If you get to thinkin' you're a person of some Influence, try orderin' somebody else's dog around.

15. IDIOSYNCRASIES OF OUR LANGUAGE:  One Tequila, two Tequila, three Tequila, floor. 

16. QUOTE OF THE WEEK:  “You can’t build a reputation on what you are going to do.”  Henry Ford (Tell us about it, Henry.)

Copyright, 1996-2009, all rights reserved.

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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