Tuesday, February 17, 2009

Alleged $8 Billion Dollar Fraud by Texas Financier Stanford

(AP Writer Monica Rhor in Houston)
On Feb. 17th, AP reported that federal regulators charged Texas financier R. Allen Stanford and three of his firms with a "massive" fraud that centered around high-interest-rate certificates of deposit, and raided some of the companies' offices. Probably most shocking is that the guy's a Baylor grad! Fraud just doesn't seem very...you know... Baptist.

Watch CNBC video report by clicking here

In a complaint filed in federal court in Dallas, the Securities and Exchange Commission alleged Stanford orchestrated a fraudulent investment scheme centered on an $8 billion CD program that promised "improbable and unsubstantiated high interest rates."

Stanford's assets, along with those of the three companies, were frozen. Stanford's firms include Antigua-based Stanford International Bank, broker-dealer Stanford Group Co. and investment adviser Stanford Capital Management, which are both based in Houston.

The bank's chief financial officer, James Davis, and Stanford Financial Group's chief investment officer, Laura Pendergest-Holt, were also charged in the complaint.

Alfredo Perez, a spokesman for the U.S. Marshal's Service in Houston, confirmed that agents raided Stanford's office in Houston Tuesday morning, but he did not have any other immediate comment.

The SEC alleged Stanford and his businesses misrepresented the safety of the deposits, claiming the bank reinvested client funds in liquid financial instruments to help return profits on investments sharply higher than average rates of similar products.
"Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises, and fabricated historical return data to prey on investors," Linda Chatman Thomsen, director of the SEC's division of enforcement, said in a statement.

The SEC also accuses Stanford of running a second scheme tied to sales of a mutual fund product, which allegedly used false historical performance data to grow the program from less than $10 million in 2004 to more than $1 billion. The alleged fraud helped generate $25 million in fees for Stanford Group in 2007 and 2008, according to the SEC.
Stanford, 58, is one of the most prominent businessmen in the Caribbean, with investment advisers around the world helping him grow a personal fortune estimated at $2.2 billion by Forbes magazine.

His Stanford International Bank Ltd. said deposits surged from $624 million in 1999 to $8.4 billion in December. The bank is based in the twin-island Caribbean nation of Antigua and Barbuda, which has carved out a niche as a tax haven and offshore base for Internet gambling.
Stanford has deep roots in Texas, where he graduated from Baylor University, and still speaks with a slight twang. But he travels in different circles now — knighted in 2006 by the islands' government, Stanford is known there as "Sir Allen." And last year he shook up the staid world of professional cricket by bankrolling the purse in a $20 million winner-take-all match in Antigua between England and a West Indies select team.

Law Firms Lay Off Record Number of Attorneys

The National Law Journal and Law.com have recently reported record attorney layoffs. Washington took the brunt of the layoffs with 149 D.C. staff at Hogan & Hartson offered buyouts and dozens more attorneys and staff at Holland & Knight, Dechert, Bryan Cave, and DLA Piper let go. Almost 250 lawyers and staff in Washington were affected. The poor economy has required downsizing of firms all over the U.S. to keep them in the black. Here's a list of firms that have reported layoffs as of February 17, 2009:

Akin Gump
Ballard Spahr Andrews & Ingersoll
Bell Boyd & Lloyd
Bingham Mccutchen
Blank Rome
Brown Rudnick Berlack Israels
Bryan Cave
Buchanan Ingersoll & Rooney
Cadwalader, Wickersham & Taft
Cahill Gordon
Clifford Chance
Cooley Godward
Dewey & Leboeuf
Dickstein Shapiro
DLA Piper
Drinker Biddle & Reath
Duane Morris
Epstein Becker
Faegre & Benson
Fenwick & West
Fish & Richardson
Foley Hoag
Fragomen, Del Rey, Bernsen & Loewy
Freshfields Bruckhaus Deringer
Fried, Frank, Harris, Shriver & Jacobson
Goodwin Procter
Heller Ehrman
Hogan & Hartson
Holland & Knight
Hunton & Williams
Jenner & Block
Katten Muchin Rosenman
Kaye Scholer
Kirkland & Ellis
Loeb & Loeb
Luce Forward
Mayer Brown
McDermott Will
McKee Nelson
Milbank Tweed Hadley & McCloy
Moore & Van Allen
Morgan & Finnegan
Morrison & Foerster
Nixon Peabody
O'Melveny & Myers
Orrick, Herrington & Sutcliffe
Patton Boggs
Paul, Hastings, Janofsky & Walker
Pillsbury Winthrop Shaw Pittman
Powell Goldstein
Proskauer Rose
Reed Smith
Ropes & Gray
Seyfarth Shaw
Shutts & Bowen
Simpson Thacher & Bartlett
Sonnenschein Nath & Rosenthal
Squire, Sanders & Dempsey
Sutherland Asbill & Brennan
Synnestvedt & Lechner
Taylor Wessing
Thelen Reid Brown Raysman & Steiner
White & Case
Wilson Sonsini
Wolf Block

Unfortunately, there will probably be more. The question is whether there is anything to be learned from the huge salaries to first year associates and the billable hour pressures to keep the doors open. Perhaps a new model for law firms will arise out of the rubble when the economy recovers that better aligns outside attorneys with their clients.

Wednesday, February 11, 2009

Email is Smoking Gun in Salmonella Cover Up

Okay, so that headline is dramatic. But when there is written evidence of testing of peanuts with salmonella way back in 2006 and the owners and managers decide to ship the tainted products anyway to keep the cash coming in, there's an ethics problem that quickly became deadly. Nine people have died from that business decision. The business decision was based on greed.
The owner of a U.S. peanut company refused to testify to Congress on Wednesday amid reports that he urged his workers to ship bacteria-tainted products and pleaded with health officials to be allowed to "turn the raw peanuts on the floor into money."
Stewart Parnell, owner of Peanut Corp. of America, repeatedly invoked his right not to incriminate himself before the House of Representatives subcommittee holding a hearing on a salmonella outbreak blamed on his company.

The outbreak has sickened some 600 people in the U.S. and may be linked to nine deaths — the latest reported in Ohio on Wednesday — and has resulted in one of the largest product recalls ever, involving more than 1,800 items.

Friday, February 6, 2009

KV Implodes

As we suspected last month, KV's poor ethical choices led to it's investigation by several federal authorities, including the FDA and SEC. News today is that KV has layed off about 1000 employees . See prior blogs to see the story unfold from product recalls, to misbranded products, to family feuds, to potential board of directors liability for selling products which they may have known were not made to the drug specifications approved by the FDA.

Monday, February 2, 2009

Lawyers Billable Hour is Tough to Defend

Jonathan Glater of the New York Times wrote an article that examined lawyers are having trouble defending the the billable hour. "Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client’s problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model. "

“This is the time to get rid of the billable hour,” said Evan R. Chesler, presiding partner at Cravath, Swaine & Moore in New York, one of a number of large firms whose most senior lawyers bill more than $800 an hour. “Clients are concerned about the budgets, more so than perhaps a year or two ago,” he added, with a lawyer’s gift for understatement.

This blogger notes that the difficulty lies in the fact that lawyers trained in the law, not in business. They don't know any other business models besides the billable hour "eat what you kill" approach to lawyer compensation. Law firms are worried about changing business models in difficult economic times. "Two top U.S. firms, Heller Ehrman and Thelen, have collapsed in recent months. Others have laid off lawyers and staff," reports Mr. Glater in his article.

However, some of the more creative firms are utilizing flat fees for handling transactions and success fees for positive outcomes to market their firms, using the down economy as the inspiration for new solutions for clients. The change is welcomed by many corporations since the attorneys' billable hour has been used regularly since the 1960s. Most in-house attorneys have law firm experience and fully appreciate the pressure of attorneys to bill a large number of hours to advance in the firm or hold onto large partner compensation packages.

Mr. Glater's article continues-- “Does this make any sense?” said David B. Wilkins, professor of legal ethics and director of the program on the legal profession at Harvard. “It makes as much sense as any other kind of effort to measure your value by some kind of objective, extrinsic measure. Which is not much.” In this blogger's observation, the fact is lawyers and their clients are not aligned with regard to fees for service since the longer the work takes, the more the attorney bills. Clients want the fastest result possible, but that isn't in the attorneys' best interest. I liken it to taking a car into the mechanic and he says you need a new gazinkazoink. You have no reference to know that this is in fact what you need, but you pay the fee for the part and installation because you have no alternative. The response to such a comparison by many attorneys is to take offense, responding that ethics keeps them from overbilling or worrying too much about the number of hourse they must bill. While a majority of attorneys are ethical in their billing, the temptation is too great for some and there is billing recorded when the time either didn't need to be spent or was marked up to reflect a "value" billing situation that wasn't agreed to in advance. To deny the potential for wrongdoing under the billable hour arrangement is to place your head in the sand.

Mr. Glater notes that greed may also encourage lawyers to change their payment plans... Law firms are running out of hours that they can bill in a year, said Scott F. Turow, best-selling author of legal thrillers and a partner at Sonnenschein Nath & Rosenthal in Chicago. “Firms are approaching the limit of how hard they can ask lawyers to work,” he wrote, in an e-mail response to a reporter’s query. “Without alternative billing schemes, lawyers will not be able to maintain the rapid escalation in incomes that big firms have seen.” A recent study released last year by the Association of Corporate Counsel showed a rise in the number of companies paying by the hour — but that covered the spring and summer, before the worst of the downturn.
Many smaller firms and solo practitioners have long offered to perform services, like mortgage closings, for flat fees. Plaintiff lawyers also often work on a contingency basis, receiving a percentage of any awards. “What we do in our business litigation is charge clients some kind of monthly retainer, which gets credited against an eventual recovery,” said John G. Balestriere, a partner at Balestriere Lanza, a Manhattan firm with five lawyers. “It’s a lot easier for us to tell a client, ‘We want to do this, we want to push for summary judgment,’ ” he said, and so avoid a lengthy, costly trial. When not paid by the hour, lawyers’ approach to their work changes, said Carl A. Leonard, a former chairman of Morrison & Foerster who is now a senior consultant at Hildebrandt International, which advises professional services firms. In one case, he said, Morrison & Foerster negotiated a fixed fee for defending a company in court, covering work up to the point of a motion for summary judgment. On top of the fee, if the case settled for less than what the company feared having to pay if it lost in court, the law firm got a percentage of the amount saved. The arrangement made sense when the goal was to resolve the dispute quickly, Mr. Leonard said. Lawyers on the case negotiated a settlement for much less than the client’s worst-case number, Mr. Leonard said. “The effective hourly rate was something like 150 percent of our hourly rates,” he added. “We made money, the client was happy.”
In litigation, firms that charge by the hour can suffer if they are too successful and end a lawsuit — and the stream of payments from continuing work — too quickly. One law firm that recently collapsed, Heller Ehrman, was hurt in part because a number of cases had settled.

That collapse highlights the risk to law firms experimenting with other payment arrangements: If lawyers set too low a price, they lose money. Many lawyers may not be good enough businessmen to pick the right price, said Mr. Krebs, of the Association of Corporate Counsel.
“The difficulty is, we don’t really know what it costs us to do something,” he said. But the biggest stumbling block to alternative fee structures may be the managing partners at law firms, who will have to overhaul compensation structures to reward partners and associates for something other than taking a long time to do something.

“I don’t think law firms have completely come to grips with that issue,” said J. Stephen Poor, managing partner at Seyfarth Shaw in Chicago. “But they need to start coming to grips with it very quickly.”